Our Economy is Severely Ill. How Do We Treat It?
Imagine for a second that our society as we know it is a human body. The economy is the heart. Income inequality is the disease afflicting it. Social unrest and poisoned discourse are the symptoms. Still with me?
These aren’t small issues. We’re talking about items that go to the very structure of how our world operates. Our biggest problems are often complex. They can also be quite boring. This deadly combination breeds apathy and inaction, both of which can be fatal if unchanged for long periods of time. We’re starting to see the results of that now.
As my few regular readers know, I try to focus on practical issues in a measured, apolitical, economics-centered way. In researching various articles and covering the potpourri of economic issues we face in both the developed and developing world, I keep running straight into one issue: income inequality.
I like discussing the markets, keeping people level-headed with their investments, and encouraging involvement in personal finance. These are all worthwhile objectives in their own right. The problem is that people need to have some money left over at the end of the week to participate in these discussions. Increasingly, many don’t.
And that’s the crux of the issue. All the investment advice and wealth-building strategies are only helpful if you have money with which to follow these recommendations. Studies and surveys vary, but most estimate that between 70% (per this study) and 50% (per this one over here) of Americans don’t have $1,000 to spare. Use the lower number if you want, that’s still terrible. It’s about half the population up in Canada, too. The UK does marginally better, leaving only about a third of its population penniless.
Would we be satisfied if our heart was only pumping blood to 40–60% of our body? Probably not. Income inequality is a similarly systemic issue — whether you’re comfortable or not, it affects our society as a whole. Very few are completely immune to the symptoms and problems it brings about. This is why we have to get serious about solving it.
“Building” our “wealth”
I’ll try to avoid metaphors for a sentence or two and focus on building wealth. I tend to approach the “wealth” issue with my own little equation in mind. It’s a simple one:
There’s one major item to pay attention to with that equation. If the first line adds up to zero (or a negative number), then it stops right there. Multiplying by zero just yields more zero. That’s where a large chunk of our population currently finds themself. Multiplying by zero. Sure there are other items my simple little rules don’t account for neatly, like purchased assets retaining value or home equity, but in an overly simplified way it works.
Also included in that seemingly simple equation are all of our collective disagreements and worries, believe it or not. For example, let’s indulge and imagine for just one moment that both sides of the political aisle are acting in what they believe are legitimately the world’s best interests. We disagree with each other, but tactfully.
One side argues that the way to increase wealth is by reducing the “costs” side of that first line. Lower taxes, deregulate and make items cheaper, make hiring easier, etc. etc. The idea is that, even if earnings remain stagnant, people can begin building wealth using the leftover funds from the reduced costs.
Likewise, another side says that the way to go is increasing the earnings figure. Costs become less important if that first number is high enough to guarantee leftover money and comfort. If we can collectively raise earnings through setting mandated floors on salaries/wages, or boost bargaining power through unionization and other items, the result will be the same — a greater number left over to invest, provide security, and build wealth.
All of the well-intentioned advice by people like myself goes into this equation too. Budgeting tools (reducing costs), maximizing your side-hustle (increasing earnings), investment strategies (juicing up that “investment return” item). Unfortunately, those strategies have been of little use to many as of late. If you’re out of funds by the time you pay for housing and transportation, this is all just a theoretical exercise.
And if you feel like you can’t win? Working hard, doing the right things, and still multiplying by zero? Well, you can either get increasingly irritated, angry, or polarized, or you can drop out entirely. Give up. Apathy and cynicism. We’re seeing a weird mixture of all these items right now, and it’s killing us.
What’s actually happened over the last several decades (while we bickered with each other) is that earnings have stagnated (nominally) or declined (on a real, inflation-adjusted basis). Costs have risen continuously. Both sides of that first equation are trending in the wrong direction. Every milestone we pass is another huge chunk of the population multiplying by zero and getting left behind.
In some cases, we’ve been in a similar situation before. Housing prices (relative to income) are just now reaching the worst levels we’ve recorded. The 1950s in the United States, believe it or not, saw similar levels. The UK also just blew through its own worst-recorded levels, previously seen in a post-war housing shortage in the late 1940s. Back then the issues were largely supply and demand. That still plays a part, sure. But it’s not as simple.
The income inequality piece was not as big a factor during those previous highs. Our current levels most closely resemble the 1920s versus any other period in history. I don’t recall that ending well. But it also changes how our market functions.
Builders will build homes based on what they can maximize profits on, not based on who needs housing the most. Since a greater and greater percentage of the wealth is concentrated up at the top, builders are more likely to focus on new housing and developments that cater to those who are looking to buy — largely the top third or so of the country. Everyone else is left fighting for the one open lease on the last 700-square-foot apartment in town that was built in 1962.
For many families in the upper portion of the working class and lower portion of the middle class, their home was their wealth-building vehicle, via equity. At the very least, if they didn’t do anything with it, they’d have a paid-off home to eliminate their largest payment (housing) in retirement. Social security could then step in and at least keep the utilities on and pay for some basic necessities.
Without reasonably priced housing, those sections of the population are now in the rental class. There are times that renting makes sense, certainly, but if you’re paycheck to paycheck you’re now building no wealth at all. You’ll still have a housing payment in retirement, which may mean there is no retirement.
Education is another factor. Some, like myself, would argue that formal education (for many, but not all fields) is a massive artificial barrier to entry that actually increases income inequality. Wealthy families are far more likely to have children graduate college, who are then more likely to be wealthy themselves and then perpetuate the cycle.
Those from households with relatively modest earnings have to finance an increasingly large burden, setting back their own wealth-building for decades even if they graduate and find a decent paying job. Both of those represent a big “if”, to begin with. Then they enter a market for post-grads that saw its best earnings come and go over half a century ago.
Massively rising costs, realistically declining earnings. If it happens for a year or two, we can call it an aberration. It’s been happening for decades. This is now what I’d call a systemic disease. Financial insecurity causes too many problems to count — anxiety, depression, anger, health issues (related to stress), and deadly discourse. We can’t ignore it.
A long project
Repairing decades-long damage is not a quick project. Nor will it have a magic bullet. Try ignoring everything that goes wrong in your mouth from age 18 to 63 and then go see a dentist. I’ll guarantee you it’s not going to be fixed with one appointment. This is why we have to stop hating each other for long enough to hear out a wide variety of ideas and get to fixing some of this.
I like to look at problems in bite-sized increments so it seems more manageable. It’s why I have separate (but overlapping) articles on the housing market, inflation, education, investing, etc. It’s tougher to do that with income inequality, as it’s such a far-reaching and systemic issue. But we have to try.
I personally believe we have to start with the two largest purchases citizens are likely to make — housing and education. And yes, it’s well past time to consider education an economic issue. Depending on the college, four-year education costs as much as a starter home did a few years ago. Stack housing costs on top of that and it’s no wonder why people throw up their hands.
We also have to take a hard look at what policies, programs, etc. aren’t working for the majority of the population. The median representative in the United States is a millionaire. Whether their intentions are good or not, we can’t expect them to be truly representative of our population at large. If we cannot collectively get together and form solutions that gain widespread popularity, we can’t expect action legislatively.
One thing that won’t work is arguing with each other on ideological lines and continuing to focus on issues that are symptoms of a larger disease. Financial security and economic stability are essential to a comfortable life. Let’s not be so shortsighted and vitriolic as to voluntarily surrender ours.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.