Net zo min als ik op HBO-gangsters stem, stem ik op politici, ik wil niet deelnemen aan de vulgarisering van de samenleving:
real-world economics review, issue no. 69
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The “life cycle” theory of savings depicts individuals borrowing to consume more when young,
and repay out of incomes expected to rise during their working life. They pay interest to
“patient” savers who defer their own consumption in order to earn interest. This “abstinence”
theory blames debtors for their plight of needing credit to get by in today’s world. Inherited
wealth seems to play no role, as if everyone starts from the same economic point. Also
absent from this “pay later” view is the fact that real wages have stopped rising since 1980.
Upward mobility is much more difficult to achieve, and most debtors have to pay by working
even harder for lower wages.
It is not by deferring consumption that inheritors obtain their wealth. As Marx put it, it is absurd
to view the Rothschilds as growing so rich simply by being Europe’s most “abstinent”
consumers. And on the macroeconomic level, this individualistic “life-cycle theory” of interest
ignores the fact that the economy is an overall system whose volume of debt grows
exponentially from one generation to the next as savings accrue and are augmented by new
electronic bank credit – extracting interest from debtors.
Another diversionary explanation of wealth disparity is educational status, duly dubbed
“human capital” on the logic that each academic step adds to the stream of future earnings.
The idea is that better-educated individuals at the best schools earn more – justifying student
debt. One CEO of a Fortune 500 company has assured me that the reason he is so rich is
because he is so smart and well educated. Other corporate executives tell me that the reason
they hire economics PhDs is that it shows that the prospective employee is willing to work
hard for a goal to get a better job. The tacit message is that such PhDs have learned to
accept writing economic fictions to get ahead. But all you really need is greed, and that can’t
be taught in school.
On the negative side of the relationship between education and net worth, schooling has
become so expensive and debt leveraged that the burden of student loans is keeping recent
graduates living at home with their parents instead of being able to start families in homes of
their own. For-profit technical schools such as the University of Phoenix have notoriously low
graduation rates, but use government-guaranteed loans to create an artificial market selling
dreams that end in jobless student-loan peonage taking its place alongside debt serfdom for
homebuyers paying mortgages.
Matters are even worse than Piketty’s measure of inequality shows. He refers to gross
income, not the net earnings after meeting basic expenses. To make wages conceptually
symmetrical with profits or rents – corporate profits or cash flow after meeting the costs of
production – the appropriate measure would be wages after meeting basic living expenses.
That is why net worth measures are more important than income.
What U.S. official statistics call “disposable income” – paychecks after taxes and FICA
withholding – is not all that disposable. Recipients must pay their monthly “nut”: debt service
on bank loans and credit cards, home mortgages or rent, pension fund and health insurance
contributions, and other basic expenses needed simply to break even, such as food and
transportation to and from work. Faced with these monthly obligations, a rising proportion of
the labor force finds itself with scant savings. Hence the “traumatized worker” effect, “one
paycheck away from homelessness,” too fearful to strike or even to complain about working
conditions or the lack of wage increases.
The upshot is that most wealth takes the form of what classical economists characterized as
unearned income, mainly from the FIRE (finance, insurance and real estate) sector: interest
and various forms of economic rent, inherited wealth and “capital” gains, not to speak of tax
avoidance, stock options and other favoritism for rentiers.
Piketty’s statistics show a number of turning points in the share of wages compared to returns
to capital (interest, dividends and capital gains). The Gilded Age was followed by a move
toward greater equality during 1914–50. A progressive U.S. income tax was legislated in
1913, taxing capital gains as normal income – at a high rate. (Only about 1 percent of
Americans initially had to file tax returns.) The Great War was followed by the financial crash
of 1929, the Great Depression and World War II that destroyed capital or taxed it more
heavily. A period of relative stability followed in the 1960s and 70s as progressive taxes and
public regulation were maintained.
