Class Warfare Blog

December 29, 2011

The Middle Class—Death by Finance

I recently became aware of an economist’s determination that total wealth in the U.S. peaked in the 1970s. That seemed odd, to say the least, but then I heard the mental tumblers clicking into place, one after another.

How could our total wealth not be still increasing? Aren’t taxes low, aren’t hedge fund managers making millions and millions each year? Then it seemed not so strange, in fact it seemed quite logical. The hinge pin is, of course, Wall Street. The reason Wall Street was invented and continues to exist is to allocate capital. Investors put up money by buying stock in companies and the companies grow and prosper and pay back the stockholders with interest. The stock market gets paid by skimming a little off the top as “fees.” All is well and good. But then some geniuses decided that financial markets could be used for other things than allocating capital, they could be used to create capital. Thus were born all manner of unusual “financial instruments” to the effect, I am told, that Harvard University even teaches “financial engineering” or how to do this.

There’s but one problem with this. Financial markets cannot create wealth, merely redistribute it. So, as more and more capital was distributed to financiers through these “new and improved” financial instruments (derivatives, collateralized mortgage obligations, etc.) less and less was distributed to people who made things and created actual wealth.

According to some sources from 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. In the naughts it reached 41 percent! This corresponded to a doubling of the GDP share of financial markets (from 4% to 8%).

In essence, our financial markets were siphoning off billions of dollars to enrich financiers, beggaring the rest of us. Money that ordinarily would have been used to support viable companies went, instead, to financial funds and instruments promising bigger returns on investment that those productive companies offered. (This is how a sector rated at less than 10% of GDP rakes in 40% of the total profits.) And, because what was good for the market was good for them and they defined what was good for the market, sending jobs overseas skyrocketed. Since this practice was defined to be “good” by Wall Street analysts, stock prices soared and money flowed to financiers when jobs flowed overseas. But fewer and fewer things of real value got created in this country.

There is a political party which wants to deregulate Wall Street and wants taxes on the rich to go down, no matter the effect on the country as a whole. There is a political party which calls rich financiers “job creators” when all of the evidence indicates the only jobs they create are in foreign countries. There is a political party which shouts down any statement that indicates the U.S. is in decline, a decline that they are causing.

Voting for candidates from that party means you are voting to continue to destroy the wealth of this country and hastening our decline.


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