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More household wealth in America sounds like good news, but it could also mean economic trouble.
The ratio of wealth to income has hit a recent record, according to Credit Suisse.The last time it was this high was during the Great Depression. And it came close two other times: 1999, the year before the dotcom bubble burst, and leading up to 2007, before the housing market crash.
Wealth has skyrocketed, driven mainly by the soaring stock market, and that has mostly benefited the rich. Income for the average person, meanwhile, hasn't been growing much.
Credit Suisse analysts found that the ratio of wealth to income is 6.5. For more than 100 years, it has typically fallen between 4 and 5.
"This is a worrying signal given that abnormally high wealth income ratios have always signaled recession in the past," the Credit Suisse report said.
Wealth per adult in the U.S. has risen every year since 2008. In fact, average wealth is now 19% above the pre-crisis peak hit in 2006, the report stated. And $31.5 trillion household wealth has been added to the U.S. since 2008.
While experts said it's normal for wealth to outpace income, especially after a recession, it becomes a problem when it rises so fast that people feel overly optimistic about their wealth.
Tim Yeager, chair of the Arkansas Bankers Association, said when wealth inequality increases, the likelihood of asset bubbles also rises.
"Stock market and financial industry wealth are always moving around looking for the highest returns and makes bubbles more likely," he said. "When the stock market gets hot, more people pour in and that amplifies the creation of a pending bubble.
Russell Price, senior economist at Ameriprise, is hopeful the income side of the equation will balance out soon. "The pockets of slack in the labor market are evaporating and job growth is very encouraging - both are needed to increase wages."
The fact that there's been three periods of high wealth to income ratios in 15 years has Yeager concerned. "These asset bubbles are becoming more frequent and that causes financial instability."
Federal Reserve Chair Janet Yellen said in a speech Friday the increasing inequality could dampen the economy. "It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority," she said.
– There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination – one that must urgently be addressed.
There is good reason for the spike in interest. While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike. The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.
In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.
In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times. With political gridlock blocking an appropriate fiscal response – after 2008, the United States Congress did not pass an annual budget, a basic component of responsible economic governance, for five years – central banks have been forced to bolster economies artificially. To do so, they have relied on near-zero interest rates and unconventional measures like quantitative easing to stimulate growth and job creation.
Beyond being incomplete, this approach implicitly favors the wealthy, who hold a disproportionately large share of financial assets. Meanwhile, companies have become increasingly aggressive in their efforts to reduce their tax bills, including through so-called inversions, by which they move their headquarters to lower-tax jurisdictions.
As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.
Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.
This is a dangerous combination that erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda.
Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve.
In fact, a number of steps can and should be taken to stem the rise in inequality. In the US, for example, sustained political determination would help to close massive loopholes in estate planning and inheritance, as well as in household and corporate taxation, that disproportionately benefit the wealthy.
Likewise, there is scope for removing the antiquated practice of taxing hedge and private-equity funds’ “carried interest” at a preferential rate. The way home ownership is taxed and subsidized could be reformed more significantly, especially at the top price levels. And a strong case has been made for raising the minimum wage.
To be sure, such measures will make only a dent in inequality, albeit an important and visible one. In order to deepen their impact, a more comprehensive macroeconomic policy stance is needed, with the explicit goal of reinvigorating and redesigning structural-reform efforts, boosting aggregate demand, and eliminating debt overhangs. Such an approach would reduce the enormous policy burden currently borne by central banks.
It is time for heightened global attention to inequality to translate into concerted action. Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it. Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.
For decades, people have been predicting how the rise of advanced computing and robotic technologies will affect our lives. On one side, there are warnings that robots will displace humans in the economy, destroying livelihoods, especially for low-skill workers. Others look forward to the vast economic opportunities that robots will present, claiming, for example, that they will improve productivity or take on undesirable jobs. The venture capitalist Peter Thiel, who recently joined the debate, falls into the latter camp, asserting that robots will save us from a future of high prices and low wages.
