A Tale of Two Economies
We could call them the “haves” and the “have nots” but those terms are overused and inaccurate. Regardless of the bumper-sticker label you try to put on it, the U.S. is increasingly becoming a tale of two economies. At one end of the economic spectrum there are perhaps a third of Americans who are doing really well. This fortunate third is seeing regular and sizeable raises, they’re enjoying travel during their free time and their kids are getting an excellent education. Life is good and so, as they see it, the economy is good.
That leaves a bit over two thirds, sixty-seven percent to be exact, who are not so positive about their financial state of affairs. Just over half, fifty-two percent, give the U.S. economy a “C” rating. The other fifteen percent are split between “D” and “F.” The low grades come despite recovering employment that has people who have been out of the job market for years dusting off their work clothes and heading back to the office. The complaints have shifted from “no jobs,” the common refrain four or five years ago to “crummy wages” more recently. Headlines like McDonald’s CEO getting a 368% raise while most of the company’s employees struggle to make ends meet only grinds in the obvious discrepancy. The average bonus in the world of finance, while down from previous highs, still tops $146,000 dollars. That’s right: a single bonus for the haves is more money than the total annual salary of all but the top five percent of U.S. workers.
The Financialization of the Economy
Experts openly wonder if our economy has become too dependent on banking and insurance services. A full twenty percent of the U.S. economy is what are called FIRE services: Finance, Insurance and Real Estate. Compare that with FIRE businesses accounting for just ten percent of the economy in 1947. As we move away from an economy that builds things to one that uses money to make money we leave our financial system in the hands of industries that lack transparency and which continually work to weaken government oversight of their actions.
An Economy Built on Nothing
The financial sector, that ever-growing slice of our economy, is built upon complexity and financial instruments of intangible assets that are difficult to objectively value. How much is a bundle of securitized assets really worth? Our financial world is a swirl of money in which only fifteen percent ends up in the “real” economy. Nobody’s buying goods, nobody’s manufacturing anything, packaging anything or shipping anything. Thus eighty-five percent of the profits stays locked within the closed loop of bankers, brokers, and salesmen, instead of circulating to places where it would translate into more tangible goods that could raise the financial outlook for the rest of us. When challenged, those within this closed system self-righteously invoke “the free market” as a way of deflecting hard questions—but is it a free market or are they gaming a system from which those of us falling from the middle class have been deliberately excluded?
A Clue to the Popularity of Trump, Sanders?
Presidential candidates on the left and right have singled out our dependence on the financial sector as a major economic issue. Bernie Sander’s call to break up the big banks resonates with voters, even though Sanders himself is having difficulty defining both the mechanism and legal basis for carrying out that plan. Much of the legal framework for regulating banks that was passed in 2008 has yet to be fully implemented. That fact alone stands as testimony to how skilled banks are at influencing both the legislative and enforcement mechanisms of our government.
We Need Evolution, Not Revolution
For all the seemingly insurmountable challenges, the number of substantive changes we would need to right our economy might be relatively small. We want to incentivize companies to pay workers more and executives less, which could be accomplished through progressive taxation. Likewise, relatively minor adjustments to the tax, trade and regulatory structure could shift the investment emphasis to favor tangible goods over bundles of securities. We don’t need to lock up vast numbers of the financial class to make substantive changes. All that’s needed is to prosecute the relative handful of bad actors who think the rules don’t apply to them because they have a house in the Hamptons and they give a lot of money to your senator.
For the most part the U.S. economy works, it just doesn’t work for enough people. But, if we don’t make some simple changes that will level the playing field, we stand a good chance of being overtaken by revolution—which tends to throw out the good with the bad. Think I’m exaggerating? Imagine how long a Trump or Sanders presidential run would have lasted ten years ago. But popular discontent with the status quo is on the rise, and that voter unhappiness has propelled both candidates into major contenders for the presidency. The problem? Try to think of a country that’s gone through major upheaval and come out in better shape; there aren’t any that fit that description. Keep that in mind when you’re crafting your personal investment strategy, and when you vote.
