Automation, globalization and weak labor bargaining power have created an unaffordable economy for 80% of Americans. They are on the downward leg of the K. But the wealthiest 20% are doing really well and are on the rising leg. How did our economy become so divided and our politics so divisive?
Most wealthy people get their money by inheritance, by building their human capital through education, by being lucky in a risky venture, or by a combination of extreme frugality and long-term investing. A recent Federal Reserve report revealed that 93 percent of the value in the financial markets is owned by the top 10 percent wealthiest people. When the Federal Reserve adjusts interest rates by buying or selling securities in the New York financial markets, it is trading with the wealthiest Americans. The interest rate divides the rich from the poor. When interest rates rise, a rich person says: “Great! Now I will be earning more on my bank deposits.” While a poor person says: “Oh, no! Now I will have to pay more on my debt.” Which side of the interest rate you are on makes all the difference. The problem for rich people is in figuring out what to do with all their money. You can’t take that much money home and stuff it in your mattress. If there were no place to invest it, you would have to pay a bank to hold your money to keep it safe.
It is not that the top 20% are evil people trying to take advantage of their fellow Americans. Quite the contrary, most wealthy people want a vibrant economy that benefits everyone. Most wealthy Americans typically donate money to help other people. A recent poll reported that a majority of wealthy people would be willing to pay higher taxes if it were best for America. The problem is the concept of money and how different people think about money. On Sunday morning it is all about generosity and helping the dear neighbor, but on Monday morning it can become about greed and running the dear neighbor off the road. The key difference is in how we think about money.
Economics focuses on money because it is easy to measure and provides a convenient summary measure of our success and well-being. But what money means to you often has a lot to do with how much you have. Poor people want and need money to pay the rent, buy food and replace worn-out clothing. Their sense of self-worth is not based on how much money they have. But when reaching a million dollars or more, you are likely to begin viewing your wealth differently. After all, you are now a millionaire! Money can become valuable to you for its own sake. This is partly because you are now able to meet your basic needs without difficulty. You may even begin to scale up selected purchases such as an expensive automobile or an exclusive property to better display your wealth. In his 1899 book, The Theory of the Leisure Class, Thorstein Veblen revealed that some goods become more prestigious and desirable when their price rises. Acquiring “Veblen goods” can reinforce a wealthy person’s sense of self-worth. But bidding up the price of Picasso paintings does not bring Picasso back to life to produce more paintings.
World War II reinforced our sense that “we are all in this together.” The generous GI-Bill provided many benefits to young returning soldiers who were able to provide for their families as the sole breadwinner so their wives could have babies to create the “baby boom.” The educated elite kept their own compensation down with most CEOs making on average only about 20 times that of the median worker. Following the war, worker compensation kept up with rising productivity. But after 1976 output per worker continued to rise but worker compensation began to fall in real terms (i.e., after controlling for inflation). Since that time, the average CEO pay in the top corporations has risen to almost 300 times the median worker’s compensation. Most families could no longer cover their expenses with only one breadwinner. Women entered the labor force in much greater numbers. Women who went to college often married well-educated men. But even today only about one third of Americans have a college degree. Wealth has become increasingly more concentrated. A trillion dollars is a thousand billion dollars, and a billion dollars is a thousand million dollars. Elon Musk may be the first trillionaire, but there are others right behind him.
From the farmers market to the competing restaurants and those great exercise classes led by the owner who sweats along with the class earning every penny she makes, it is clear that free enterprise can work really well at the local level. But at the corporate level, it can be quite different. A large powerful corporation can often block competition by quickly buying up competitors or temporarily lowering prices to run the annoying intruder out of the market. A media firm with up-to-date technology can extract information from participants that is unavailable to its competitors. Former Greek finance minister, Yanis Varoufakis explains all this in his book “Technofeutalism: What Killed Capitalism.” The richest 20% have become the Lords of the Manor – the nobility, leaving the bottom 80% as the peasants or serfs. This is not theoretical. It is reality. Jeff Bezos recently had a $50 million wedding – just “chump change” for him. Engineers who create artificial intelligence algorithms are paid millions of dollars, while users of A.I. get their personal data extracted. Under the greedy pig theory of economics, otherwise known as maximizing shareholder value, the worker’s hard work pays off. But not for the worker. The worker’s hard work pays off for the shareholder. As in slavery, the owner gets the profits, and the worker gets to do the work. Investors in mutual funds may not even know the name of the companies they are invested in, much less help those companies in any way, other than providing them with money that the wealthy investor would have to pay a bank to hold on to if there were no place to invest.
