An Economic Epiphany

I freely admit that the subject I probably know the least about is economics. I didn’t take Economics in college, primarily because I both despised and feared Statistics. I have never had more than a passing interest in it throughout my adult life. It is pretty much Greek to me, and outside of the bare basics of supply side and demand side I know very little about the complex influence of the application of various policies on the economy. But in the wake of the recent great recession I have vowed to learn more.

It was a significant epiphany for me that, during the consumption of a soft serve cone at Burger King, a revelation came to me, ostensibly from the bowels of the universe, about the basic nature of economics. It came to mind, as it often does, that the obscene profits taken by certain people were immoral. I was struck by the thought that since there exists a finite amount of wealth this means that as long as there were winners there was a corresponding amount of wealth lost by losers. This troubled me. It made the accumulation of great wealth by CEOs, hedge fund managers, and insider day traders, among others, seem particularly cruel.

The pain and despair of those unfortunate “losers” is not only a personal tragedy but a national one as well. Some of these losers are businesses and their failures carry with them the loss of jobs and production of wealth. And many of those “losers” are not failures in the classic sense of being inferior players of the game. Many of them were merely on the wrong end of an arbitrary decision by the powerful. Their only crime was being in the wrong place at the wrong time.

So I asked myself, “How do we reduce the numbers of losers without reducing the number of winners at the same time?” After all, people deserve to make profits from their hard work and good ideas. This was when the light bulb went on. It became clear why certain economic indicators were so important to those who care about such things. The answer was growth. If additional wealth is created and the economy grows, then, at least on average, the profiteers take their profits from the added wealth produced and the losers need not lose. Ideally profits and growth are equal and there are no losers. We know this does not happen in nature. There are always some losers. But in growth times the losers are more likely defined by the natural perils of the market than by the dirty tricks of the Gekkoesque, although those indignities still happen with greater than deserved frequency. During periods of growth things in general are not so bad. Lots of winners and few losers.

We won’t go into the idea that perpetual growth is impossible in a capital based system. Not now at least. So we will assume that growth is possible and likely probable. I wondered why growth was so slow today. What could be the cause of profit taking without the creation of wealth necessary for a healthy, free marketplace? It was this phenomenon which seemed to me to be the likely cause of a non growing economy, of winners and losers, and the harbinger of economic weakness with the accompanying recessions. Could it be that there are those who take profits, often obscene profits, without contributing to the creation of wealth in any way, who are some of the main villains in this scenario that creates losers?

There are plenty of people in America who make money, lots of it, and never create one iota of wealth. They do it simply by transferring money or assets from one place to another, one party to another, taking a goodly cut for their facilitation. Another group makes their millions organizing, and often manipulating deals, consolidations and mergers, once again taking their cut merely from having the connections to bring the players together. These people often use other people’s money to make their own, socializing the risks and privatizing the profits. Corporate CEOs take in outrageously big salaries, with gigantic golden parachutes. Their compensation is not commensurate with their value to the business. Another bunch of leeches manage hedge funds, those exclusive mutual funds that exist mostly for the wealthy. These Wall Street millionaires actually do participate in a degree of wealth creation but also take huge salaries for performance that is little better than the average Joe using Charles Schwab.

These people are examples of a phenomenon made popular during the Reagan years. It is the concept of making money without doing any work. There have always been people who did this but in the 80’s it became fashionable. For the huge influx of students who rushed into MBA programs at the same time it became the ultimate goal. The ethic of hard work and playing by the rules gave way to a cut throat race to the top where success was measured only by how rich one could get, how fast and how easy.

I feel that after thirty years or so of this amoral profiteering I call “transactional exploitation” our country was ripe for the kind of economic collapse we suffered in 2008. It was this vampiric greed, coupled with the repeal of Glass-Steagal, that played an important role in bringing on the great recession.

The economy of the early 2000’s was largely driven by the housing construction and real estate markets. To simplify a complex scenario, in the 1990’s Congressional Democrats advocated that we make home purchase available to more Americans. Because home ownership was regarded as a lynchpin of American economic prosperity the Democrats reasoned that making home ownership available to more citizens would help stabilize the economy. They were thinking along the lines of slightly lowered income requirements, lower down payments, longer term mortgages and reasonable interest. Instead the vultures, enabled by the repeal of Glass-Steagall, created toxic financial products which they misrepresented to naive first time home buyers. Banks created nebulous security constructs which led to short term profits but were destined to fail. When the bubble burst it took down the housing market, major lenders and established securities brokerage houses. All of Wall Street collapsed in the wake of this implosion and investors suddenly lost as much as 40% of their assets. We are still crawling out of that hole and yet the vultures keep looking for scams that will make them flush while flushing the suckers they exploit down the proverbial drain.

I do not begrudge talented people from making good livings from the application of their unique skills. But there is a difference between making a living and making a killing. Just look at the words, living and killing. Which word fits better into a just and prosperous society, where all have the opportunity to thrive. Which fits a society where the ladder to success exists, but honest people trying to climb it are stepped on and thrown of by the ruthless or never allowed on it because of the neighborhood they grew up in or the color of their skin or the economic impossibility of getting the education or training they need to be able to climb in the first place.

Somehow society, through our collective ownership of government, must begin to re-balance the value of professional endeavor in America. We must figure out a way to reduce the value of the greedy non wealth creators and increase the respect for and value of under appreciated careers such as educators, scientists both social and applied, nurses etc. We must educate to the point where consensus demands that the gap in earnings between the lowest and highest is not so dramatic.

The transactional exploiters, who imagine themselves job and wealth creators, and those who worship them, aspiring to be just like them, are a bigger threat to the American economy and national security than any of the alleged “takers” so often mythologized by some. It is the alleged “makers” of whom we need to be careful.

Maybe I know more about economics than I imagined.

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