IS Wall Street the main cause of U.S. income/wealth inequality?

Great Debates
1

[I think this op is better here than in Elections but if a mod feels otherwise please feel free …]

Sanders’ singular message is income inequality … caused by Wall Street having the economy rigged.

It’s a nice sound bite, a good marketing angle that hits on Hillary’s vulnerabilities hard, but is it actually true? And would a tax on every trade be a meaningful part of a solution or would it risk significant negative impacts?

(Please note: IMHO income, and more so wealth, inequality must be meaningfully addressed for the good of the society as a whole, the wealthiest inclusive, and I believe that economic populism is a winning political tactic this season. Simple messaging sells best. Selling the product of a candidate or even of an approach is a packaging issue, not a reality issue. This discussion however is hoped to be a reality one.)

My assessment is that reality is much more complicated than what Sanders presents and that the solution he proposes are both simplistic and risk more harms than goods. He wants war on the 1% and as he points out about military interventionalism internationally, sometimes good intentions have unintended consequences.

The hollowing out of the middle class is resulting from multiple factors. [ul]
[li]More and more jobs of the middle class are being automated including jobs of many knowledge workers. maybe eventually increased automation will, by way of increased productivity, raise the whole boat … but for now it mainly raises the prospects of those who own the capital.[/li][li]For both better and worse we are unavoidably part of an international economic community. American workers are competing internationally and we are competing internationally to the place to invest capital. The net global impact is a major decrease in income and wealth inequality as the poorest of the world move up, but we have some negative local impacts.[/li][li]As noted by Sanders, higher education is a virtually required minimum to get a middle class job now, but getting such uses up most families’ ability to accumulate any wealth. (I do not think his solution is realistic, but the observation is, I believe, valid.) [/li][li]And also addessed by Sanders, the tax structure that favors the very wealthiest.[/li][/ul]

Let us assume, for the sake of discussion, that Sanders somehow, with magical pixie dust gets a political revolution and accomplishes his free college in public institutions, paid for by taxes on all trades and much greater taxation across the board but especially on corporations and the income brackets, and increases minimum wage to $15/hr federally … given the first two listed factors, what happens? Does it actually fix them or does it accelerate and amplify their impacts?

My assessment is the latter but I would be interested to hear a reasoned (not sound bite or shouting) discussion of it.

Thanks.

2

You forgot the war on unions as a cause of inequality. Unions were the single most important reason for the increases in wages and benefits in the first place. Their decline, which has neatly corresponded with the decline in equality, can’t be dismissed as a cause.

3

His singular message is stupid.

Wall Street didn’t rig the economy. Rich people get rich by spending less than they earn and investing the rest. That’s how the world works.

I only know of data for a raise in MW to $10.10, but that is projected to cost a half million jobs or so. I assume a raise to $15 will cost at least that much. If Sanders is upset by the switch to automation, raising MW is going to encourage that - automated order-takers at McD’s instead of MW human workers will become more popular.

According to the Tax Foundation, Bernie wants to spend somewhere north of $18T, and his tax plan will raise something like $9.8T, so the national debt will increase by at least $10T, probably much more than that. It will also depress job creation by six million jobs. I don’t expect reducing job growth by six million jobs will help things.

This part is obviously true, which is why protectionism doesn’t work. Bernie Sanders is wrong to oppose free trade. Most economists recognize the value of free trade - combing the universities for some far-left fruitcake to contradict this is misleading to the point of dumb.

I need to see that the observation is valid before addressing the solution. That is, I would need to see a cite that most families are unable to accumulate any wealth if they have a child who attends college, in particular state university.

I don’t mean I want to hear a lot of whining from over-privileged twits from OWS complaining that their undergraduate degree in comparative literature or Victim Studies from Harvard saddled them with debt because Starbucks doesn’t pay well enough - I mean a cite that the average cost of the average student at the average school bankrupts his or her family.

This will be an interesting election, in which we can determine if either side, if any, is serious about anything. If the GOP nominates Trump, it will show that they are stupid and not serious. If the Dems nominate Bernie, it will show that they are not stupid and not serious.

Regards,
Shodan

4

Wall St. refers not just to the stock brokerages, but the all of the major financial institutions who have raped the country’s economy. Blaming them for doing so is tricky business, most of what they did was perfectly legal, and any illegal acts haven’t been prosecuted. So you can blame them if you want, but I’d put at least the same amount of blame on the government that made their fraudulent activities and bribery of public officials legal while failing to enforce the regulations they legislated. So take our pick, blame the bank robber or blame the bank manager who left the front door open and the vault unlocked. YMMV.

