Let me be clear—I firmly believe free market capitalism offers more opportunity than any other economic system ever tried. It is responsible for raising the standard of living for more people than every other system.
Having said that, there are more and more signs of holes in the fabric of capitalism that bode ill for our future.
In an interview on 60 Minutes, Roy Dalio, founder of Bridgewater, the biggest hedge fund involving 110 clients and $240 billion in assets, said, “The disparity in income and wealth is approaching a national emergency.”
You can’t be more capitalistic than Dalio. “The American dream is lost,” he said. “It’s very different than when I was growing up.”
Dalio expressed similar sentiments in an essay posted on LinkedIn. He pointed to statistics including that the bottom 60 percent of income-earners in the U.S. keep falling further behind the top 40 percent—and that the percentage of children who grew up to earn more than their parents has fallen to 50 percent today from 90 percent in 1970.
The income gap is about as high as ever, and the wealth gap is the highest since the late 1930s because the wealth of the top one percent of the population is more than that of the bottom 90 percent combined, Dalio said.
The Republican idea that cutting taxes on the rich promotes productivity “doesn’t make any sense to me at all.” The wealthy “must pay more,” Dalio said, “The important thing is to take those tax dollars and make them productive,” he added.
“Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the eft and populism of the right and often leads to revolutions of one sort or another,” Dalio wrote.
Nobody can be a better beneficiary of capitalism, although I find it difficult to agree with 100% of what Dalio postures, but he has many valid points and much to consider.
The stats from a few years back are enlightening and things have gotten worse.
• Over 300 million people in America
• 140 million taxpayer returns
• 250,000 plus (about 17%) earn more than $1,000,000 a year
• The richest 1% earn more than 19% of the country’s total household income
Wages are generally stagnant. John Kennedy’s adage, “A rising tide lifts all boats,” simply is not quite as true anymore.
Disney CEO Bob Iger, in his most recent comp package, got paid over 1,400 times as much as the company’s median employee. He’s done a great job at the Kingdom. The stock has risen from $24 to $132 under his watch.
He’s obviously a very capable employee—but he has no skin in the game.
Not sure how Disney employees feel about that disparity. There are dozens of examples of this disparity and the consequences they raise.
There are a growing number of people like Dalio who feel there is a tax revolt coming and a serious problem of unrest.
Dalio is certainly not alone. At the Milliken Institute’s Global Conference, his comments were echoed by Jamie Dimon of JP Morgan Chase and Alan Schwartz of Guggenheim Partners (dodgers).
What are the consequences of this widening disparity?
For individual workers—more depression, more obesity, more stress-related issues.
For society as a whole—more polarization and more shifts to populist leaders and causes. The Democrats are moving more left to borrow socialist program and the Republicans are trying to live with Trump whose agenda is not always the same as the party.
Quite possible—unrest in the streets, a tax revolution and general discomfort with the status quo.
What can be done?
A. For the wealthy—higher personal and estate taxes. The doubling of the estate tax exemption to over $11 million in last year’s tax cut was the wrong direction.
B. Steps need to be taken to energize the wealthy to spend more money on important projects like Langone in NYU med school tuition or Dalio on education in Connecticut before they pass on.
C. Redefine the AMT (Alternative Minimum Tax) for everyone over $500,000/year and all corporations.
D. 60 Fortune 500 companies paid no federal income taxes on $79 billion in corporate income last year. Amazon said it’s effective tax rate was below zero. It got a $10.5 billion rebate.
E. Shareholders approve management comp plans when disparity ranges widen over 500 to 750 times median workers pay.
F. Investment (Wall St.) banks should be operated as partnerships (not corporations) as they were before 1993.
G. Commercial and investment banks should be separated and capital requirements should be at least 15-to-1.
For the economically disadvantaged
1. Provide better education—more school choice—mandatory school uniforms—counter the influence of teachers’ unions
2. Do more to discourage out-of-wedlock births
3. The advocacy of open borders will put more pressure on the poor. Establish quotas for migrant workers
4. Make English the official language of the U.S. and all government documents in English.
Five years ago when I first considered and wrote about the disparity gap in wealth and income, I tended to believe that market forces would help improve the disparity problem as the overall economy expanded.
Well it hasn’t happened
Five years ago our national debt was $17 trillion. Today it’s $22 trillion. This only exacerbates the problem because we have to pay interest on the debt, which leaves less available money to govern.
The consequences of following the lead suggested by the disparity advocates of continually increasing the safety net, more spending by the government of money we have to borrow, expanding unionization and raising the debt ceiling offers no easy or acceptable path that will produce any positive results.
Contrary to the disparity advocates, this country has now and will continue to offer unlimited opportunities for those who prepare through at least a high school education, want to seek out opportunity, and are willing to work hard enough to make it happen.
Average CEO compensation reported for the 500 biggest US companies in 2012 was $10.5 million (Forbes Executive Compensation Report), which works out to almost $6,000 per hour. Private industry worker salary and benefits averaged $31.16 per hour in September 2013 while workers in state and local governments averaged $42.51 per hour (the Bureau of Labor Statistics). The question de jour by many, noted liberal economists, is whether this is FAIR or good for America?…the insinuation being that CEO’s are unfairly paid too much.
The disparity advocates warn that there are serious consequences to this gap that include an invitation to social unrest, as well as a deepening rut into which the poor will be entrenched. It will foment resentment, failing morale, disincentive, unrest and maybe revolution.