The news of society’s growing inequality makes all of us uneasy. But why? Dan Ariely reveals some new, surprising research on what we think is fair, as far as how wealth is distributed over societies … then shows how it stacks up to the real stats. Here is a direct video link.
Today the wealthiest 1% of the global population has more more than at any time in the last 50 years. While this may sound like progress for some, a compounding cost of extreme wealth concentration is that it is highly inefficient resource utilization and bad for economic growth and human progress.
Case in point: the Organization for Economic Cooperation and Development, representing a number of the world’s richest countries including the United States, estimates that inequality has knocked nearly five percentage points off economic growth in those countries over the past 15 years, and the drag is getting worse with each passing year. See OECD: Why less inequality benefits all:
In high-inequality countries, people from poor households typically have less access to quality education. This leads to “large amounts of wasted potential and lower social mobility,” which directly harms economic growth, according to the OECD.
Whether one is in or out of the wealthiest percentile, pragmatists should admit that the largest factor driving income and wealth disparity over the past 20 years has not been merit or ‘hard work’ but rather extreme financialization which has ballooned asset bubbles and reinforced policies and incentives for corporations, central banks and governments to artificially boost the price of leveraged assets to unsustainable levels at the expense of labor and productivity. In the end, this trend is self-defeating for business, as well as everything else.
A good graphical explanation of the reality is captured in the below chart of pies. Where the top 1% of the population has 40 slices and the bottom 40% has no pie at all. The result: lots of wasted resources (pie) and a very low multiplier effect through the economy. See: The richest 1% of the population now owns more of the country’s wealth than at any time in the last 50 years.
Policies that continue to pile more pie where it is will go unused are just dumb management. And in the end history shows, folks with no pie eventually come and take pie off those that are hoarding it.
A couple of easy rule changes that would go a long way to amend currently destructive incentives:
As we move into year end, the airwaves are full of analyst forecasts for further equity gains in 2018. Saved from bankruptcy by government bailouts in 2008 and emboldened by years of central bank asset buying since, the long always siren song has never been louder.
But already the second longest expansion in market history, at some point here, odds favor less favorable outcomes. As shown in this table since 1850, there has never been a decade that escaped having at least one economic recession. Bulls are betting 2008-2018 will be the first.
It is critical for thinking people to remember that the investment sales sector is always bullish. No matter how much undeserved gains they have already been gifted, this crowd will always call for more–because they are paid to keep people in risk assets at all costs. This reminder from Sven Henrich on the bulls of 2008 is useful. Same crowd today, same message always. Buy and holders beware.
Just remember, Wall Street will never tell you to sell.#2008forecasts pic.twitter.com/c664pSO1No
— Sven Henrich (@NorthmanTrader) July 14, 2017
Cory’s Chart Corner
