Saturday, September 04, 2010

Failure to Distribute Economic Prosperity to We the People Broke the Economy

Robert Reich, in the New York Times, today, hits the nail on the head regarding the state of our economy, why things are not improving, and the way to end the Great Recession.  Reich points out that the maldistribution of income is a key factor in the collapse of our economy.

Why?

Because when the richest individuals receive a disproportionate share of the wealth, it leaves our system vulnerable to economic shock caused by the disruption of the interaction between supply and demand.

In other words, not enough of the proceeds arising from the enormous amount of production we've seen over the last thirty years was/is getting to the people who will exercise their purchasing power. That is, the working person, who spends his wages immediately, mostly because he has no other choice, returns his income to the stream of purchasing power, thus creating demand, so crucial to keeping our economy running. If most of the income distributes to the wealthy, or savers, this will short-circuit the economic flow.  When savings are not returned to the stream of active purchasing power, that part of the "income arising from the process of production will not be translated into the salaries, wages, rents, and profits needed to buy back the output of the economy." *

The propensity to invest is much more uncertain. Unlike most consumer spending, capital expenditures are made with the expectation of profit, which depends on finding a market. In good times, people are confident and investment is likely, however, when the unemployment rate is high and the economic forecast, bleak, slowing capital formation.

For the last three decades, tax rates for the wealthy have fallen substantially, while their income has risen rapidly. Real incomes for the top .01% have jumped more than 300% since 1980 and real income has doubled for the top 1%.  How did this happen?  Well according to David Moss from Harvard Business School, deregulation, in addition to tax breaks for corporations, slashing of the social safety net, etc. - legacy of former President Ronald Reagan - played a major part in the growing wealth divide. Moss discovered that income disparities between rich and poor grew as government regulations eased.

Therefore, extending tax-cuts to the rich will not stimulate our economy; rather it will more than likely transform the Great Recession into another Great Depression.
"Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income."
* Heilbroner, Robert. Making of Economic Society. p. 155 Prentice-Hall, Inc, 1962.

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