Forum Post: Income Inequality and Debt
Posted 13 years ago on Oct. 4, 2011, 9:05 a.m. EST by Researcher
(11)
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A study by the IMF indicates that there is a relationship between increasing income inequality (the rich getting richer) and indebtedness.
The classic line that "we can't tax the rich because that will stifle investment" may, in fact, be true. But that all depends upon how one defines "investment". It appears that the rich are just "investing" their money by loaning it to "consumers" so they can buy various items.
This is, of course, not "investment" how economists typically think of it. They usually think of things like building factories and machines and doing research which improves productivity and has the capacity to improve our lives.
Perhaps I'm just too stupid to understand, but I don't see how our indebtedness has improved our lives.
Side note: I may post, from time to time, interesting research I come across in hopes of generating informed discussion. Feel free to comment.
We can tax them, limit there salaries, and cap their profits... As long at the Federal Reserve Bank is able to print new money and loan it to the 1% first they will effectively rob our purchasing power. It is the most regressive forum of taxation!
I think taxation is a good idea. I'm actually glad to see that Obama has been working with Buffett (who has long criticized the preferential tax treatment of the wealthy) in proposing an interesting idea for taxing the wealthy.
The risk with taxing, though, is that while wealth may not "trickle down", taxes often do. So we want to make sure anything we impose doesn't end up trickling down to the bottom.
But I think beyond taxes we need to look at the way incentives work. There is a paradigm that cutting labor expenses is good while raising executive pay is also good. I'm not sure why this idea has caught on. I've seen part of it attributed to Jensen's suggestion regarding the principal/agent problem. Basically the idea is that in order to get management of a company on the side of shareholders, you need to give them appropriate incentives. The problem is that, in many cases, management decides what those incentives are. So they can reap in huge bonuses based entirely on short-term profits (or in some cases, unrealized profits that don't pan out) while destroying the business in the long run.
The end results is that management wins, shareholders get screwed, bondholders get screwed, employees get screwed, and if the firm is "too big to fail", the rest of us get screwed.
I'm not sure how to address that. The problem with simply capping salaries is that many corporations are multi-national. They can move funds overseas. Many of them do. Corporations already move assets and offices overseas to reduce corporate taxes. There is plenty of potential for loopholes and these guys are pretty good at finding said loopholes.
I think you missed my point... I stating the ineffectiveness of those actions as long as the Federal Reserve Bank is bilking the American people. When they print new money and expand the pool of dollars in the economy it erodes the purchasing power of the dollars in our pockets. It has the effect of lowering minimum wage in REAL terms though no one sees it in nominal terms. People will notice the loss of purchasing power when the go to the store and prices have gone up - this is happening in NY w/ milk reaching $4/gallon.
Guess who benefits form the hire prices? Every dollar they print goes leave the Fed as a loan - to the federal government - then the federal government pays it back with interest paid goes to profit the share holders of the Fed bank. That's right, they have share holders...they aren't really a part of the government. Who are these share holders? No one really knows but my guess is they don't belong to the 99%. And you can bet taxes, salary caps and profit caps don't effect them much.
I guess I don't share your view of the Federal Reserve. Inflation erodes the value of the dollar, but who has the dollar? Is it the 99% (have-nots) or the 1% (haves)? It also erodes the real value of debts. Who owns debts?
I think it's fair to say that real wages haven't kept up well with inflation. But is the Fed the cause of that? I'm more inclined to think that there are other factors such as "globalization" and the rhetoric surrounding it. We've eroded bargaining power of labor and have bought the idea that businesses need cheap labor to remain profitable. No doubt it's a complicated issue. But I'm not sure the Fed is the cause.
I think you do have a valid point with regard to the public's perception of that erosion. If I get a 2% raise but inflation is 4%, I'm actually taking a pay cut but it doesn't necessarily feel that way. It screws with one's psychology. I think a greater emphasis needs to be placed upon distinguishing "raises" from "cost of living adjustments". That could force people to question: where is my cost of living adjustment? I would personally like to see those to be more common place.
