THE BULL MARKET CONTINUES
Gross Domestic Product fell in the first quarter almost 1% below initial estimates at negative 0.7%. The majority of the slowdown can be attributed to slow buildup in inventories, lackluster consumer spending and stronger imports. Second-quarter GDP is estimated to grow at a modest 2% gain and the economy is expected to grow at about a 1% pace for the first 2015. Not very impressive! At the same time income growth rose 0.4% in April. However much of what individuals are earning they are saving. Inflation continues to decelerate, or as I would call it, the economy has deflationary tendencies. Statements from Fed board members are indicating that the Fed should exert caution in patients before increasing interest rates for the first time in nearly a decade. To me, this indicates that all is not well in Mudville.
However, Bull Market continues to have a life of its own and so far, wants to just go up. There is an old saying on Wall Street, “don’t fight the tape.” I see longer-term negative implications because of deflation in Europe, slowing economies of China and Japan, the effects of lower oil prices and the effects of continued income inequality.
INCOME INEQUALITY. COMMENTS: on The New Yorker Magazine entitled RICHER AND POORER
Economic inequality has been measured on a scale, from 0 to 1 with an index known as the Gini index. If all the income in the world are earned by one person and everyone else earn nothing, the world will have a Gini index of one. If everyone in the world earned exactly the same income, the world would have a Gini index of zero. In 1928 the Gini index was at a high of .476, just before the stock market collapsed, with the top 1% earning 24% of all income. In 1944 the top 1% earned 11% and now in 2013, the top 1% once again earned 24% of all income and the Gini index is back to .476. Is there a correlation between the Gini index in 1928 before the stock market collapsed and the current situation? Income inequality in the United States is greater than any other democracy in the developed world.
Last year Thomas Pickety’s book, Capital In the 21st Century, became a bestseller. Basically the book explained that income inequality and economic growth could not go hand in hand after reaching a critical point. This book was followed by a book entitled The Unstable American State and a world version of this argument, entitled Inequality Matters in a report by the United Nations and a book by economists Joseph Stiglitz called The Price of Inequality, all of which indicated that income inequality is not good for economic growth on a worldwide basis. Last year, Pew research Center conducted a survey about which of the five dangers people in 45 countries considered to be the greatest threat in the world. Most countries polled had religious extremism and ethnic hatred at the top of their list. But most Americans and Europeans chose inequality as the number one problem. Capitalism may be the best system in the world, but it creates winners and losers by its very nature. And capitalism as Karl Marx pointed out; can choke on its own success, as capital dominates the workers, causing wages to shrink beyond the ability to keep all boats afloat.
As stated in the Lone Bear Letter: In the US all income growth in the last 15 years has gone to the top 1% of the economic ladder, whereas wages, adjusted for inflation, are down 4.3%. It is estimated by Oxfam America that the top 1% in the world own 99% of total world wealth and most of that belongs to the 0.01%, as worldwide only 80 billionaires control 50% of the global wealth (they own more than 3.5 billion people in the bottom half). There is nothing wrong with accumulating wealth; however, the excessiveness of wealth accumulation could have a stifling effect on the US and world consumer based economies and could make future economic growth unsustainable. The cause of this great wage slowdown and shifting of assets to the very rich has several main causes: 1) Globalization has forced many American and Developed Country’s workers to compete with worldwide poorer workers, who are willing to accept lower wages. 2) Computers and modern machines are replacing human labor in numerous ways. 3) The rest of the world has become more educated and more highly skilled than the US, which ranks 39th in basic education, according to the latest Social Progress Index. 4) Economic and political power (through political contributions) has been switched away from workers and toward billionaire entrepreneurs, corporations and high paid executives. 5) The very nature of the Internet makes pricing extremely competitive and thereby squeezes profit margins, causing companies to trim work force expenses in order to maintain competiveness. The proposals that the President made at his State of the Union Address on 1/20/15, for ‘Middle Class Economics’ have in my opinion, no chance of passage in the Republican Congress. Because of these factors, instead of all boats rising, this scenario isn’t good for anybody and it is possible that as in the 1930s depression, all boats will sink. After all, how many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions, in my opinion, are taking the breath out of the economy, are shaking its base and have yet to be seen in the metrics.
In another book written by Robert Putnam entitled Our Kids The American Dream in Crisis an attempt to set statistics aside and instead tell a story. Our Kids, is a heartfelt portrait of four generations of Putnam’s fellow 1959 graduates and their children in the town of Port Clinton on Lake Erie. The world obviously changed and Port Clinton changed with it. Putnam states that most of the downtown shops of his youth now stand empty and derelict. In the 1970s the town’s manufacturing base collapsed. Between 1999 and 2013 the percentage of children in Port Clinton living in poverty rose from 10% to 40%. Wealthy newcomers began arriving in Port Clinton in the 1990s and built their mansions and golf courses and gated communities next to the trailer parks. A comment of one of the higher income residents to Putnam was, “If my kids are going to be successful, I don’t think they should have to pay other people who are sitting around and doing nothing for their success.” As income inequality expands, kids from the more privileged backgrounds start and probably finish further and further ahead of their less privileged peers. Putnam sees the American dream in crisis. He states, “Americans used to care about other people’s kids and now they only care about their own kids.” The situation is even getting worse. In states where Republican governors have cut taxes, they find they also have to cut educational expenditures.
The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.
What’s new about the chasm between the rich and the poor in the United States is that American politicians are now all climbing on the bandwagon and talking about it. In a recent January forum sponsored by Freedom Partners (the Koch brothers), GOP presidential candidates Ted Cruz, RAM Paul, and Mark Rubio battled over which one of them disliked inequality more. At the end of Pres. Obama’s State of the Union address he said “let’s close the loopholes that lead to inequality by allowing the top 1% to avoid paying taxes on their accumulated wealth.” Speaker of the House John Bayner countered that with “the president’s policies have made income inequality worse.” The causes of income equality are much disputed. What is no longer in disputed, is that income inequality is bad for the economy and could eventually lead to its stagnation and the sinking of all boats.