The Retired Investor: How Top-Down Economic Policies Pushed Country Over the Edge

The Federal Reserve Bank's smoothing of the business cycle, which started in the 1990s, was meant to ensure price stability and the health of the labor market. It's top-down policies of reducing interest rates through the banking system and into the hands of the largest corporations was meant to benefit the whole economy.

 

The problem is that corporations and the minority of Americans that control them are not the whole economy. What did that matter, argued supply-side economists. This group, who championed Reaganomics in the 1980s and beyond, assured us that the benefits of the Federal Reserve Bank's policies would ‘trickle-down' throughout the entirety of U.S. society over time. They said the same thing about corporate tax cuts. Those assurances never materialized. Why? Times had changed, and neither the government nor the Fed realized their mistake.

 

As profit-seeking organizations, corporations do not seek to be fair, equitable, or distribute justice. They ignore that side of the pendulum swing (as they should). Corporations simply seek to reduce costs and expand revenues. If they are good at doing so, more and more profits are generated for themselves and their shareholders.

 

In the 1990s, and especially after the turn of this century, U.S. companies and their owners realized that by investing overseas where labor and taxes were much lower, they could reduce costs, widen profitability, and open new markets for their products. As a bonus, it could also help them to compete in an increasingly global marketplace with larger and larger companies.

 

In the ensuing years, U.S. jobs and industries were exported overseas leaving entire regional industries rusting into decay. It also drastically reduced the size of the great American middle class, which had acted as a buffer between the haves and have-nots within society. It also made any semblance of 'trickle-down' economics a sad joke. There was nothing fair or equitable about this trend and yet our politicians applauded the outcome. We were winning the market share war in China. And all it cost was money and giving them our greatest corporate trade and technology secrets.  After all, both parties' politicians reasoned, who doesn't want cheaper T-shirts (for those who could buy them) at Walmart?

 

In my Nov. 8, 2012, column "The Incredibly Shrinking Middle Classhttps://tinyl.io/Av8y" I wrote "Last month the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That is the biggest share on record since 1967. The share earned by middle-income households fell to 14.3 percent, a record low. From 1979 to 2007, the incomes of the richest one percent of Americans soared 275 percent. That same 1 percent earned 23.5 percent of all income, the largest share since 1928. At that rate, the rich are 288 times richer than you the middle class."

 

At the same time, with the additional corporate profits rolling in, company managements invested in technology, especially labor-saving technology, that further reduced the need for human capital.  Companies got bigger, owners became billionaires, the stock market boomed, and those with enough money to invest (mostly Baby Boomers), were paid off in escalating stock prices, buybacks, and extra dividends. As for the bottom half of society, "Let them eat cake."

 

Today, income inequality is a worldwide phenomenon where the richest one percent own half the world's wealth, while the poorest half of the world own just 0.75 percent. Here at home, the bottom segment of American society has been suffering through the worst period of income inequality in American history, far higher than during America's colonial period.

 

In a column I wrote entitled "The Next Third World Nation" back in 2010, I asked this question, "What do Cote d'Ivoire, Uruguay and the United States have in common? Answer: all three nations have about the same level of income inequality. America now ranks lowest of all developed nations in terms of its income distribution." It has declined further over the ensuing 14 years.

 

It is no coincidence that the rise in populism here in the U.S. began about the same time. There was a gathering sense that the real people in this country were under attack by money-grubbing elites, many of whom were thought to be liberal or represent liberal-minded institutions. Movements such as Occupy Wall Street and the Republican Tea Party were early warning signs of the discontent that has now bubbled over among many Americans in the form of today's populism. 

 

Unfortunately, the same trickle-down mentality and government policies that created this inequality continue today. Trump, if elected, offers tax cuts for the wealthy. Biden is funneling billions into corporations as you read this.

 

Who suffers the most from the Fed's higher interest rate policies? The credit card holders, the family purchasing a used car, the first-time home buyer; that's who. Ask yourself who benefited the most from the trillions of dollars in spending over the last decade under the last two administrations. 

 

In my next column, I will tackle the issue of protectionism, which I believe is the cousin of today's populism, as well as the similarities and differences between the crisis we will face over the next decade and those of similar times in our nation's past. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.