As for the interest payments, beyond Fed expenses and the interest paid to banks for the reserves they have at the Fed, that money actually goes back into the treasury. It's a silly little shift from one pocket into the other. But most of that interest just goes back to the Treasury.
"But most of that interest just goes back to the Treasury." "Most" is a debatable measure.
Fist, the Member Banks that make up the Fed get their cut. As any business owner will tell you - yes we can keep the profit but only after we pay the bank back. Before the Treasury sees a dime a dividend is paid to the Fed Member Banks. Avery high dividend.
The Fed is a banking cartel in which the member banks benefit from the laws enforced by our government. It was very clever to structure the Fed bank in a way that makes it look like the treasury will receive all the profit... And indeed the treasury may make a lot of money in times of heavy lending/inflation... But this money is made off the backs of those who feel the loss of buying power the most. (It isn't likely the %1 keeps their wealth in US$)
Isn't this kind of Government/Banking collusion a big part of why people are occupying Wall Street. We can't just accept that - if it gives money to the treasury than it's okay.
No, you're not stupid. Indebtedness does NOT improve our lives.
How can we fight indebtedness? We can start in our daily lives by not getting into debt any more than absolutely necessary. Resist the temptation to buy things we cannot afford. Don't squander your money on things of little or no value. Save our money for things that have real, lasting meaning and value. My $0.02 worth.....
Indebtedness is a personal choice. Spend less than you make and stop blaming others for your choices.
It may very well be a personal choice but that isn't to say that isn't socially influenced. We have a culture of debt. Years ago, no one would have thought of purchasing many of things we do on debt. Anything we could possible want we can borrow against.
Household debt levels have been steadily rising over the last few decades. Increase in overall debt has contributed to economic growth over the last few decades. It filled in the gap due to stagnant real wage levels.
Unfortunately these debt levels (and this debt growth) are not sustainable. People are now wising up to this fact as they enter a process of deleveraging.
What about government debt that we had no say in creating.
Most of current govt debt is due to tax cuts for the wealthy and unnecessary wars + interest payment on all this debt. Do we as a country want to live a third world lifestyle like Somalia ? Then yes, we can completely eliminate government spending altogether.
The issue with government debt is definitely a concern as well. But there are two sides of the coin here and they are both ugly.
The last deleveraging recession that the US had was in the 30's. Deleveraging can be extremely painful. In the first part of the Great Depression, GDP had huge declines due to the fact that people were hoarding cash and not taking on further debt (which expands the money supply.) Government spending is able to step and fill the spending gap.
So our options are to deleverage without government stepping in which could be extremely painful. Or we can deleverage with the government stepping in to fill the spending gap. This reduces pain but at what cost?
I don't know the costs here but I think it's worthwhile to consider HOW the goverment does spending. Things like spending in infrastructure can be productive and we can obtain a return on that investment. Those are all important points to consider if we are going to use government spending to fill that gap.
Either way, our options aren't good. On the bright side, we have more options than Greece!
Same rule of thumb applies, and I agree they are out of control. Protest should target government first, then (if ever) the private citizens which make up corporations...which are organizations that never took $$ from me without providing value for the $$ (unlike the govt which does so with every paycheck)
That's the challenge this whole thing is trying to figure out in these short weeks since it started, which to address first: the chicken or the egg.
Vote for people who not only promise to address the government debt, but have proven in the past that they have the spine to do it. FIRST, we have to STOP GETTING DEEPER INTO DEBT. Congress just agreed to increase our government debt ceiling from $14.3 trillion to $16.7 trillion.
Who is that? I've been promised trickle down economics, stimulus, and everything else but at the end of the day not one party has lived up to the mandate. Telling me that our government is fiscally irresponsible is calling the ocean wet. That's what this movement is trying to figure out- what's next?