We have reviewed a number of information sources and have put together our take on the factors.
Higher tax rates on the wealthy are a start, they may treat some of the symptoms but they don’t get at the cause.
The cause is the overwhelming inequality creating structure that was built around the 1980’s supply side economics movement.
Drilling down into the factors involved we see the following.
- A growing share of GDP growth is being generated in the unproductive financial sector of the economy while the GDP growth from the productive sector of the economy is declining.
- Because more and more of the economy is just moving money around we are approaching a tipping point of negative real productive growth.
- With the wealthy dominating the unproductive side, the result is increasing Inequality as it is much easier to move around digits than plants.
- One result is a decline in consumer purchasing power that has to be offset by consumer debt.
- One of the driving background forces behind Inequality is the corporate forces that have evolved over the past 40 years based on work popularized, by the economist Milton Friedman’s “Theory of the Firm” where anything that adds to corporate profit is ok, even shipping jobs to other countries.
- Another trend that evolved out of the 80’s Supply Side movement and increased Inequality is Privatization. This movement is called Private Equity. When combined with low interest rates (QE easy money) it made Inequality easy to facilitate, the PE people just buy a firm, pull out the cash for themselves, lay off workers, get a loan for the company to cover cash pulled out, and then sell the firm with a new story to another PE firm.
- In the end the question has to be asked, where is value created, extracted, and even destroyed. That is the question posed by Dr Mariana Mazzucato in her recent book, “The Value of Everything” from which some of the above ideas have been drawn.
- From the Mazzucato book, British Scholar Carlota Perez has argued that the decoupling of finance from the real economy is not “natural” but is an artifact of deregulation and an excess belief in the power of free markets.
For people interested in how Inequality will affect the Overall Economic Health of the Country and the attendant stock market, a few items pop up:
- The interlocking factors involved with increasing Inequality have been growing since the 1970’s and have become a dominant force in the last two 17.6 year Macro economic cycles, 1982 to 2000, and 2001 to 2018.
- The current 17.6 year Macro cycle which started in October 2018 is likely to be where we will see some of the early unwinding and accompanied economic and political changes appear.
- The corporate direction that evolved out of the 80’s, massage earning through cost cutting and stock buybacks rather than a sale growth direction where investment and R&D is the driving force is now showing up in the low growth/low inflation results. Business investment is now around 60 year lows.
- Over the past 40 years Corporations have adopted a Downsize and Distribute versus a Retain and Invest motto.
- One factor to keep in mind, and that could help facilitate the rollover into a big change in economic direction, is the vulnerability that has crept into the corporate structure through easy cheap money over the past 10 years. This has allowed corporations to give away cash and replace it with cheap debt. This leads to ill prepared corporation for tough times. At the moment third of the S&P 500 has a negative net worth and the rest are not far behind. This will not work well if earnings decline.
- In summary one can hope that a Stakeholder Value direction will replace a Shareholder Value direction that has become so popular over the past 40 years. This would put management, employees, community, and product quality on the same footing as shareholders. Corporate Values have to be aligned with public values for an economy to work and grow.