Saturday, June 25, 2016

The other 1%

Much is written about the probable 1% of the U.S. population, probably world population, that controls such a disproportionate amount of the world's wealth.  The divide is so wide that the middle class is being hollowed out, by all accounts, here in the U.S.  There are many who still have middle class values and images of themselves as middle class, but from a wealth point of view are on week to week budgets with little or no excess.

In fact, a significant number of Americans pay little or no taxes other than the regressive social security tax, local regulatory taxes, and whatever sales taxes exist wherever they live.  Some statistics suggest that this may be as many as 40% of all Americans, some even say more, some of course less. When the top 1% are deemed to have so much(and the top .01% have such massive wealth), and so much of the population lives from paycheck to paycheck, or worse, the suggestion that things are out of kilter is legitimate.  What to do about this is less clear, as what is needed cannot be solved by just taxing the wealthy more.  That might feel right, but it would not come close to solving the problem.  What that requires is real growth in our economy and a more principled approach to worker compensation.

The "other 1%" mentioned in the title applies to corporations.  They are the small percentage of corporations with massive amounts of cash, both in this country and money made legitimately overseas.  Most of these companies are related to the tech industry and some are simply long term conservative cash cows.  With borrowing costs historically low, however, many more corporations are on the surface cash rich, and they use that cash to buy back stock, offer senior employees large stock option plans, and pay attractive dividends.  This all serves to help raise their stock price over time, even often in the near term, but one could make the argument that is not a productive use of capital.  One could also say with certainty that this could be dangerous if there were any significant economic downturn.

Making large stock buybacks, paying such attractive dividends, and rewarding executive employees so generously, often with borrowed money, can suggest that these companies have no ideas or opportunities for new capital investments, the type of investments that lead to hiring more employees, paying rank and file employees better wages, providing more training for research and development, and generally all things that a company that aspires to future growth would do.  Instead, much of what could be used for capital investment for future growth is spent to reward existing shareholders and senior executives as soon as possible.

That certainly does not seem like what is best for our economy long term, but it is not really as simple as that.  What is said next here is nothing new.  Globalization of business activities has changed the economic landscape in a way that is not changing anytime soon.  Technology, with all of its benefits, has reduced the need for hands on workers relative to the past.  Product cycles move much more quickly due to massive advertising, omnipresent social media, and ever changing consumer preferences, and that makes it difficult for businesses, especially small businesses, to take risks on innovation.

There are no answers in this comment.  What can be highlighted is that the U.S. economy is still among the most resilient and creative in the world.  Old paradigms are in the process of changing and that does not happen quickly.  The angst that is felt today could very well eventually lead to a period of greater prosperity, or more importantly greater optimism and opportunity.  During this election season, the negative seems to be front and center of almost all debates and pundit commentary.  Much of that should be ignored, and taken for what it is.  That is that they are simply scare tactics to attract votes. The economy has at times in the past been much better, at times much worse.  Relatively speaking the U.S. should do well, but that may not be in a satisfying enough way to many in the next few years.  In fact, it is unlikely to be the case, even if all is headed in the right direction.


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