Thursday, August 18, 2022

Is the Wealth Gap an employment problem or a strategy problem?

The roots of the widening wealth gap in the United States reach back to the 1970s, when technology and global competition forced American corporations to reshape their workforces in order to remain competitive. As a result, many middle-class jobs have either migrated overseas or been replaced by automation. Gone are the days of single-wage-earner families, lifetime employment, and pensions. In real numbers, incomes have been declining since the 1990s, while the costs of wealth-building essentials, particularly higher education and good health, have increased at rates greater than inflation. It’s become harder to make a living, and harder to save for the future.

One response to these economic pressures has been the proliferation of debt by individuals, corporations, and governments. As Jonathan Rauch explains in a National Journal article:

In a democracy, politicians and the public are unlikely to accept depressed spending power if they can help it. They can try to compensate by easing credit standards, effectively encouraging the non-rich to sustain purchasing power by borrowing. They might, for example, create policies allowing banks to write flimsy home mortgages and encouraging consumers to seek them. Call this the “let them eat credit” strategy.

In a booming economy, additional debt can accelerate growth. However, debt has a different effect when an economy is stagnant or declining. At first, easy credit may maintain economic growth, and allow individuals to improve their standard of living. But eventually, lower incomes and minimal savings lead to a contraction. People and governments can’t pay their debts. The consequences are unemployment, foreclosures, higher taxes, fewer benefits. To varying degrees, this is where Europe, Japan, and the United States currently find themselves.

Long term, many economists believe there will be a “re-equilibration” of income, debt, and even a narrowing of the wealth gap. Technology and the opportunity for profit will create new industries and employment. Already, many consumers are “de-leveraging” by paying off credit card balances, and forgoing further borrowing. If a higher-employed, lower-debt America takes the next step, and gets serious about saving, there’s reason to believe the wealth gap will shrink as well.

Here’s why: Although we tend to see banks and brokerage houses as lenders and financiers, the real source of funds for lending is the savings and investments of other individuals—particularly from the 1 percent. When people have greater capital needs, or there is a lack of funds available, those with money to lend or invest (again, the 1 percent) stand to make higher profits. As more people build savings and proportionally reduce their indebtedness, then the dynamic changes; there is more capital available, and the profits are spread amongst a larger pool of depositors and investors. In addition, increased saving and reduced debt almost always trigger increased spending, which causes the economy to expand—without the looming threat of a debt-induced collapse.

Individual Applications

Because rebalancing usually requires some short-term financial contraction (less spending, more saving), both individuals and politicians are less than eager to commit to the process. The typical response is to see if a little more debt might stimulate another round of growth. History shows this is wishful thinking. You can’t do much about public policy, but don’t allow this thinking to influence your personal financial decisions.

The answers to the original trio of questions about your personal financial circumstances involve some combination of income and savings. If you aren’t in the top 25%, determining how to increase income may be a critical issue. Regarding income, the NYT article on the wealthy provided an interesting statistic: The wealthiest 1 percent accounted for 36% of all self-employed income. Depending on your skill set and current circumstances, you may want to consider becoming your own boss—maybe not today—but sometime in the future.

And whether the goal is to maintain your current level of wealth or move up, maximizing saving is an essential ingredient. Referring to Steglitz’s earlier comments, saving 15% to 25% of income is a benchmark for crossing the threshold and becoming a 10-, 5- or 1-percenter when it comes to net worth. Even if your prospects for higher income appear limited, increased and consistent saving can keep you from living on the wrong side of the wealth gap.

Managing debt goes hand-in-glove with increased saving. In the short term, refinancing may help cash flow, but simply shifting debt to another bank or another credit card without eventually retiring it is not productive.

Recent public policies have not narrowed the wealth gap. Personal action remains your best strategy for crossing wealth thresholds.

If you are already a 1-percenter, stay ahead of the contraction curve through ongoing saving.

If you want to cross higher wealth thresholds, start or step up your saving.

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS).  He can be reached at [email protected]  See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice.  You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil

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