“The Bigger The Slice, The Smaller The Pizza”
Dolors & Sense
by Sanford Rose
KISSIMMEE, FL—(Weekly Hubris)—8/16/10—The distribution of income affects its amount. It used to be thought that the effect was positive. But of late the thinking has reversed.
The distribution of income in the US has become progressively more unequal. In 1976, the top 1 percent of households took in about 9 percent of all income. By 2007, that share had risen to 24 percent.
Just think about it: Only one out of a hundred diners grabs nearly a quarter of the pizza.
Does that make the pie larger? It could, if it unleashes the productive energies of the 99 also-rans.
In the last cycle, however, inequality unleashed envy, not increased effort. And envy unleashed credit. If the also-rans could not earn their way to prosperity, they would borrow their way to it.
Of course, they would borrow to buy a house, receiving, as was common, loans equal to 100 percent of an often inflated valuation. Then, if they couldn’t pay, no worries: they would just re-finance the loan on a progressively more valuable property. And as that value inexorably rose, they would draw out part of their increased equity to support a rising standard of living.
But the gambit eventually misfired, in part because the central bank played its proverbial role of taking away the punch bowl just as the party was shifting into high gear.
Cheap credit vanished, and real estate fell hard, harder than it had for 70 years. It fell so hard that it drained the country of confidence. Jobs disappeared and, nearly three years later, they have not re-emerged.
They may never re-emerge.
The economy is now scarcely growing, and this cripple-gaited pace will persist for many years. Growth may even stop and turn negative in the next few quarters.
Thus, inequality spawned envy, which stoked excess borrowing, which led to a crash, which shrank the size of the economy in late 2008 and early 2009 (and may shrink it again for a part of 2010 and 2011).
One obvious conclusion is that we should never again let so few preempt so much of the pie.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)