Wealthy Americans can sometimes fall into the trap of thinking that international trade is all about making money. Unlike most middle-class Americans, who struggle to save money at Walmart, Dollar Tree and other low-price retailers, wealthy people sometimes focus on accumulating money for its own sake. Being extremely wealthy can distort a person’s view of tariffs and international trade. We have an international trade deficit. More money is going out than is coming in. We are losing money. But we get high-quality products at very low prices. A wealthy person may not even know what a good pair of memory foam sneakers cost at Walmart. Some wealthy people are not even familiar with the cost of “groceries.” Some wealthy people who have an exceptionally poor grasp of economics may even think that raising tariffs will make the exporting country pay more to sell their products to us. They do not know that Walmart and other retailers typically have to pass along the tariff that they pay at America’s seaports, airports and border crossings to their customers as part of the price of the product. Little do they realize that using tariffs to pay for a cut in income taxes is just transferring the tax burden from being based on the ability to pay to a sales tax (hidden in the shelf-price of the product) that hits everyone the same regardless of their ability to pay. The rich get richer, and the poor get poorer.
In particular, the top 20% get richer and the bottom 80% struggle even more to get by. The MAGA crowd clearly knew that there was something wrong with the system, even if they did not fully grasp all the details. If Bernie Sanders had beaten Hilary Clinton in the Democratic primary in 2016, or a certain tv celebrity from “The Apprentice” had not appeared on “The Joe Rogan Experience” podcast in 2024 to convince a large number of young men who had been ignoring politics to vote for him, or the COVID-19 pandemic had not disrupted the supply-chain and driven up prices when it did, or the horrific events in Israel and Palestine had not occurred under the Biden administration, we might now have a different president focused more on helping the poor and middle-class Americans in the bottom 80% and not on worshipping and rewarding the richest Americans in the top 20%.
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Automation, globalization and weak labor bargaining power have created an unaffordable economy for 80% of Americans. They are on the downward leg of the K. But the wealthiest 20% are doing really well and are on the rising leg. How did our economy become so divided and our politics so divisive?
Most wealthy people get their money by inheritance, by building their human capital through education, by being lucky in a risky venture, or by a combination of extreme frugality and long-term investing. A recent Federal Reserve report revealed that 93 percent of the value in the financial markets is owned by the top 10 percent wealthiest people. When the Federal Reserve adjusts interest rates by buying or selling securities in the New York financial markets, it is trading with the wealthiest Americans. The interest rate divides the rich from the poor. When interest rates rise, a rich person says: “Great! Now I will be earning more on my bank deposits.” While a poor person says: “Oh, no! Now I will have to pay more on my debt.” Which side of the interest rate you are on makes all the difference. The problem for rich people is in figuring out what to do with all their money. You can’t just take it home and stuff it in your mattress. If there were no place to invest it, you would have to pay a bank to hold your money to keep it safe.
It is not that the top 20% are evil people trying to take advantage of their fellow Americans. Quite the contrary, most wealthy people want a vibrant economy that benefits everyone. Most wealthy Americans typically donate money to help other people. A recent poll reported that a majority of wealthy people would be willing to pay higher taxes if it were best for America. The problem is the concept of money and how different people think about money. On Sunday morning it is all about generosity and helping the dear neighbor, but on Monday morning it can become about greed and running the dear neighbor off the road. The key difference is in how we think about money.
Economics focuses on money because it is easy to measure and provides a convenient summary measure of our success and well-being. But what money means to you often has a lot to do with how much you have. Poor people want and need money to pay the rent, buy food and replace worn-out clothing. Their sense of self-worth is not based on how much money they have. But when reaching a million dollars or more, you are likely to begin viewing your wealth differently. After all, you are now a millionaire! Money can become valuable to you for its own sake. This is partly because you are now able to meet your basic needs without difficulty. You may even begin to scale up selected purchases such as an expensive automobile or an exclusive property to better display your wealth. In his 1899 book, The Theory of the Leisure Class, Thorstein Veblen revealed that some goods become more prestigious and desirable when their price rises. Acquiring “Veblen goods” can reinforce a wealthy person’s sense of self-worth. But bidding up the price of Picasso paintings does not bring Picasso back to life to produce more paintings.