5

(bolding mine)

Some are and some aren’t. Let me know when a company fires its CEO, CFO, and the rest of the executive suite and hires their replacements in Bangalore. We seem to have a cultural belief these days that those who do certain jobs (manufacturing, engineering, customer service) are fungible; “I need three tons of software engineer on this project, find out where we can get them cheapest per pound.” Directors and executives, on the other hand, are unique and irreplaceable; you must have the right man, whatever the price. Of course, it’s in certain people’s interest to promote that idea. Get rid of that discrepancy, then we’ll have free competition.

That said, does “Wall Street” refer just to the traders at the NYSE, equity investors in general, decision makers at the nation’s financial institutions, or boards of directors (elected by the major shareholders) and executives of large companies? Sanders may just be using the term as a shorthand for “those who have manipulated the system to promote inequality”, in which case the answer to the OP is “yes”.

6

What Sanders would say is that’s the point - they have kept the government from making these things illegal.

7

Pretty much. He’s preaching to the (IMOH loonier) left wing liberals who eat this stuff up. And it’s the same old class warfare, we need massive reforms, let’s dump the baby AND the bathwater rhetoric that hurt the Dems in the late 70s through the 2000s. Clinton was the one who showed the Dems how to come back from that image, but the lesson wasn’t learned and now, here we are again with Sanders. I almost hope he wins AND gets everything he wants…it will be a watershed moment for the Dems when the country turns against them like the country has turned against the Republicans, who think their whacky fundamentalist and reactionary politics are what the people REALLY want.

I think it will have the opposite effect of the one he wants. I’d say it will drive some if not many small to medium businesses out of business, it will drive larger corporations to further automation of the work place and/or to offshoring and outsourcing labor, and if he makes the taxes punitive it will drive more Americans to consider moving their wealth out of the US, or at least not investing as much in the US. It will probably cause foreign companies to do the same, and if he is really serious about some sort of trade tariffs then I can see that spinning out of control pretty quickly. That could cause a world wide depression, just like the Great Depression, as countries mirror what we do and reflect that back on us.

Of course, the reality is that even if he’s elected he’s not going to be able to do any of this (or at least most of it), because he’s not going to be God King of America…he’s going to be President, which means he has to work with the other branches of the government to get anything done. The Republicans will be, if anything, MORE opposed to Sanders than they were of Obama, since he is a genuine left wing radical and really wants all that left wing economic stuff to happen. Even his own party is going to be split, especially if Sanders wins by a narrow margin, though even if he doesn’t, unless they are themselves left wingers with solid left wing constituencies back home they would have to worry about re-election and how supporting some of Sanders loopier policies would impact that.

8

Actually rich people get rich by:

  • inheriting
  • running profitable businesses
  • pyramid schemes
  • owning a resource (e.g. oil)
  • winning a lottery
  • crime

I’ve worked all my life (computer programmer, teacher); always spent less than I earned and invested wisely. And I’m not rich.

9

:dubious: If you’ve simply been putting in your 10% into a 401K for the last 20 years you are going to be close to a million dollars by now, because the one thing on your list you didn’t mention was investing. You may not FEEL particularly rich (I certainly don’t) but by the standards of many on this board having a million dollars or more in assets makes one ‘rich’.

10

That is not correct. 80+% of millionaires in the USA made their own fortunes, as well as a majority of the billionaires. (Cite.)

And winning the lottery is too rare to be statistically significant. Same with crime - most criminals, over their lifetime, would be better off if they had worked even a minimum wage job.

Regards,
Shodan

11

This is just a guess pulled out my butt but I’ll bet that Madoff hurt the rich more than he helped them.

12

But then how would those poor politicians make their millions of dollars off of lobbying? Then they would just be regular people like the rest of us scum.

13

In Wall St. terms that’s not rich. And many people would be a lot richer if their retirement investments weren’t paying for the bad bets made on Wall St.

I will always remember the advice on investing given to me as a young man - If it matters to you whether the price of the stock goes up or down then you’re in the wrong business. That advice was given to someone by a broker at Bear Sterns. That someone’s son went into the right business and millions during the financial bubble burst. The people who work all their lives and invested 10% of their income for decades in publicly regulated funds should have a lot more than a million dollars in assets by now based on the returns ‘earned’ by the managers of those funds.

14

In terms of a large percentage of the worlds population, having access to running water, sanitation and electricity makes the average westerner vastly more rich, so I’m not sure what good that comparison is.