Figuring out which side is right requires, first and foremost, an understanding of the six ways that humans have historically created value: through our legs, our fingers, our mouths, our brains, our smiles, and our minds. Our legs and other large muscles move things to where we need them to be, so our fingers can rearrange them into useful patterns. Our brains regulate routine activities, keeping the leg- and finger-work on track. Our mouths – indeed, our words, whether spoken or written – enable us to inform and entertain one another. Our smiles help us to connect with others, ensuring that we pull roughly in the same direction. Finally, our minds – our curiosity and creativity – identify and resolve important and interesting challenges.
Thiel, for his part, refutes the argument – often made by robot doomsayers – that the impact of artificial intelligence and advanced robotics on the labor force will mirror globalization’s impact on advanced-country workers. Globalization hurt lower-skill workers in places like the United States, as it enabled people from faraway countries to compete for the leg-and-finger positions in the global division of labor. Given that these new competitors demanded lower wages, they were the obvious choice for many companies.
According to Thiel, the key difference between this phenomenon and the rise of robots lies in consumption. Developing-country workers took advantage of the bargaining power that globalization afforded them to gain resources for their own consumption. Computers and robots, by contrast, do not consume anything except electricity, even as they complete leg, finger, and even brain activities faster and more efficiently than humans would.
Here, Thiel offers an example from his experience as CEO of PayPal. Instead of having humans scrutinize every item in every batch of 1,000,000 transactions for indications of fraud, PayPal’s computers can approve the obviously legitimate transactions, and pass on the 1,000 or so that could be fraudulent for thoughtful consideration by a human. One worker and a computer system can thus do what PayPal would have had to hire 1,000 workers to do a generation ago. Given that the computer system does not need things like food, that thousand-fold increase in productivity will redound entirely to the benefit of the middle class.
Put another way, globalization lowered the wages of low-skill advanced-country workers because others would perform their jobs more cheaply, and then consume the value that they had created. Computers mean that higher-skill workers – and the lower-skill workers who remain to oversee the large robotic factories and warehouses – can spend their time on more valuable activities, assisted by computers that demand little.
Thiel’s argument may be correct. But it is far from airtight.
In fact, Thiel seems to be running into the old diamonds-and-water paradox – water is essential, but costs nothing, whereas diamonds are virtually useless, but extremely expensive – albeit in a sophisticated and subtle way. The paradox exists because, in a market economy, the value of water is set not by the total usefulness of water (infinite) or by the average usefulness of water (very large), but by the marginal value of the last drop of water consumed (very low).
Similarly, the wages and salaries of low- and high-skill workers in the robot-computer economy of the future will not be determined by the (very high) productivity of the one lower-skill worker ensuring that all of the robots are in their places or the one high-skill worker reprogramming the software. Instead, compensation will reflect what workers outside the highly productive computer-robot economy are creating and earning.
The newly industrialized city of Manchester, which horrified Friedrich Engels when he worked there in the 1840s, had the highest level of labor productivity the world had ever seen. But the factory workers’ wages were set not by their extraordinary productivity, but by what they would earn if they returned to the potato fields of pre-famine Ireland.
So the question is not whether robots and computers will make human labor in the goods, high-tech services, and information-producing sectors infinitely more productive. They will. What really matters is whether the jobs outside of the robot-computer economy – jobs involving people’s mouths, smiles, and minds – remain valuable and in high demand.
From 1850 to 1970 or so, rapid technological progress first triggered wage increases in line with productivity gains. Then came the protracted process of income-distribution equalization, as machines, installed to substitute for human legs, and fingers created more jobs in machine-minding, which used human brains and mouths, than it destroyed in sectors requiring routine muscle power or dexterity work. And rising real incomes increased leisure time, thereby boosting demand for smiles and the products of minds.
Will the same occur when machines take over routine brainwork? Maybe. But it is far from being a safe bet on which to rest an entire argument, as Thiel has.