World War II reinforced our sense that “we are all in this together.” The generous GI-Bill provided many benefits to young returning soldiers who were able to provide for their families as the sole breadwinner so their wives could have babies to create the “baby boom.” The educated elite kept their own compensation down with CEOs making on average only about 20 times that of the median worker. Following the war, worker compensation kept up with rising productivity. But after 1976 output per worker continued to rise but worker compensation began to fall in real terms (i.e., after controlling for inflation). Since that time, the average CEO pay in America has risen to almost 300 times the median worker’s compensation. Most families could no longer cover their expenses with only one breadwinner. Women entered the labor force in much greater numbers. And women who went to college often met and married well-educated men. But even today only about one third of Americans have a college degree. Wealthy communities have become wealthier, and wealth has become increasingly more concentrated. A trillion dollars is a thousand billion dollars, and a billion dollars is a thousand million dollars. Elon Musk may be the first trillionaire, but there are others right behind him.
From the farmers market to the competing restaurants and those great exercise classes led by the owner who sweats along with the class earning every penny she makes, it is clear that free enterprise can work really well at the local level. But at the corporate level, it can be quite different. A large powerful corporation can often block competition by quickly buying up competitors or temporarily lowering prices to run the annoying intruder out of the market. A media firm with up-to-date technology can extract information from participants that is unavailable to its competitors. Former Greek finance minister, Yanis Varoufakis explains all this in his book “Technofeutalism: What Killed Capitalism.” The richest 20% have become the Lords of the Manor – the nobility, leaving the bottom 80% as the peasants or serfs. This is not theoretical. It is reality. Jeff Bezos recently had a $50 million wedding – just “chump change” for him. Engineers who create artificial intelligence algorithms are paid millions of dollars, while users of A.I. get their personal data extracted. Under the greedy pig theory of economics, otherwise known as maximizing shareholder value, the worker’s hard work pays off. But not for the worker. The worker’s hard work pays off for the shareholder. As in slavery, the owner gets the profits, and the worker gets to do the work. Investors in mutual funds may not even know the name of the companies they are invested in, much less help those companies in any way, other than providing them with money that the wealthy investor would have to pay a bank to hold onto if there were no place to invest.
Wealthy Americans can sometimes fall into the trap of thinking that international trade is all about making money. Unlike most middle-class Americans, who struggle to save money at Walmart, Dollar Tree and other low-price retailers, wealthy people sometimes focus on accumulating money for its own sake. Being extremely wealthy can distort a person’s view of tariffs and international trade. We have an international trade deficit. More money is going out than is coming in. We are losing money. But we get high-quality products at very low prices. A wealthy person may not even know what a good pair of memory foam sneakers cost at Walmart. Some wealthy people are not even familiar with the cost of “groceries.” Some wealthy people who have an exceptionally poor grasp of economics may even think that raising tariffs will make the exporting country pay more to sell their products to us. They do not know that Walmart and other retailers typically have to pass along the tariff that they pay at America’s seaports, airports and border crossings to their customers as part of the price of the product. Little do they realize that using tariffs to pay for a cut in income taxes is just transferring the tax burden from being based on the ability to pay to a sales tax (hidden in the shelf-price of the product) that hits everyone the same regardless of their ability to pay. The rich get richer, and the poor get poorer.
In particular, the top 20% get richer and the bottom 80% struggle even more to get by. The MAGA crowd clearly knew that there was something wrong with the system, even if they did not fully grasp all the details. If Bernie Sanders had beaten Hilary Clinton in the Democratic primary in 2016, or a certain tv celebrity from “The Apprentice” had not appeared on “The Joe Rogan Experience” podcast in 2024 to convince a large number of young men who had been ignoring politics to vote for him, or the COVID-19 pandemic had not disrupted the supply-chain and driven up prices when it did, or the horrific events in Israel and Palestine had not occurred under the Biden administration, we might now have a different president focused more on helping the poor and middle-class Americans in the bottom 80% and not on worshipping and rewarding the richest Americans in the top 20%.