The American economy is suffering from a fundamental imbalance. This imbalance, simply stated, results from the inadequacy of the current level of wages – and the current level of employment – to support economic activity and investment.
Like any market economy, the American economy depends on consumption to support economic activity directly, and to support it indirectly by buying the output of goods and services that makes investments profitable.
The economy is not paying ordinary working Americans enough for them to be able to support consumption, in other words to buy the goods and services they produce. A resort has been made to borrowing – by means of consumer borrowing through mortgages and other loans, and government deficits to sustain spending.
Meanwhile, wealthy individuals – the “1%”, as Occupy Wall Street calls them – and corporations are awash in cash, with not enough places to invest it. In a desperate attempt to maintain the profitability of their investments, investors and corporations are searching for – and in the process creating – one financial bubble after another. When the bubbles burst, recessions will result.
In this blog, we argue for the necessity of a large shift of earning from wealthy individuals and corporations to ordinary working people. The simplest way to achieve this is by reversing some of the tax changes that have favored corporations and the rich.
Would this redistribution be a Robin Hood kind of theft from the rich? Is it morally right? The simple answer is:
The economy should be answerable to the people, rather than the other way round – we must reject the myth that the economy “belongs” in any absolute sense to the rich.
If the economy is not the property of the rich, to be manipulated for their benefit, what is it good for?
The economy should provide a framework within which people have the opportunity to fulfill their potential.
With this objective in mind, what are people entitled to expect of the economy? Surely, at least, it should pass the following four tests:
(1) Does the economy achieve reasonably full employment with wages at or above the living wage level for those people who are able to work?
(2) Does it provide support for those people who are unable to work because they are too young, too old, too sick, or are in school?
(3) Does it create a framework of financial stability within which people are able to plan their working lives, housing, retirement, etc.?
(4) Does it encourage individuals to be inventive, creative and entrepreneurial?
In 2012, as highlighted by the emergence of Occupy Wall Street, it is clear that the economy must be given a failing grade on at least the first three of these tests. Why has it been underperforming so badly, and what can be done to rectify matters?
The increasingly unequal distribution of income that has emerged in the United States in the past three decades constitutes an imbalance in the economy that has become pervasive and fundamental. This booklet makes the case that an extremely unequal distribution of income is incompatible with a stable full-employment economy.
While a degree of inequality may be conducive to the fourth test – providing scope for the entrepreneurial spirit – extreme inequality has the opposite effect of undermining economic growth and stability.
This blog has been established to explain and elaborate the whys and hows of 1% economy.
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