Giuseppe H. Robalino

Undeniable, if not compelling, evidence has been presented regarding disparities in income ranging from the bottom 20% to the top .01% of Americans. History textbooks, beginning as early as the eighth grade, are riddled with such comparisons. A common phrase many are familiar with is “the widening gap between the rich and poor.” Others include “the rich are getting richer, the poor are getting poorer” and “the shrinking middle class.” So commonplace are these concepts that they have become engrained in the mind of almost every American, and their appearance in nearly every textbook ensures these ideas transcend generations. In a few cases, we have heard some commentators and public figures discuss the “myth of the American Dream,” or even worse, the “death of the American Dream.” However, the historic shift from regarding economic disparity as an individual issue over to a collective, societal civil rights issue walks a very delicate line. Unmeasured go the consequences such dialogue has on the psyche of the American people, and most importantly our youth. One can only guess whether it will empower us to strive for financial success or leave us in a state of perceived helplessness. For that reason, we question the effectiveness of such a response that can potentially replace an internal “locus of control” with an external locus; a psychological effect that leaves room for the broader acceptance of continued expansion of social welfare and wealth redistribution because the groundwork has already been laid supposedly proving the need for robust external intervention. If any one change to this dialogue is to be made it is the following:  the question before us is not if the income distribution is skewed or if that is fair, but rather what can be done to expand the “in-crowd” and prepare and empower more Americans to break into the world that is financial markets—and the answer to that is the promotion financial literacy.

 

Crucial to spreading financial literacy is providing society with an explanation as to why the system operates as it now does—with the topmost income distributions holding 50% of all securities in the market and the majority of income available (Wealth Inequality). After reviewing key developments in American and world history, we find that there are certain root causes of this status quo. In fact, that some of these causes were more the product of historical development than just purely greed or selfish intent. Other causes were even influenced by the nature of interventionist government. These root causes include Keynesian economics, the concentration of experience and expertise in the top income brackets, businessmen with dual-income sources, globalization, and select kinds of government intervention as alluded to previously.

 

Alexander Hamilton’s ideal of a banker-class led economy is fundamental to the early debates of how our then-new republic ought to be run. Thereafter, our history saw the establishment of many “Banks of the United States,” eventually culminating in the creation of the Federal Reserve System in 1913 and the stock exchange. With the Great Depression and President Roosevelt’s embrace of Keynesian economics, we eventually adopted idea that monetary policy—in terms of interest rates and money supply—can be manipulated to respond to recession and inflation. Gone were the days of simplistic joint-stock companies and government bonds that funded the early days of exploration, trade, and the Revolutionary War. Gone were the days when risk was relatively limited to how much capital an investor contributed to a particular venture.

 

Currently, experience and knowledge is indeed concentrated at the top because investors and, later on, fund managers of wealthy clients have been dealing with the aforementioned changes throughout history. They were most certainly at the right place at the right time. Not only were businessmen generating profits by providing services and products, but also by having companies go public and recruiting shareholders. With that in motion, it became possible for banks to innovate new and more complex financial instruments, as the market demanded it—not solely out of ambition, but also need.

 

The world was starting to become “smaller,” globalization was emerging. The death of state-sponsored enterprises (mercantilism and its search for acquiring the world’s limited supply of gold) and the expansion of commerce overseas involving different currencies, all demanded more complicated financial instruments to hedge risk (derivatives), promise international farmers stable crop prices (futures trading), and foreign exchange markets to enable imports/exports. This has culminated in a stock market diversified across the entire world’s access to securities, managed funds, governments’ debt, and the leverage necessary to make all those transactions possible. Unsurprisingly and perhaps thankfully for economic growth, those most readily available and capable to respond to these rapid changes were the topmost income brackets.

 

Yet, this elite was not and currently is not limited to the private sector. Government oversight itself is a revolving door of regulatory officials rotating from private to public positions and vice-versa. These officials have become truly specialized in what has evolved into a very complicated field in need of such expertise. Yet, in the private sector, the increase in new, lengthy regulations or laws aimed at closing the wealth gap has contributed to more spending and compensation awarded to those analysts specializing in creating/reconfiguring financial instruments to meet those imposed changes or still turn a profit (for example, despite capital gains taxes).

