Category: Economies

Of course economics is incredibly complicated and a bit chaotic. But sometimes reducing things to their most simplistic can be informative.

The standard short version of how capitalism works is this: Workers get paid, and with that money they buy the goods that all workers have created, and that pays for costs of producing the goods.

It is circular. It works. Until someone is taking more than their fair share, and removes it from the economy by storing their wealth somewhere. This happens when increased productivity is not matched by increased wages, and the rich get more of the profits.

That means that there are more goods to be purchased than wages can pay for, because some money has been removed from the circular economy by rich people. Elon Musk doesn’t spend billions a year on goods.

To make up for that shortfall of cash to buy the goods we create, we borrow. 40% of Americans (the lowest earners) are spending more in any year than what they earn.

For this to keep happening, interest rates need to keep going lower and lower. So interest rates and inequality may be connected.

Fixing inequality means increasing the income of workers so that they get a share of the productivity increases they are part of. More income means higher interest rates to control spending, and meanwhile inequality decreases.

See this NYT article for some similar thoughts

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Inequality in the US has been getting worse for decades, and the message becomes more powerful when you give it a dollar value.

In a comprehensive article from Time magazine we learn that if the level of inequality from the mid-70s had not changed, today the average household would be $297K better off. Also, if inequality had not risen, the median wage earner would be earning double what they are today.

This is the result of, aside from capitalism naturally causing the rich to get richer, a dramatic lowering of tax rates for high earners. That is what changed, and more inequality is the result.

Unfortunately many voters merely need to hear the words “tax cut” without questioning how it would affect them personally.

Time says:

An America with an economy $2 trillion smaller and a workforce $2.5 trillion a year poorer than they otherwise would be had inequality held constant since 1975. This is an America in which 47 percent of renters are cost burdened, in which 40 percent of households can’t cover a $400 emergency expense, in which half of Americans over age 55 have no retirement savings at all. This is an America in which 28 million have no health insurance, and in which 44 million underinsured Americans can’t afford the deductibles or copays to use the insurance they have.

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