The 1980 turning point in wealth and income distribution
The great turning point occurred in 1980 after the victory of Margaret Thatcher’s
Conservatives in Britain and Ronald Reagan in the United States. Progressive taxes were
rolled back, public enterprises were privatized and debts soared – owed mainly to the
wealthy. Interest rates have been driven down to historic lows – and after the crash of 2008
the aim of Quantitative Easing has been to re-inflate asset prices by reviving a Bubble
Economy aiming mainly at “capital” gains for wealth-holders. These trends have led wealth to
soar and become concentrated in the hands of the top 1% and other wealthy families, first
during the post-1980 bubble and even more during its post-2008 collapse.
1. Interest rates and easier credit terms promoting debt leveraging (pyramiding)
Interest rates determine the rate at which a given flow of income, interest or dividends is
capitalized into mortgage loans, bond or stock prices. Rising steadily from 1951, loans by
U.S. banks to prime corporate customers reached a peak of 20 percent by yearend 1979. At
that rate it was nearly impossible to make a profit or capital gain by borrowing to buy housing,
commercial real estate, stocks or bonds.
Then, for more than thirty years, interest rates plunged to all-time lows. This decline led
bankers and bondholders to lend more and more against income-yielding properties. As
mortgage interest rates fell, larger bank loans could be afforded out of existing income and
rent, because a property is worth whatever a bank will lend against it. This “creates wealth” by
purely financial means – an explosion of bank credit financing capital gains over and above
current income. Prices for bonds enjoyed the greatest bull market in history.
In addition to lowering interest rates, banks stretched out the maturities and also required
lower down payments to attract more customers hoping to get rich by going deeper into debt.
And until 2008, real estate – the economy’s largest asset – rose almost steadily. But a
byproduct of debt leveraging is that mortgage holders receive a rising proportion of the rental
income of property. Home ownership was becoming a road to debt peonage, as owners’
equity declined as a share of the property’s price.
Much the same phenomenon was occurring in industry after 1980. Innovations in leveraged
buyouts enabled corporate raiders, management teams and ambitious financial empire-
builders to buy companies on credit, paying earnings to bondholders instead of reinvesting in
the business (or paying income taxes). Capital gains were achieved by bidding up stock
prices by share buybacks and higher dividend payouts, while cutting costs by downsizing and
scaling back pension plans.
Most money is not being made by tangible capital investment but financially. Stock buybacks
are being financed even with borrowed funds – going into debt to create short-term capital
gains for managers whose pay is tied to stock options. “In 2012, the 500 highest paid US
executives made on average $30.3 [million] each ... More than 80 per cent of it came in the
form of stock options or stock awards. Their incentives are skewed towards extracting value
from the companies they run, rather than creating future value.”3
Gains by the 1% of this sort are not an inherently natural law. “Greed will always be with us.
Dumb laws are optional,” the Financial Times writer just quoted observes. This perception is
missing in Piketty’s analysis. Thinking about inequality simply in terms of comparing the return
to capital to overall economic growth leaves little room for public policy. And in the absence of
government taking the lead, planning shifts to Wall Street and other financial centers. The
result is as centrally planned an economy as Hayek warned against in The Road to Serfdom.
But it is planned financially, for purely pecuniary gain, not for economic growth or industrial
capital formation as such.
This means that in order to preserve its momentum, financialization evolves into Bubble
Economies, requiring ever larger injections of credit to bid up asset prices by enough to cover
the interest charges falling due. Wealth-holders can gain only as long as asset prices grow as
exponentially as the compounding of interest. This requires that banks continue to lend, or
that governments bail out financial markets, e.g. by the Federal Reserve’s Quantitative
Easing or Mario Draghi’s “Whatever it takes” at the European Central Bank.
Bankers promote fiscal policies to encourage debt leveraging by focusing the public’s
attention on personal gains to be made by borrowing to buy assets expected to rise in price.
What is suppressed is recognition that the wealthiest layer of the economy gets most of the
gains while homebuyers, industry and governments go deeper into debt.
2. Privatization and rent seeking
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