The “One Size Fits All” Solution

The two biggest problems immediately facing our society are 1) wealth inequality; and 2) middle class rage.

We’ve all known the first problem for years now. The Occupy Wall Street movement was one of the first mass movements against inequality. The problem has continued to grow in magnitude. You’ve seen some of the statistics:

• the richest 1% possess 35% of the country’s wealth
• the richest 10% possess 73% of the country’s wealth
• the bottom 60% possess just 5% of the country’s wealth

But there are other, even more distressing ways of perceiving the problem. The Gini Coefficient is a single number that neatly captures just how inequally wealth is distributed. Here are some Gini Coefficient values for various countries, taking into account taxation:

• Sweden: 25.9%
• France: 29.3%
• Germany: 29.5%
• Japan: 32.9%
• USA: 37.8%
• Turkey: 40.9%
• Mexico: 47.6%

As you can see, the USA comes in pretty low on this list. But it gets worse. Let’s talk about social mobility — the ability to get ahead in the world through hard work and initiative. Americans like to think that theirs is the land of opportunity. They’re dead wrong — America is pretty bad on this score. It’s measured with something called “Intergenerational Income Elasticity”, but you might just as well call it the “Silver Spoon Score”. It measures just how much the wealth of parents determines the wealth of children. In a properly egalitarian society, you’d expect that hard work is the most important component of success, and being born rich shouldn’t have much effect. You’d be wrong, at least about America. Here are some values for Intergenerational Income Elasticity:

• USA 47%
• France 41%
• Germany 32%
• Canada 19%
• Denmark 15%

The moral of this story is obvious: if you want to get ahead in the world, “Go north, young man”.

This wasn’t always the case; most of these numbers starting drifting in the wrong direction during the Reagan years, and they really went sour during the administration of George W. Bush. 

Let’s set aside any moral or egalitarian reasoning; let’s just take a coldly capitalist view that the only thing that matters is economic growth; how the wealth is distributed doesn’t matter. OK, let’s see where that takes us.

We all know that, in order to grow, an economy needs capital. Rich people do a service to society by investing their money, permitting businesses to expand, hire more people, and make us all even richer. 

Spenders and Savers
But that’s only half the story. Let’s divide the population into two groups: Spenders and Savers. Savers are like the ant and Spenders are like the Grasshopper. Obviously, Spenders are bad and Savers are good, right?

Wrong! Imagine a society with all Savers and no Spenders. If nobody buys their products, businesses go bankrupt. Nobody has a job. Everybody starves. 

Now imagine a society with all Spenders and no Savers. This economy will tick along just fine, but it will never grow, because businesses will never have the capital they need to expand.

A healthy economy needs both Spenders and Savers. The Spenders buy the products that keep businesses going, and the Savers provide the capital businesses need to expand. 

But how do we figure out the ideal balance between Spending and Saving? That’s easy: interest rates tell us the proper balance. If interest rates are high, then businesses are desperate for capital and we need more saving. If interest rates are low, then businesses don’t want capital because they don’t see any prospect of growth, because there aren’t enough Spenders. 

Now for the social-political twist on this: Savers are rich people and Spenders are poor people. After all, you can only have so many iPhones and BMWs. At a certain level of wealth, you have nothing better to do with your money than invest it.

On the other hand, if you’re poor, you don’t have any spare money to invest; every dollar that comes in goes right back out again to pay the rent, bus fare, food, shoes for the kids, and so on. 

All this leads to a simple formula for a healthy economy: when interest rates are high, transfer wealth from poor people to rich people, so that we’ll have more savings. When interest rates are low, transfer wealth from rich people to poor people so we’ll have more spending.

This analysis has nothing to do with Justice, Fairness, or Equality. It’s a cold, capitalist way of ensuring economic growth. 

Interest rates have been at ridiculously low levels for years now. In some countries, interest rates have gone negative — a truly preposterous situation! This is really the economy’s way of transferring wealth from rich people to poor people: the rich people have to pay money on their savings. But it’s a horribly inefficient and socially dangerous way to redress the economic error. Much better would be to raise taxes on the rich. But we’re not doing that.

Middle Class Rage
The second immediate problem is middle class rage. John Biggs gave voice to this in a great essay at What he doesn’t say is that the middle class is now experiencing what the poor have always experienced: anger at a system that appears to be rigged against them. Some of the poor express their rage with crime; it won’t be long before the middle class imitates them. But for now, that rage is manifested in the political support for Mr. Trump, an American Hitler who promises to make everything right. Mr. Trump will lose this election, but the rage will remain as long as we have such extreme wealth inequality. 

Let’s return to the subject of egalitarianism. Some people dismiss egalitarianism as some kind of soft-headed, bleeding-heart naivete. Those people should watch this video:

Egalitarianism is not some new-fangled liberal concept: it has been woven into our DNA for millions of years. Monkeys refuse to accept inequality. So do dogs and numerous other animals. And so does Homo Sapiens. A healthy, safe society requires a measure of egalitarianism. In the video, the monkey throws the cucumber at the experimenter; in America, the middle class votes for Trump. 

Conclusion: raise taxes on the rich

The obvious conclusion is that both of our immediate problems can be addressed by raising taxes on the rich. It’s that simple.