Tuesday, January 05, 2016

On An Alternative Theory of Income Inequality

Why is there growing earnings gap between the highest earners and the rest of the U.S. workforce? While a number of hypotheses have been advanced, I think many miss important developments. In my view, the following culprits have materially affected the wages, salaries and income of the lowest ranks.
  1.  Both governmental and cultural destruction of the family. I’m not going to dwell on this, but, statistically, the fastest path to poverty is to be a single mom. Want to not be poor? Finish high school and get married before getting pregnant. Harsh perhaps, but statistically unarguable.
  2. The Federal Reserve continues to oppress lower earners. For most folks, building wealth starts with home ownership. Replacing rent payments with mortgage payments generally results in owning an asset (home). In some markets, that asset appreciates. When my wife and I were apartment dwellers, we saved for a home down payment. Our savings earned interest. Now, I won’t say that the interest was huge, but it was noticeable and helped in accumulating a down payment. With interest on savings essentially at zero, it is harder to accumulate that critical down payment. Further, and likely more significant, the Fed’s multiyear zero interest policy has pressured bank earnings. Banks, scrambling to replace the lost earnings that used to accrue from customer deposits, have jacked up every kind of fee. Minimum balance fees, ATM fees, rather shocking fees for a bounced check and much more.  The wealthy never experience those fees, only those at the bottom of the financial ladder. Those costs strip savings.
  3.  Government agencies are intentionally putting companies out of business, and raising the cost of doing business for others. Don’t think the U.S. government drives firm right out of business? Read this article on Bucky Balls. http://gizmodo.com/how-buckyballs-fell-apart-1609183224The EPA has a war on coal and doesn’t care that formerly well-paid coal miners have few job alternatives. And the Dodd-Frank financial regulation bill imposes simply staggering costs on banks.  JP Morgan added 5,000 additional compliance employees. Those employees aren’t helping write new loans or grow the bank’s income; they are raising its expenses. And higher expenses means less income to invest in the business, grow and hire more.
  4. The abandonment of higher education by state governments. I won't say just how cheap my tuition was at The University of Memphis in the 1960's, but it is a tiny fraction of today's state university tuition. I was able to pay my tuition with a couple of part-time jobs (neither of which was very high-paying). I'm guessing that the rising cost of Medicare has squeezed colleges right out of the picture. Whatever the cause, it is inescapable that fewer people can afford college, and many that do graduate with massive student debt. The 21st century equivalent of indentured servitude. Less educated people have a massive handicap in the knowledge economy, and those with debt start work with a financial handicap.
  5.  Here’s the sleeper: The Financial Accounting Standards Board (FASB). Unless you are an accountant or public company board member, you’ve probably never heard of them. But they rule accounting practices. It is an isolated group of Mandarins, who frequently change once practical accounting policies to far more complex and recondite structures. Several years ago, they made a landmark change in the rules governing how companies must account for stock options granted to employees. Tech companies in particular had made widespread use of options to attract and retain workers. If the business was successful, workers could accumulate wealth. And many at firms like Lotus, Dell, Apple and Microsoft did just that. Some academicians whined that the accounting practices of that era failed to capture the cost of options, and thereby overstated business income, and, as a result, that the accounting treatment should change.  Companies and accountants in general opposed a rule change, arguing that the then-current treatment was reasonable and understood by investors.  The FASB ignored the practical accountants and imposed a rather complex rule that resulted in companies recording an expense for options. And, predictably, it resulted in far fewer options being granted. And those that were issued are generally granted only to the most senior executives. Those lower in the corporate structure no longer have the opportunity to build real wealth if their company becomes successful. Now, some companies still do issue options to all employees. But most of those are smaller tech start-ups. Very few larger companies grant options beyond executives.

There you have it. Income inequality isn’t just the result of globalization and automation, or greedy rich preying on the unlucky. It is at least somewhat the consequence of actions by government and government sanctioned entities.

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