 

The argument can certainly be made that the wealth gap will never be closed so long as banks and the Federal Reserve can continue to benefit from interest rate manipulation, in ways the individual American cannot. Therefore, it becomes even more necessary to educate more people on how to use financial instruments. That way individual investors would be able to increase their control over the market share for securities, balancing the control large banks currently have. And, by providing the historical context as discussed earlier without unfairly over-emphasizing the fact a wealth gap exists or implying the American Dream is dead; a more optimistic approach to the issue should arise. It would be less likely that individuals will remain pessimistically ever-conscious of inequality and demand more government intervention (which for better or for worse had its hand in contributing to the inequality). Americans would more likely feel in control of financial options available to them. This is what we refer to as having a feeling of self-empowerment and what psychology includes in its definition of having an “internal locus of control.” This is why “economic inequality” is a myth: not because we deny the statistics, but because we deny the idea that the American People is powerless without further increases in government intervention.

 

Dr. Andrew Foy of the Penn State Medical Center corroborates the potential psychological effects this “victimization” has on individuals. Through what psychology calls “learned helplessness,” one can move his mindset from an internal locus (belief one has more control than not over his circumstances in life) to an external locus (belief one has less control than not over circumstances in life). In fact, this shift can occur implicitly (Foy), such as through language found in textbooks or pointed dialogue in the media. It can also occur explicitly, such as through political campaign rhetoric (Foy).

 

Our proposal of financial literacy would reverse learned helplessness. The question, of course, remains of what would constitute financial literacy. And, while various teaching methods can be developed, we present a general framework. As stated and described earlier, it would begin with a historical/economic explanation of why the inequality has occurred followed by lessons that breed personal empowerment. However, these lessons would not be romanticized, hollow promises of success; but instead would detail tangible steps on how to ascertain financial stability and independence. Elementary levels of financial education would explain and reinforce the purpose of having currency, responsible spending, checkbook balancing, and paying down debt. Intermediate levels would explore credit cards, credit scores, mortgages, the basic science behind interest rates, and the role of the government and the Federal Reserve. At the more advanced levels, people would be introduced to the stock market, its principles, and the roles investors and bankers play in directing the flow of money and the financing of industry. The theme of “knowledge is power” and how we are all part of an intertwined market economy would be heavily underscored. It would be explained how, through investment, one can invest in instruments/funds that can range from (relatively) safely supplementing one’s income to those that, comparatively speaking, can greatly “create” money, enhance wealth, and cap losses such as securitized assets, options contracts, and swaps. The aim is not to turn every American student into a banker, but rather just to provide a baseline knowledge of practical solutions to our modern-day financial infrastructure. This should eliminate the mystery, along with the feeling of helplessness and suspicion some current Americans have of our system.

 

Now, this education has come, in some way, from gurus in the media, financial advisers, community financial workshops, etc. However, it must be far more widespread and institutionalized than it currently is. For example, if the government were to become involved at all appropriate action would be through the educational system, entrenching our proposed framework into the curriculum. The welfare system would also be reformed by funding it with more private dollars, providing recipients with financial counseling, and allowing them to practice what they have learned through private—not solely public—work contracts. We deliberately focus on increasing the role of the private sector since the expansion of and greater government spending on wholly publicly run programs has actually resulted in a dependency crisis.

 

In fact, political scientist Charles Murray, using statistical trend line analyses, pointed out that improvements in the lives of the poor actually began to decrease after programs, such as President Johnson’s Great Society, were introduced. He revealed that income and educational improvement actually started to decline. And recently, the commissioner in charge of disbursing unemployment benefits admitted at a congressional hearing that the longer coverage lasted, the longer it took for recipients to become re-employed (C-SPAN Video Library). While one can argue that the fact is merely due to a currently stagnant economy, one only need see the preceding example of the sixties, when the U.S. was experiencing one of the greatest bull markets since the Crash of 1929 (Graham).

 

Therefore, the remainder of the response to such a compelling question is then left to the American people, not the government. Curiously enough, progressive economist Richard Wolff has an answer we enjoy entertaining because, in its essence, it is entirely grassroots-led. On the March 24, 2013 episode of Bill Moyer’s Journal on PBS, Wolff described the benefits of a corporate society based on democratic principles: worker-owned cooperatives. In this system, employees would make all decisions regarding pay and product making. Ideally, employees would consider the social and environmental impacts of their decisions since increased shareholder profits would no longer be a primary objective. In effect, his proposal creates the first-ever instance of a “truly” self-regulating market—a market that, among other things, would distribute profit more equitably (Richard Wolff on Curing Capitalism).

