Sunday, May 05, 2019

Wealth Gap Statistics: Mostly Nonsense, but Maybe a Grain of Truth

I am running into more and more information from influential people about the wealth gap.  Here’s an example by Ray Dalio, an influential financier in whom people have great confidence.  

To me, at least at first, it seems like just more gasoline on the fire of leftist hysteria about income and wealth inequality.

By U.S. Department of Agriculture - Flickr: 20130817-FS-UNK-0004, Public Domain,

Yes, I know the author is giving us statistical nonsense instead of true facts as do others, and as still others have countered.  However, in spite of its statistical errors, this article may have touched on a truly genuine and perhaps justified sentiment of injustice. 

Of course it is full of fake news, i.e. bad science that deserves to be countered.  Of course I have read Philip Magness’s marvelous pieces on income inequality, and I understand that much of what we read is poorly researched (Piketty et al.).  But in my opinion the most important point Dalio’s article makes is that there is truly an injustice that needs to be addressed today, and it has more to do with a slanted playing field that it does with wealth or income per se.

Here is an extract of Dalio’s article, in contrast to his other bad stats, that I think pinpoints the origin of the injustice:

"Central banks’ printing of money and buying of financial assets (which were necessary to deal with the 2008 debt crisis and to stimulate economic growth) drove up the prices of financial assets, which helped make people who own financial assets richer relative to those who don’t own them. When the Federal Reserve (and most other central banks) buys financial assets to put money in the economy in order to stimulate the economy, the sellers of those financial assets (who are rich enough to have financial assets) a) get richer because the financial asset prices rise and b) are more likely to buy financial assets than to buy goods and services, which makes the rich richer and flush with money and credit…."

Personally, this hits a cord.  I can definitely say that I am very miffed–indeed indignant and horrified–that my savings are so little remunerated today.  This is theft pure and simple, perpetrated indirectly by individuals in whom the public has placed its blind trust, i.e. the Federal Reserve.  

Dalio gets it wrong:  This is not capitalism; this is captivation of politicians by bankers.  (You can tell I’ve read Calomiris’s Fragile by Design, a fabulously enlightening book.)  

Also, it is entirely possible that not only are the wealthy buying financial assets more than usual but that, due to economic and political precarity, businesses have chosen to play in the speculative financial sector rather than risk their capital on producing useful things and services, and/or than invest in a trained workforce through higher wages.  

Does this notion not deserve more research?  I think so.  Yes, it’s true that Piketty and Dalio and others get the facts wrong, and I’m ecstatic to see that research institutes such as AIER and others are doing something about this.  But the anti-capitalists do get something right here.  In my words:  

Today’s politicians and their minions are acting in ways that come dangerously close to being criminal.  And perhaps even more significantly, it is precisely from this unjust state of affairs that all the hullabaloo about income and wealth inequality gets its power and influence, even as the rabble-rousers get the details wrong and miss the mark.

The troublemakers may be ineffective at inculpating the wealthy, but they have hit a sensitive nerve of the general public, and this is having an effect.  Free-market supporters need to up their argument.  Countering bad statistics is one thing; finding the underlying problem and convincing the voting public of ways to solve it are quite another.

This is just a thought on a Sunday afternoon.  I wish someone would do something to inform all of us ordinary people, modest savers such as myself who are truly the victims of government's “legalized embezzlement” as Edward C. Harwood used to call it, so that we can make changes through the ballot box.  

("Legalized embezzlement" is Harwood's term for government meddling with the money and credit supply in ways that cause harm to the economy and to the general public, usually through price distortion, sometimes with price inflation (but sometimes not), and through exaggerated stock market, real estate and other market bubbles and subsequent crashes.)

It is the ordinary public that is most devastated by violent economic events caused by diddling with money supply in a fiat-monetary environment.  Someone should explain this underlying monetary injustice to voters.  It surely helps enflame the income-inequality hysteria.  

What might the solution be?  A return to a monetary standard that will ensure that money and credit act not as gasoline on an out-of-control fire, but rather as the water that puts the flames out and allows economic life to thrive.

Labels: , , , , , , , , ,