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September 22, 2016


Piketty’s dour formula of r > g (the return to capital is greater than the economic growth rate) is in his view set in stone and thus wealth grows faster than income and, absent public intervention, will inevitably lead to increasing inequality. Historically, he is right, but his formula does not provide a satisfactory explanation for the runaway growth in wealth and income inequality we are currently experiencing at the top of the income ladder.

The classic definition of wealth is that it is savings out of ordinary income, but that definition does not fit where or what kind of such income comes from. Much of the increase in wealth for the rich and corporate class, for instance, comes from increases in the value of fixed assets such as real property. Thus if the value of real estate increases only because of where it is and not to physical improvements, this does not lead to a more productive economy; no workers have been hired, no wages paid, no investments made.

Such so called “land rents” are the most obvious source of increasing wealth for the already rich in this economy, but there are many other such sources of wealth other than ordinary income and real estate from which the rich and corporate class can add to the r of Piketty’s equation. Economists have identified many others, including but not limited to monopoly profits, drug pricing, patents and other forms of intellectual property, known to economists generically as “rents.”

Thus if the capitalized value of rents give rise to wealth, and if the rents increase, so will wealth. If monopoly power increases, monopoly profits will increase, and so too will the value of the monopolies. However, since these increases in wealth to the few have little to do with productivity of the economy, productivity will decrease and so too will the value of wages adjusted for inflation causing increased wage inequality – a vicious circle. (The foregoing is largely that of Stiglitz in his book I have cited earlier.)

So where are we and what can we do to eradicate or at least reduce this cancer of wage and wealth inequality which is leading us to economic oblivion and destruction of the “American Dream,” not to mention its savaging of aggregate demand and reduced economic growth? Are we just to sit here and watch Piketty’s formula decide our fate, or do we end the rules made by the rich and corporate class and re-write the rules of the game to suit the interests of the vast majority of Americans? We are where we are today by political choice, that of the rich and corporate class, and what they changed we can change to better suit a vision that calls for a fairer sharing of the income generated by our economy.

Can you imagine an economy that grew faster than in any other time, one in which incomes grew at the top, middle and bottom, and where those at the bottom saw their incomes grow FASTER THAN THOSE AT THE TOP? It happened, and how did it happen? It happened because of public intervention and had its impetus from a runaway Wall Street that gave us the Great Depression, much as the recent Wall Street banks did recently (which gave us Bush’s Great Recession, bailouts, millions of unemployed and millions more foreclosed from their own homes etc.).  It happened because Franklin Delano Roosevelt with his New Deal changed the rules and put into place a series of major policy changes to blunt the harmful effects of unregulated banks and stock markets.

He did so via formation of agencies charged with regulation of runaway banks and stock markets, such as the FDIC (which ended runs on banks with its federal guarantees); with the Glass-Steagall Act of 1933, (which segregated commercial banking from investment banking and thus prevented banks from using depositor’s money for risky speculation); with the SEC (which enforced new market and securities laws that protected ordinary investors by preventing market manipulation and insider trading); with the National Labor Relations Act (which gave workers the rights to bargain collectively). In other words, he changed the rules by which the economy and its participants were to be governed, and it was a smashing success, now known by many economists as “The Golden Age of Capitalism.”

The Republican-sponsored Taft-Hartley Act of 1947 was one of the first harbingers of things to come. It allowed right to work laws, among other things. Then came Powell’s infamous memo of 1971 and the collapse of the New Deal under incessant attack by the rich and corporate class, income tax changes that favored the already rich, bankruptcy laws that allowed corporations to fail and yet survive under Chapter 11 while disallowing bankruptcy protection for mortgage and student loans etc. etc. etc. It became evident that there was a new sheriff in town, and that he was taking no prisoners. “Shareholder value” and “stock analysts’ quarterly findings” became the holy grails of corporate performance, all without regard to other shareholders in the corporate enterprise, i.e., that of consumers, producers and the communities in which particular corporations were sited.

Books could be and have been written on the topics here treated, but I have to stop somewhere, so I am stopping here. My point in this essay is to tell readers that all is not lost, that it is within our power to change the way our economy is structured, that rules can be written which (as with Roosevelt’s New Deal) will deal with the excesses of finance and trade and along with rewritten rules of corporate governance, tax and bankruptcy laws so that we can all enjoy a fairer distribution of the economy’s income, as we once did.

We can write new rules with a view toward promotion of economic growth and a shared prosperity rather than continuing to put up with the present system which can only operate to channel more of the nation’s wealth and income into the pockets of the already rich, so let’s do it! Perhaps unfortunately, change involves the political class, so let’s vote both our conscience and our pocket books this fall for candidates who promise to sidetrack our present race to economic and social oblivion.    GERALD      E




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