As to bad bets on Wall Street, my own investments have survived and expanded every crash since the 80’s. The epic downturn in 2008 certainly was a hit…but I was back to even by 2010. And my investments are nothing special. Yet the trend, if you look at it over large time frames, is all upward. The real advice is start investing early, if your company have a 401K invest the maximum you can into it, and then leave the money be…don’t constantly be trying to shift it around because unless you really know what you are doing it’s a fools errand.

15

But those of us who have done that are not in the 1% and certainly not in the 0.1% with so much of the money. Hedge fund managers don’t get rich by saving their pennies.

Still, the problem is all through America, and blaming Wall Street only is pretty simplistic.

16

If Wall Street is a proxy for the “financial sector” then no, most of what Bernie says is false and they do not bear the majority of the blame for any of our recent troubles. They were not the driver of taking out unwise mortgages–Federal policies encouraging home ownership and discouraging renting (by offering no tax relief to renters but offering immense tax relief to buyers and by creating a Federal clearing house for mortgages and FHA loans) are to blame for that. In many countries, even OECD countries, the American concept of the 30-Year mortgage does not exist. The 30-year mortgage would have a very small market if not for Government, because in a free market banks would only issues those with huge down payments and to people with very strong income and wealth.

The financial sector is to blame for some things, they’ve done stupid shit that has had terrible impacts on the rest of the economy for hundreds of years. But let’s keep in mind–all industries have, in different ways. Free markets and independently operated companies will always have some negatives they cause, the question is are those negatives offset by the prosperity and economic growth that comes from having them? Market based economies (whether “social welfare” states or closer to a free capitalist state) have decided the answer is “yes, they are worth it.” The job of government is to regulate/limit the negatives as best it can, but it’s foolish to expect we can make the world perfect.

17

Google, MasterCard, Adobe, Microsoft, and Pepsi all have Indian CEOs. It is just false that executives are protected from international competition.

4 things are causing the rise of inequality and Sanders will do nothing about them.

  1. Unskilled and low skilled labor now have to compete will billions of third world workers due to globalization and the internet making it easier to monitor and build factories in those countries.
  2. Globalization and the internet make it easier to sell to the whole world and those companies that do can be bigger than ever. Management and finance people can capture the same percentage of the gains they always have but the large nature of the companies gives them much larger rewards for that same percentage.
  3. Natural monopolies. If Ford, or GE was making a huge profit then someone could copy their product, build a rival and make alot of money. The success of McDonalds spun out Burger King, Wendys, Taco Bell, etc. What makes Facebook valuable is all of the people using it. The network effects software companies create make them natural monopolies, and they are able to extract monopoly profits.
  4. Low interest rates make home ownership more valuable. When interest rates hit a permanent low plateau in the 1980s home values started to shoot up. Zoning laws and other regulations make building enough new housing to meet demand impossible in most places. Low interest rates have increased the amount people can pay for a house while supply constraints have created a permanent shortage of houses. Thus housing prices have shot up and most of the wealth disparities of the last thirty years have their origin in rising home values.

The only way to stop globalization is to start a trade war which will hurt the US worse than other countries since what they produce is cheap and what we produce is expensive.
There is no way to tax tech monopolies since their relatively small workforces make it easier for them to move to another country if such a plan was enacted.
High interest rates would send unemployment soaring, and enacting housing reform would be politically impossible given Sanders’ coalition.

18

Nor did I say that hedge fund managers get rich by saving their pennies. However, ‘rich’ is a relative term, and I’ve seen it said on this board that having a million dollars (or some other arbitrary amount) is ‘rich’…and that is certainly attainable to anyone who is disciplined enough to invest from an early age in their 401K or whatever other investment medium they choose. Despite periodic setbacks, things like money market funds or other funds have paid off pretty well, in my own experience at least, over the past 20-30 years. Am I in the top 1%? Nope. It would be nice but no, I’m not. However, I’m nearly at the point where I can retire on my investments with what I get from Social Security being a nice bonus, which is kind of what I was going for.

I agree, blaming Wall Street for all our problems IS simplistic. But then, Sanders overall message has been one of simplistic sound bites that resonate with people. Clinton has been the one trying to keep it real and to point this out, but she seems to not be getting much traction with this approach.

19

When someone can make money investing in a company whose stock value goes up when employees are laid off that’s inequality.

20

And when the moon hits your eye like a big pizza pie, what’s that?

Sanders and the OP are talking about income inequality, or wealth inequality. Did you have any thoughts about that?

Regards,
Shodan