Posted 10/28/2011

HOW THE RICH HURT THE ECONOMY

There is yet another reason to occupy Wall Street.

One beyond the issues of disproportional wealth distribution and excessive pay and bonuses during hard times.

It seems the very rich, the upper one percent of the income folks, are a major force destabilizing the economy.

When the good times roll, the upper one percent roll so much higher and faster.  In the last three recoveries, rich incomes gained eight percent while the economy's income averaged only three percent. 

When the bad times come, the rich sink faster and further downward. In the last three recessions, rich incomes declined three percent, then six percent and eight percent.

This excessive up and down movement of the rich tends to exaggerate the up and down swings of the entire economy.  Since 1990, retail stocks have always been a safe, even, predictable investment. But the stocks of luxury goods has become extremely volatile, leaping upward during the booms and falling far during the busts.  Luxury goods makers have pulled the entire U.S. retail category into a steady decline.   

It wasn't always thus.

When America's rich were defined as landowners, the group was a steadying influence on the economy.  Later, when America's rich were defined by great trusts and corporations, the rich continued to be a steadying influence on the economy.  (J.P. Morgan once single-handedly prevented President Teddy Roosevelt's administration from suffering a severe economic bust.) 

The "Corporate Man" who emerged from World War II was also a steady influence on the economy.  Making only 35 times as much as their average workers, these CEOs never lost sight of the economy and its effects on people.

But things spun out of control in the 1990s, when CEOs started collecting outsized bonuses and huge stock options.  In less than ten years, the average CEO was making several hundred times the pay of his average worker.  As he flaunted his new-found wealth with fancy cars, mega-homes, yachts and corporate jets, the average CEO lost sight of his worker bees, whom he saw as mere cost statistics.

This trend has continued unabated up to the present day.  The average worker is no longer a person, but simply a statistic.  That's why CEOs are comfortable with hoarding billions of corporate dollars while simultaneously adding to the nation's unemployment figures.

The economy has become so unstable that it affects the rich as well as the middle class and the poor.  In fact the richer the man, the bigger the crash during bad times.  The number of people making one million dollars a year crashed down 40 percent between 2007 and 2009.  And many will never recover.  Since 1994, 73 percent of the original top 400 have disappeared.

Why is all this happening?  Three reasons:

First, the nature of wealth has changed.  It was once a solid thing, based on land, trusts, railroads and gold.  But today wealth has been "financialized" into paper – stocks, bonds, mortgage-backed securities and credit default swaps which can make radical moves in a day, depending on how news is interpreted by large financial institutions.

Second is the emergence of the non-human super rich – corporations, banks, unions and other special interest groups which have incredible power to leverage government away from the common interest.  (Bad court decisions about the meaning of the 14th Amendment gave corporations the status of flesh-and-blood people.)  This is a key reason for the government's interest in bailing out corporations and banks ahead of people.  The power of special interests can be seen in our complex body of tax laws, which serve to make the rich richer and the poor poorer.

Third is the advent of financial computer programming, which facilitates massive amounts of stocks and bond trading at lightning speeds.  A rumor comes out of Europe, four financial institutions hit the "sell" button, the computers whirr and the stock market leaps or crashes.  And the poor small investor never knew what hit him.

A historian will note that we had booms and busts in the past.  Even in the 19th century.  But these were caused by massive bank and railroad stock speculations involving not only the rich, but the general population as well.  The stock market crash of 1929 found Joseph Kennedy's shoeshine boy giving stock tips to his customers.  This century's dot.com bust was also the product of massive speculation among the general population. 

But what we are facing now is very different.  The housing crash was not caused by massive general population speculation.  Even in the worst markets, speculators accounted for less than 35 percent of home sales.  It was the financialization of those sales into mortgages, mortgage-backed securities and credit default swaps that caused the economy to crash and made a non-recovery recovery.

In the good old stable days, busts were generally spaced at least 20 years apart.   But the dot.com and housing busts were only six years apart.

In the good old stable days, busts led to robust recoveries.  But the recent busts have led to razor-thin recoveries.

The Democrats and Republicans are going to have to grow up in a hurry.

The nation desperately needs a blockbuster financial reform package which includes five key ingredients –

1. Private Sector Job Production

2. Government Spending Reduction

3. New Federal Tax Program

4. Strict Federal Debt Control

5. Massive Reduction in Special Interest Influence Over Policy and Legislation

And this has been exacerbated by the collective "Hal" who has taken over the stock market with massive lightning trades.  This is driving the steadying influence of the small "buy and hold" investor out of the market.

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