 

However, we strongly caution implementation of this plan as suggested. We favor a republican form of cooperative, where employees still elect a board of directors and CEO to guide the company vision and still be able to recruit shareholders in order to keep the stock market alive. Our proposal would involve employees electing directors who would, as part of compensation, provide employees with stock options in the company, financial literacy workshops per our proposed framework, and participation in company-sponsored philanthropic events. Under Wolff’s current proposal, his stated claim is to actually displace traditional, hierarchical corporations with democratic cooperatives funded by government subsidies (Richard Wolff on Curing Capitalism). That is not the path we wish to entertain for reasons lying out of the scope of this paper.

 

We find that this modification to Wolff’s model would be far more effective at addressing the issue of inequality at its root causes as opposed to the more “bandage, superficial solutions” we typically hear about. These include but are not limited to raising the minimum wage when inflation has not increased, higher taxation for top income brackets and complications to the tax code in general, and heavier regulation and more robust social expenditures. In actuality, raising the minimum wage does not necessarily translate into improved money management and complications in the tax code reduce government efficiency and create deadweight economic losses. When combined with increased public expenditures in general, they crowd-out private sector investment (Crowding Out Effect)—which is the primary driver of economic growth. And, in a system operating within our established parameters of financial literacy and republican forms of corporate governance, such approaches would prove to be a hindrance.

 

Yet, some staunch progressives may still point to two studies as reason enough to continue raising taxes and expanding the welfare state. The first was published by Harvard University and the second by UC Berkeley and the Paris School of Economics. The former found that the top quintile holds 84% of the nation’s wealth (Norton). The latter, that the top one percent’s share of “market income” (income before taxation and distribution of social benefits) has more than doubled (Atkinson) over forty years.

 

In the end however, this logic is flawed since according to OECD statistics, taxation is actually more progressive in the United States than in “socially ideal” countries like Sweden, France, and Switzerland. Also, the top one percent has already paid over 40% of income tax (in addition to capital gains taxes on their stock earnings) (Reynolds). Compounded with the rise in dependency, we find that these traditional approaches are no longer working effectively towards their goal; therefore it becomes imperative that we rethink our approach to economic inequality by exposing its myths and providing the American People with the tools necessary to increase social mobility.

 

 

Works Cited

 

Atkinson, Anthony B., Thomas Piketty, and Emmanuel Saez. "Top Incomes in the Long Run of History." Journal of Economic Literature (2011): 10+. Journal of Economic Literature, 2011. Web. 6 Apr. 2013. <http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf>.

 

"Crowding Out Effect." Investopedia.com. N.p., n.d. Web. 11 Apr. 2013. <http://www.investopedia.com/terms/c/crowdingouteffect.asp>.

 

C-SPAN Video Library. C-SPAN, n.d. Television Show. Search. Web. 11 Apr. 2013. <http://www.c-spanvideo.org/videoLibrary/search-results.php?key[]=unemployment>.

 

Foy, Andrew, M.D. "The Left's Psychological Assault on Independence." American Thinker. American Thinker, 14 July 2010. Web. 4 Apr. 2013. <http://www.americanthinker.com/2010/07/the_lefts_psychological_assaul.html>.

Graham, Benjamin, and Jason Zweig. "Commentary on Chapter 2." The Intelligent Investor. New York: HarperBusiness Essentials, 2003. 67. Print.

 

Norton, Michael I., and Dan Ariely. "Building a Better America—One Wealth Quintile at a Time." Perspectives on Psychological Science (2011): 10. 23 Feb. 2011. Web. 4 Apr. 2013. <http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf>.

 

Reynolds, Alan. "Taxes and the Top Percentile Myth." The Wall Street Journal. N.p., 23 Dec. 2010. Web. 6 Apr. 2013. <http://online.wsj.com/article/SB10001424052748703581204576033861522959234.html>.

 

Richard Wolff on Curing Capitalism. Perf. Bill Moyers and Richard Wolff. Public Broadcasting Service, 2013. Television Show. BillMoyers.com. Public Affairs Television, Inc., 22 Mar. 2013. Web. 24 Mar. 2013. <http://billmoyers.com/segment/richard-wolff-on-capitalisms-destructive-power/>.

 

Wealth Inequality in America. YouTube. N.p., 20 Nov. 2012. Web. 4 Apr. 2013. <https://www.youtube.com/watch?feature=player_embedded>.