Obama Is Right To Put Spotlight On Economic Inequality (Demo)

The topic was the rising level of economic inequality in America, which Obama identified as “the defining challenge of our time.”

Numerous trends have come together over the last few decades, he said, to create “an economy that’s become profoundly unequal and families that are more insecure.” The trends are “bad for our economy … bad for our families and social cohesion … bad for our democracy.”

The greatest threat is to America’s tradition of social mobility: “A child born in the top 20% has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20% has a less than 1-in-20 shot at making it to the top,” Obama said. The prospects of that poor child have worsened. And that poses “a fundamental threat to the American dream.”

In Washington, a town where missing the forest for the trees has been raised to an art form, Obama’s Dec. 4 speech has set off intense debate over such issues as whether economic inequality really is “the defining challenge,” or whether maybe something else should win the trophy. Unemployment, for instance. The suggestion was made that Obama focused on inequality because it’s easy for people to get morally huffy about it.

It’s an easy score, in other words, because it offends people’s delicate sensibilities and yet is so complicated a phenomenon that no one has to suggest specific remedies. Unlike unemployment, which is an acute problem today with straightforward remedies confounded by the political system.

But Obama is absolutely correct. Virtually every economic problem we have today — slow growth, high unemployment, low social mobility among the underclass — is both a manifestation and a cause of economic inequality. Income inequality produces stagnating wages for middle- and working-class employees, which suppresses overall economic growth, which creates low employment. The capital-owning class spends its income at a lower rate than the working class, which consumes most of it in the near term; that reduces overall demand in the economy, causing low growth and less employment. Slow growth also suppresses public investment in schools and social programs, which create obstacles to social mobility.

The importance of Obama’s speech lies not in any roster of remedies — in fact, it was fairly criticized for offering few new specific ideas for reversing inequality — but in placing the issue squarely on the table. “It was more agenda-setting than legislatively directed,” observes Timothy Smeeding, Director of the Institute for Research on Poverty at the University of Wisconsin.

What made the address especially effective, Smeeding said, was that it described inequality “not just about the poor and the middle class and the top 1%, but about the whole picture.”

What that means is that fighting unemployment and fighting inequality are not mutually exclusive efforts — they’re the same effort. Policies that significantly lower unemployment will also reduce inequality, Jared Bernstein, a former economic advisor to Vice President Joe Biden, now at the Center on Budget and Policy Priorities, asserts in a recent blog post on the subject.

Bernstein acknowledges that evidence that rising inequality has impeded economic growth is hard to come by. The main reason, he argues, is that the effect has been masked by higher credit card debt and by the housing bubble, which provided middle- and working-class families with the spendable wealth they lost through the stagnation of wages. When the bubble burst and credit contracted, the hangover showed just how far out of whack the distribution of income had become.

Economic growth, Bernstein writes, “has become a spectator sport for too many poor and middle-class households that watch as the gross domestic product, or GDP, productivity, the stock market, and corporate profits rise.”

Inequality not only fostered the credit boom and bust, it also promoted the loose regulatory environment and other public policies that have fueled the imbalance. That’s because inequality also is a self-perpetuating political phenomenon.

“The rich speak louder in the political debate,” writes Berkeley economist J. Bradford DeLong, “and the rich want to keep what is theirs.”

He might properly have said “what they claim to be theirs” — the argument against inequality is that they’re claiming a portion of economic wealth that really belongs to the workers who are responsible for the productivity gains of recent decades.

Michael Hiltzik has couched his column from the perspective of a one-factor thinker by which labor is the reason for productivity gains and should thus be rewarded with increasing wages and salaries. President Obama, also a one-factor thinker, declares that operating forces in the “system” has resulted in  “an economy that’s become profoundly unequal and families that are more insecure.” And that poses “a fundamental threat to the American dream.” But President Obama fails to define what he believes the American people believe to be “the American dream.” President Obama, while projecting the notion of concern, has failed to advocate specific ideas for reversing inequality outside a jobs bill that relies on taxpayer extracted and incurred national debt to finance infrastructure building, make-work government job programs, and the expansion of government-dependent welfare support programs. Never has the President advocated for the real potential of a FUTURE economy without the barriers to economic growth that result in concentrated ownership of corporations and their underlying wealth-creating, income-producing capital assets.

Economists who are one-factor labor ONLY thinkers fail to grasp the reality that full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum in order to maximize profits for the owners. The reality is that corporations constantly seek means to production that will cut costs, including an emphasis on replacing stagnant labor productivity with far more productive gains achieved through the employment of human-intelligent machines, super-automation, robotics, digital computerized operations and other non-human productive capital assets. As a result, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing productivity and role as an efficient and profitable replacement for labor.

What that means is that breaking down barriers to broadening private sector productive capital ownership and fighting inequality are not mutually exclusive efforts––they’re the same effort, but with the emphasis on OWNERSHIP CREATION that exponentially employs the non-human factor of production rather than JOB CREATION, which will follow but continue to be a less necessary factor of economic growth.

The problem is that writers such as Michael Hiltzik and conventional economists such as Timothy Smeeding, Jared Bernstein, J. Bradford DeLong, Paul Krugman, Robert Reich and others see production in one-factor labor input terms and claim that a larger portion of economic wealth “really belongs to the workers who are responsible for the productivity gains of recent decades.” But the reality is that technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power––and relatively constant). The technology industry is always changing, evolving and innovating. The result is that primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.

Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income. Long ago that was once true because labor provided 95 percent of the input into the production of products and services. But today that is not true. Capital provides not less than 90 to 95 percent of the input. Full employment as the means to distribute income is not achievable. When capital “workers” (productive capital owners) replace labor workers (non-capital owners) as the principal suppliers of products and services, labor employment alone becomes inadequate. Thus, we are left with government policies that redistribute income in one form or another. This inequality of opportunity to empower EVERY citizen to become a productive capital owner is the real source of economic inequality.

So while the masses of the American population now presently employed continue to have unsatisfied needs and wants for products and services, and are spending their limited incomes toward fulfilling their desires, they will continue to deny themselves consumption because of the underlying gut fear that they may not have a job in a year or five years, with no alternative except for a greater reliance on taxpayer extracted and incurred national debt financed government welfare, open and concealed. What purchasing they have done is arguably traceable to credit card debt and loans based on limited home equity values, as well as a practicing spending conservation. The reality is that increasingly more Americans are experiencing flatline or declining incomes and benefits from their jobs as well as increasing pressure to work longer hours for the same pay, with poor prospects for retirement security.

Conventional economists, political leaders, and the national media are oblivious to the role of physical productive capital, which is to do ever more of the work, which produces income to those who own such capital assets. Propertyless and under-capitalized Americans sense and experience that they are less secure with prospects for good incomes that they can rely on to support themselves and their families, but they feel helpless to do anything about their plight and continue to struggle on day by day, month by month. They will eventually come to realize that they are a statistic in a nation of industrial sharecroppers who work for somebody else and have no other source of income.

The majority of Americans, dependent on labor worker wages, no longer think that jobs and labor wages will return suddenly—if at all—and at a livable earnings level, that the value of their homes will re­bound, or that their limited retirement funds will soon be fully restored. Americans are scared but attribute their worsening finances to job losses, reduced hours, wage givebacks, and overall reduced earnings. They do not understand the role of productive capital driven by technological innovation and science and the requirement for them to become capital “workers” (owners), as well as labor workers, to earn a viable economic future.

And until we, as a society, understand how wealth is produced, how consumers earn the money to buy products and services and the nature of capital ownership, we will not be able to set a course to obtain an affluent quality of life for middle and working class citizens, where everyone, according to President Obama “can earn enough to raise a family, build a modest savings, own a home, and secure their retirement.” We need to build an economy of universally productive individuals and households, through broadened private sector productive, wealth-creating, income-producing capital ownership and real job opportunities resulting from significant economic growth with GDP in the double digits.

Market-sourced income (through concentrated capital ownership) has concentrated in individuals and families who will not recycle it back through the market as payment for consumer products and services. They already have most of what they want and need so they invest their excess in new productive power, making them richer and richer through greater capital ownership. This is the source of the distributional bottleneck that makes the private property, market economy ever more dysfunctional. The symptoms of dysfunction are capital ownership concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the 99 percent majority of people who depend entirely on wages from their labor or welfare and cannot survive more than a week or two without a paycheck. The production side of the economy is under-nourished and hobbled as a result.

We cannot balance the budget without cutting out coerced taxpayer-dependent redistribution of the earnings of capital “workers” (owners), which if we did at this juncture would collapse the economy and ruin lives, resulting in social strife, personal suffering and degradation, the erosion of freedom, and ultimately anarchy, which will bring on totalitarian government. While welfare, private charity, boondoggle employment and other redistribution measures are now seen as necessary, they do not have to be sustained indefinitely. There are policies that can be adopted and executed to reverse the ultimate direction of collapse of the American market economy system. These policies are based on the recognition that as the production of products and services changes from labor intensive to capital intensive, the way in which every human being––not just a few, but every person––earns his or her income must change in the same way. At the core of this quiet revolution is the understanding and commitment to broadening the ownership of productive capital.

Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers and the pledge of past savings. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital. Note, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments compared to the top 10 percent of capital owners.

What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer through their continuous accumulation of capital asset ownership, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.

As binary economist Louis Kelso asserted: “The problem with conventional financing techniques is that they address only the productive power of enterprise and the enhancement of the earning power of the rich minority. Sustaining or increasing the earning power of the majority of consumers who are dependent entirely upon the earnings of their labor, or upon welfare, is left to government or governmentally assisted redistribution of income and to chance.”

Unfortunately, pursuing economic democracy has been frustrated by the systemic concentration of economic power and exclusionary access to future capital credit to the advantage of the wealthiest Americans. The so-called 1 percent rulers of corporations have rigged the financial system to enable this already rich ownership class to systematically further enrich themselves as capital formation occurs and technological industrialization spreads throughout the world, leaving behind the 99 percent to depend on income redistribution through make work “full employment” policies, government boondoggles, excessive military build-up and dependence on arms production and sales, and social welfare programs due to the lack of an alternative to full employment and the growing economic helplessness and dependency. The unsatisfied needs and wants of society are not in that 1 percent or for that matter the 5 percent; those people are not the ones who are hurting.

Today’s techniques of finance are designed to make the rich richer. None are designed to make the poor richer. That’s why the poor are poor. The reason they are poor is because they do not have viable capital ownership. Thus, we need to focus on revising today’s techniques of finance to broaden capital ownership.

The purpose of production in a market economy is the consumption of products and services by the consumers who make up the economy. But without income, the non-capital ownership class, the 99 percenters, cannot afford to purchase the products and services they desire. But when incomes rise among consumers who have the need and desire to improve their material standard of living, the market demand for products and services strengthens, which in turn increases production and results in a growth economy.

Our national economic policy needs to eliminate all barriers to enabling productive capital acquisition to take place through commercially insured capital credit. By doing so the result would be a quiet revolution in which economic plutocracy will transform to economic democracy.

It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

For specific policy solutions see the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797 and support the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.