Thursday, February 16, 2012

Money for Nothing?

Despite recent setbacks over the last 30 years the US economy has grown by over 120% in constant dollars. This should be good news for all Americans, but there's something interesting about this period of time that's quite different from prior years.

Over most of the history of the US gains in GDP were shared more or less equally on a percentage basis among all income groups. This makes sense if you assume that the success of an enterprise, whether it's a small business or the country as a whole, is the result of the efforts of the group rather than a few individuals.

What's unusual about the last 30 years is that, unlike prior periods, the gains have gone exclusively to the upper 20% of wage earners, and the bulk of that to the top 1%.

My first reaction is that this just doesn't seem 'fair'. Shouldn't everyone participate in our country's financial success?

We know from history that there's no economic force that tends to favor equitable distribution of gains from a large enterprise. Business operates to maximize profit, and it took government regulation to eliminate slavery and sweatshops. And unions, which can give employees a voice in the distribution of gains, also need government to exist and survive.

But beyond the ethical arguments from a completely practical point of view this trend doesn't seem sustainable. We know that the US economy is heavily dependent on consumer spending, so if 80% of consumers are getting a smaller and smaller part of the gains their spending will have to decrease as well, resulting in a downward spiral. If this is true business does have a long term incentive to share gains, but I don't see a strong feedback mechanism. The correction could be traumatic.

So here are my questions;

  • Is there a problem, or is our economy behaving correctly?
  • If you believe there's a problem will it correct itself, or is some type of intervention required?
  • If you believe intervention is required, what would you do?

If you're interested in additional reading on the topic take a look at "Winner Take All Politics" which details the authors opinions that government actually created the current imbalance. Other suggestions for reading on this topic are welcome.

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