Why An Economy For The 1% Is Bad For Business, And Government

The “meek” – that old biblical euphemism for the poor – will one day inherit the earth. If so, it will only be if the world’s one percenters high-tail it to Mars before everything here goes to pot.

Because, according to a study on economic inequality by Oxfam, the poor have an uphill climb if they are ever to chip away at the enormous wealth accumulated by the world’s richest people.

In their January 44-page report titled “An Economy for the 1%”, Oxfam used data from governments and the market to state that the gap between rich and poor “is reaching new extremes.”

The wealth owned by the bottom half of the world’s employed persons has fallen by a trillion dollars in the past five years. “We live in a world with levels of inequality we may not have seen for over a century,” Oxfam states.

rich and poor
An Oxfam report, using data from the market, shows that the gap between the world’s rich and poor has grown to “new extremes perhaps not scene in over a century”.

Oxfam is global NGO that first started out as food-relief organization. Today, it does research and programs designed to help eradicate poverty from Latin America to Asia. It’s view of the world will always be skewed towards the poorest of the poor. However, it’s not hard for individuals and even global businesses to be concerned about an economy designed just for millionaires. There’s only so many of those guys to sell luxury cars and hedge funds too.

In fact, global companies like General Motors have benefited immensely from rising incomes in Brazil and China, now it’s No. 1 market. Apple can only sell so many phones in the U.S. and Europe. Once again, China is fast becoming its biggest market. But without income growth, China’s market will reach a saturation point, at which point sales stagnate. If this is a world that’s all about making money, then making sure more people have money to earn and spend makes more sense than building a global economy where only a few can afford to participate.

According to Credit Suisse, the richest 1% have now accumulated more wealth than the rest of the world put together. Part of that is due to the miracle of compound interest, of course. And the fact that the Chinese economy has become a millionaire-making factory over the last decade. Rich people can invest in good times and bad, adding to their wealth when securities markets rise.

But the poor are not part of the global investment class, and the middle class that dominate the advanced economies tend to have money when markets are expensive, and not have money when markets are affordable. From a pure financial standpoint, that puts middle income investors at more risk to losses.

Even though wealthier individuals lose more monetarily in the market, they have more money than middle income investors to absorb those losses. Rarely does a millionaire go to zero. But a middle income investor can watch his portfolio and housing value decline and never have the cash or the income to reinvest in future growth. This lag in savings and investing in economic boom times also exacerbates the problem of income inequality. Income inequality then becomes a form of economic inequality, whereas classes of people are unable to participate in the market beyond basic needs.

New global trade policies and other domestic social welfare initiatives like those in Brazil for example have helped cut the number of people living below $2 a day poverty between 1990 and 2010, according to the World Bank.

Oxfam notes that if inequality did not grow in that period, an extra 200 million people would have escaped poverty all together. That number could have risen to 700 million if poor people benefited as much from rising markets and compensation packages as the wealthy one-percent.

buildings Mumbai India
High-rise buildings stand in the background over Dharavi, one of Asia’s largest slums, in Mumbai, India.

A mere 62 individuals had the same wealth as 3.5 billion people in 2015. This figure is down from 388 individuals as recently as 2010, according to Oxfam’s calculations. The wealth of those 62 individuals is up 44% in the five years since 2010, an increase of more than half a trillion dollars to $1.76 trillion. At the same time, the net worth of the bottom half fell by just over a trillion dollars, a drop of 41% due primarily to job losses and asset erosion from the housing crisis.

The average annual income of the poorest 10% of people in the world has risen by less than $3 a day in almost a quarter of a century. Their daily income has risen by less than a single cent every year over the last 100, Oxfam says.

Governments would be wise to heed Oxfam’s warning of creeping inequalities

One reason is tax revenue. Rich people pay the lion’s share of taxes and like to let everyone know about it. But if there were more middle income earners in the U.S. that would increase the amount of tax revenue the government collects from Federal Income tax on mid-income salaries, lessening its dependence on investors and the one-percenters out there.

The Tax Policy Center in Washington DC estimates that 42% of all capital gains and dividends reported to the IRS for 2014 came from the top 0.1 percent, a sliver of the one-percenters living in the States. Of the roughly $722 billion in total capital gains and dividends reported by the IRS, about $305 billion were filed by the top echelon of earners. If middle and working class wage earners had enough money to invest, that pot would increase and, in theory, the rich could finally get their tax break.

According to the National Bureau of Economic Research, a nonpartisan organization in Cambridge, Mass., some 160,000 families in the U.S. had an average wealth of at least $20 million while the bottom 90%, or 144 million families, had an average wealth of $84,000. The report was from 2012, suggesting things have gotten worse as middle incomes have stagnated in the U.S. and the stock market gains have helped make the rich even richer.

It’s easy to see how the market makes big money investors rich. A million dollars in a 2.5% yielding government treasury bond brings in $25,000 in income the first year, or over $50,000 in just two years.  The average investor with $100,000 in the same bond gets $2,500, or over $5,000 in two years. One is serious annual income. The other just about pays two months worth of rent.

A man lies in a sleeping bag
A man lies in a sleeping bag in Justin Herman Plaza in San Francisco. Locals there say the problem is getting worse as drug abuse and other problems are increasing the number of poor living on the streets right outside the high tech capital of the world.

The bureau’s report said that wealth concentration among the richest Americans followed a U-shaped pattern during the past century. It was high in the beginning of the 20th century and then fell from 1929 to 1978. Wealth concentration among the richest 1% has been rising since the 80s. One-percenters saw their share rise from 7% of total household wealth in the late 1970s to 22% in 2012.

The bottom 90% share of the nation’s wealth fell from 35% in the mid-1980s to 23% in 2012, the Cambridge-based study found.

Lastly, disparity along incomes leads to massive segregation within urban centers. This happened to Boston back in the 1970s and 1980s. The same goes for New York. It’s now happening in San Francisco, according to one six figure techie that recently bemoaned driving to work among the city’s”riff-raff”.  In short, as Oxfam’s study shows, it is better turning more of the poor into working and middle class wage earners, than turning millionaires into billionaires.