The socialism versus capitalism rhetoric abundant in our current political debates continues to keep our economy at a near standstill. President Obama rails about the “haves” and “have-nots” looking to the wealthiest to pay their “fair share”. Then John Boehner, Republican Speaker of the House, counters with charges of “class warfare” refusing to consider new revenue sources, only entitlement cuts. Meanwhile income disparities between the top 1% and the other 99% continue to increase. The implications of such a divide are very real and can already be seen in society.
Objective proof of the disparity can be found in the Gini Score, a measurement of income distribution developed by the Italian statistician Corrado Gini in 1912. Scores go from 0 (each person with equal share of income) to 1 (one person has all the income). The Gini coefficient in 1968 in the United States was .39 and in 2010 rose to .47. In an article for Bloomberg, the author, David Lynch, quotes Michael Feroli, chief economist for JPMorgan Chase & Co. as saying, “Very high levels of inequality seem to be associated with slower economic growth”. Raghuram Rajan, the IMF’s former chief economist, notes that high levels of inequality produce ineffective economic policies and the political systems within those countries grow polarized and immobilized. It is much like the situation in the United States today.
Research provided by the International Monetary Fund, indicates the expansionary period following a recession lasts much longer in more equitable societies as they are less vulnerable to financial crises and political instability. It is much harder to make the tough sacrifices to keep growth alive when people are polarized.
It is true that a big part of our problem is overspending as pointed out by the minority groups that want to cut spending across the board. Yet, severe austerity policies have spawned riots and government collapse recently in other countries around the world. Mayor Michael Bloomberg of New York has voiced his concerns over the possibility of riots occurring in our country with so many youth unemployed. The “Occupy Wall Street” demonstrators include many of these young people who feel disenfranchised by the soaring corporate profits and lack of opportunity. Case in point is reflected in the amount of “average income” for a Goldman Sachs employee. The company reduced its workforce by 3% from a year ago and as a percentage of revenue, compensation has increased to 44% from 43%, per the Wall Street Journal. Average income is now $292,836.
Behind this unrest there is a whole generation of investors who will be lost if they perceive there is no economic justice. A look back at a similar situation in the 1920s, the Dow Jones Industrial Average did not rebound to its 1929 peak of 355.95 until 1954. The intervening 25 years saw an increase in availability of credit channels for those economically left-behind until income levels could rise for the other 99%. Today debt is sky-high for everyone so the government is trying fiscal measures that do not appear to be working.
While individual taxpayers have trimmed their debt the government debt has exploded. Domestic nonfinancial sector debt climbed to more than $36.5 trillion in the middle of 2011 compared to $32.4 trillion in mid-2008. With gridlock politically, another possible global recession looming, and unemployment stuck at over 9% our country is set-up for more severe problems ahead. It is not only a matter of the “have-nots” suffering but the “haves” will suffer too.
Page Perry, is an Atlanta-based law firm with over 150 years of collective experience representing investors in securities-related litigation and arbitration. Page Perry’s attorneys are actively involved in counseling institutional and individual investors. For further information, please contact us.