I got a job in a small office and, in discussions with an older immigrant woman accountant, I realized that, in order to take advantage of a tax deduction, she was borrowing money and writing off the interest from her taxes. I was horrified. I had just moved back from a country that encouraged everyone, especially working people, to save. In fact that country, instead of giving a monetary incentive to borrow, gave one to save, even to small savers. Made sense to me. That woman was basically borrowing money against her retirement and her house. How stupid can you get?
So, I became very interested in how economics works. But I had no academic background, so I read all kinds of books on what led to the Great Depression.
Of course, the books have different theories. My own conclusion was that the biggest problem was the disparity in wealth between rich and poor, rich and what passed for middle class.
When a few, we call them the oligarchs sometimes, gobble up a very great proportion of the money and products and services produced in the economy, they cannot spend it all on personal consumption. So they invest.
And today, the super-rich don't want to have to sit at their computers and watch stocks go up and down all day, not unless they are nouveau riche who happen to work in investments. So the super rich hire investment counselors and invest through things like hedge funds, etc. They are investing money in companies in which they have no personal stake other than friendships maybe with other investors or the management. They don't have a lot of personal sweat and tears in the companies in which they invest. The companies ship a lot of the work overseas, so the big investors just rely on the money their money makes. And also, a lot of these very wealthy people inherited their money. It may be managed by a trust or by some relative's choice of investment counselors, brokers or hedge funds.
So the money of the super-rich gets handled like a toy by someone who stands to gain, perhaps, based on the number of transactions that are performed. That encourages selling and buying stocks. And of course if you want to keep your job and you are the person or company advising someone wealthy but not that much of an investor himself, you want to show a profit. So there is a lot of incentive to try to push the stock market up whether the level of the stock market has any relation to the health of the economy or not.
Too much of a nation's income in the hands of too few leads to a very valuable and volatile stock market and a lousy economy for everyone. Sooner or later the fact becomes obvious that the stock market is just high because a lot of people are getting high on trading stocks does not indicate a healthy economy. Quite the contrary.
I don't need to state the corollary -- that a stock market that is extremely high when wages are low and the real unemployment rate, not the prettified government one, still pretty high will mean that consumer demand for goods is low. The stock market at that point, and we are quite possibly there now, is likely to bust any time.
I note that Obama is suggesting a big stimulus program involving developing infrastructure. Maybe he is trying to stave off another bust. Bush did that by pushing the housing market. We went bust anyway. That is not the answer. You have to increase the share of income that the very wealthy pay in taxes and then distribute that in a more balanced way in the economy.
When in an economy, the rich grab a huge, huge share of the wealth, it is like a person who eats only sweet or fatty foods, no or very few vegetables, meats, fish, fruits, eggs or cereals that aren't sweet. The body is likely to become very unhealthy. Sooner or later, the unbalanced diet will push the body out of balance. High cholestral, obesity, some types of diabetes and skeletal problems can result. That should be easily understood. You cannot build a house so that the base is the peak of a triangle and the roof is the base of the triangle -- like an upside down triangle. That is because the house will be top-heavy and prone to tip over. That is what we have now in our economy. Most of the money is flowing to the roof, the penthouse of our economy. It is getting too heavy to be held up by its narrow base. We will either tip over or just stagnate.
I'm not calling for socialism because I think that is a better system than capitalism. No. I don't think that, and that is not what I am talking about. I am talking about the fact that when the rich get such a large portion of a nation's wealth that all they can do with it is invest it in things that cannot produce marketable products or services because 80% of the population has incomes so low that they cannot buy the products and services produced with the money of th every rich, the economy just gets sick.
Disparity in wealth is our biggest economic problem. And the biggest reason that we don't do anything about it is because we are frightened to death of the word, "socialism." That is stupid because it isn't about a choice between capitalism and socialism. It is a matter of making a wise decision to get our economy back into something approaching a balance between supply and demand. Right now, we have too much supply capacity (not actual supply but the capacity to create supply, in other words too much money floating around Wall Street) and not enough demand (too little money floating around on Main Street).
Raising the minimum wage, increasing the real tax rates on the rich, imposing tariffs on certain imports and other actions would help get us back into balance.
That's my opinion.
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