The polarization of wealth and income inequality is a major campaign theme of next year's election. That is because everyone who thinks about and writes about income inequality finds disparity and distortions. This condition cannot be sustained in the long run. The polarization of income and wealth does not abate, but tends to get larger with each political administration and election cycle.
Recently, Warren Buffett offered advice on how to palliate the disparity and the steady demise of the middle class. Mr. Buffett has got a lot of things right, and certainly deserves listening too. Yet he avoided a solution to a three decade old problem. Instead, he offered tax subsidies. A lot of finance people are sensitive to taxes and tax avoidance is a big part of our national dilemma. Subsidies, such as the earned income tax credit (EITC) can have a demoralizing effect on the recipient. People work hard, apply themselves, follow the rules, and still receive welfare; just like some of the Fortune 500. Except, with the Fortune500, it is corporate welfare and with EITC it is personal! I surmise that Buffett was planning to reach pretty deep with his EITC REFORM -- maybe even enlisting some of the "old" middle class. Of course, you can't restore the middle class by way of the tax code. Tax relief might be important, but not critical. Yet, some reasons for the inequity are obvious and can be corrected.
Among the obvious,, to everyone, is the consolidation of economic power, means of production, and capital. Most consolidation of these individual factors compliment the others and vice-versa. If you examine any of the various business news sources, you find the common theme of mergers and acquisitions. Big deals and little deals, but in the end, still generally consolidation. It is inescapable that most of these mergers and consolidations erode the market discipline.
The middle class has also suffered from the loss of manufacturing jobs, which generally pay a higher wage. Manufacturing jobs should be the slowest to recapture. We lost manufacturing jobs, in part, as a result of faulty globalist theories. Faulty, because we did not transition into new products and services, on a worldwide basis, fast enough to offset the displacement of manufacturing jobs. This lag is old enough now to be called a permanent condition. When you look at how the manufacturing shifted to developing countries in a wholesale fashion, the differences in cost saving in many cases was marginal. That is what can happen when you let the CFO and accountants run the business!
The middle class, as well as the poor, find their buying power eroding. Mergers mean higher prices! Most of the necessities that people use claim a higher price tag as the result of some kind of merger or consolidation. There are other factors that contribute to higher prices, but the lack of meaningful competition and avoidance of market discipline is the big one.
Many consumer items in our American economy are dominated by 3 or 4 companies controlling 90% or more of the business. That takes the market discipline out. When you have 4 companies that own 90% of a market, any market discipline moves at a glacier pace. If these 4 companies share a market, I think it unlikely they would get in a dog fight for another 5%.
Blue Cross Blue Shied (BCBS) here in Tennessee has applied for an overall 36% increase in premiums. I realize current law has had some influence in the request for the hike. It is also claimed that the medical field and hospitals are not subject to the same market forces that apply to most businesses. Furthermore they say, medical productivity cannot be measured in the same way as most business. However, BCBS has 72% of the insurance business in Tennessee. Whatever market forces do exist would be choked out by this insurance monopoly. Presently, antitrust suits are being instituted against Blue Cross, for monopolistic practices in other states too.
The environment for this concentration started, in earnest, in the mid-eighties. The eighties was an era of economic quackery. The big thrust was called, modestly, supply side economics. Supply side economics had a distinctive upper income benefit to it. It was also called quackery names like "trickle-down and voodoo economics". As I recall, the late Sen. Howard Baker, from here in Tennessee called it a "riverboat gamble". In reality, it was no gamble at all, but rather an open and shut case that contributed much to the economic disparity and the economic quandary of today. The economics of the eighties and the political component trended toward Wall St. and big money. It was a perverse time, economically, of "greed is good" and laissez faire thinking. The public seemed fascinated and protective of the big corporations. After all, it was alleged that big business was the "job creators". Wrong on that count! The supply side doctrine kind of returned us to the 1920's
So how do we solve the fading of the middle class and free up the economic ladder for everyone? First, recognize the seriousness of what has happened and is happening. The eroding middle class, I think. threatens democracy. The essence of freedom is a fair assessment and reward for individual contributions to society, So many people are grossly overcompensated, and likewise under compensated. You will naturally have inequities, but some high end salaries are ridiculous, even comical. When we have a fair and honest assessment, determined by the free market forces, the middle class will be secure. When the top 10% of wealth dominate the political process, as they do today; economic concentration has contributed to the effective disenfranchisement of much of the working middle class, the poor, and the young. Just look at the demographics of who votes, who actively participates in the political process, and who donated the money. That will open anyone's eyes to the threat to democracy.
In order to repair the economy and establish some parity , we should start with the obvious defects. We can no longer tolerate the consolidation of our goods and services, manufacturing, and agriculture. The concentration of our economy requires surgery! It can no longer be treated as a bad cold. We must return to an era of trust-busting with even more purpose and vigor than 100 years ago. The FTC and the Justice Dept. have been easy to work with for a long time now. They have bought a lot of bogus arguments. They should be embarrassed. We can't even get the major banks broken up! Pundits and politicians talk a lot about breaking up the banks, but no action.
It is important to remember that if you concentrate at the top; you must subsidize at the bottom, the middle, and all around the edges. Otherwise, in time, the middle class, the poor and many more will be in the streets and they will be demanding changes. However, if we divest in the concentration and break up the monopolies, we will open opportunities for millions, and go a long way in restoring the American dream.