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Thread: Why Inequality Leads to Crises and Why It's Preventing Recovery

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    Jun 2008

    Default Why Inequality Leads to Crises and Why It's Preventing Recovery

    Why inequality leads to crisis and how it's preventing recovery:

    The Money Shot:

    "The game of capitalism only continues as long as everyone has some money to play with. If the government and corporations take everyone’s money, the game ends.

    The fed and Treasury are not giving more chips to those who need them: the American consumer. Instead, they are giving chips to the 800-pound gorillas at the poker table, such as Wall Street investment banks. Indeed, a good chunk of the money used by surviving mammoth players to buy the failing behemoths actually comes from the Fed."
    The Executive Summary:

    - Numerous prominent economists in government and academia have all said that large inequalities can cause – or at least contribute to – financial crises, including leading economists of the left and right (list in article, includes Greenspan, Schiller, Galbraith, Buffet, etc).

    - Inequality in the US reached all time highs in 2008 and 1929, immediately before financial crises.

    - There are 4 reasons inequality tends to precede financial crises:

    (1) the rich don't spend as much of their income as the less well off, leading to insufficient demand for goods and services to keep the economy humming at full capacity;

    (2) during periods of high inequality, the middle and lower classes borrow money from the rich to sustain their lifestyles, when they can borrow no more, the economy crashes;

    (3) with large amounts of excess income, the rich seek places to park their money, leading to bubbles; and

    (4) with wealth concentrated in a few hands, it is easier to influence (buy) politicians to keep or increase tax and regulatory policies favorable to the rich.
    As Nobel prize-winning economist Joseph Stiglitz put it:
    "Wealth begets power, which begets more wealth …. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work."
    - The US has among the most unequal distributions of wealth in the world -- larger than most countries we consider banana republics.

    - The US public wildly underestimates the level inequality in the US:

    "The report … “Building a Better America — One Wealth Quintile At A Time” by Dan Ariely of Duke University and Michael I. Norton of Harvard Business School … shows that across ideological, economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the real number is closer to 84 percent."
    - The government response to the latest crisis benefits the rich almost entirely, by supporting the bond and stock market. The rich hold nearly all of such financial instruments: "As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%. The richest 10% own 98.5% of all financial securities."

    - The Fed has given trillions to the biggest banks, and virtually nothing to main street.

    - Corporate profits are up. Stock prices are up. So why isn’t anyone hiring? Actually, many American companies are — just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.

    - Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate … that is, not only do they pay no taxes, but they actually get tax refunds.

    Check out the link to read the full piece.
    Last edited by Munger; 07-08-11 at 03:04 PM.

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