On wealth concentration and the 99.5%

This article was posted on BI lately: Investment Manager Explains Why 99.5% of Americans Can Never Win, based on Professor Domhoff’s site here. I think this article is very consistent with what libertarians argue in terms of wealth concentration going towards those who are more politically connected. Let’s pull out a few key parts:

I sit in an interesting chair in the financial services industry. Our clients largely fall into the top 1%, have a net worth of $US5,000,000 or above, and — if working — make over $US300,000 per year. My observations on the sources of their wealth and concerns come from my professional and social activities within this group.

So he’s quite well positioned to understand where the 1% come from. He goes on to break it down into the lower half of the top 1%, showing how this group includes “physicians, attorneys, upper middle management, and small business people who have done well”. This is distinguished from the upper half of the top 1%, note the difference in where they make their money:

“Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting“.

It should come as no surprise to us that the top 0.5% in the USA come from the banking, real estate and government contracting industries. Below he points out some of the benefits that flow only to the very elite, the top 0.1%:

Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits. Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%.

From further down in the post, pay attention to where most of the top 0.5% acquire their wealth:

Those with a higher net worth tend to acquire most of their net worth from capital gains, not income that has been saved and invested. Large capital gains tend to come when private businesses are acquired by private or public companies with stock or when executives are paid directly by options or stock. Wall Street and the banking industry are frequently involved, either directly or indirectly.

One very relevant question here is: Why is so much money flowing into financial instruments rather than labour? This question is answered by looking at who the beneficiaries of money supply inflation are. See my earlier posts here and here for further discussion. Consider the following factors:

  • Who benefits more when asset prices go up? Think about who tends to own more of their wealth in assets versus who tends to be reliant on an employer for wage increases. That’s right, the rich tend to own more of their wealth in assets, and the poor would tend to be those people reliant on their employer for wage increases.
  • Which sector is given an unnatural advantage by the government? That would generally be the banking sector thanks to the government interventions I outline in the post: “But we already have a free market in currency/banking?“. Quick list here: 1. Coercively imposed government monopoly on production of money, 2. legal tender laws, 3. central bank with monopoly power to create legal money, 4. central bank has a mandate to manipulate money supply, 5. Interest rates are set by the monopoly market authority, 6. Implicit/Explicit bailout guarantees, 7. Artificial protection of banks through deposit insurance.
  • From a Cantillon effects perspective, benefits flow to the first recipient of the newly created money. “There is a general redistribution of wealth to the people closest to the money spigot, every time there is a new injection of money that disturbs the price equilibrium.” This part may be tricky to understand, so see Robert Murphy’s explanation (in the quoted part of his blog post here).

Though the outcome might manifest itself via the appearance of a market, this massive inequality / wealth transfer from poor to rich is not the result of a free market, it is the result of government.

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