Income inequality and the gap between rich and poor are going to be “hot topics” as we move toward the mid-term elections in November and the discussion will become even more heated in 2016 when we elect our next president. I believe these are serious issues and we need to find solutions. Unfortunately, most of the proposed solutions we hear are geared to advance political careers with little thought given to the overall impact on our economy.
But before I speak about solutions I would like to point out what has caused a huge increase in the wealth gap over the past 5 years. The rich, at their end of the spectrum, have investment capital. The poor, at the other end, have very little if any investment capital. With the Stock Market (as measured by the S&P 500) up over 125% during this period, it is obvious why the wealth gap grew dramatically. However, during the prior 2 years the Market lost 50% of its value, and of course this narrowed the wealth gap. (A market crash that narrows the wealth gap is not a solution to the problem.)
Capitalism will always favor those who have capital to invest, and unless we come up with a solution that encourages or even demands participation in the capitalist system, the wealth gap will only continue to grow. I also believe that far too many politicians who claim to be advocates for the poor have an ulterior motive. They benefit from having a constituency that is dependent on the government for their subsistence and that will always vote to keep them in office.
So how do we go about dramatically increasing participation in the capitalist system, with all the inherent benefits, currently enjoyed by those who have the means to participate?
Believe it or not, government can provide the answer. Here’s how. Every employer and employee (roughly 93% of the working age population) would be required to contribute to an investment account run by the government. This capital would be invested in broadly based, low or no cost, passive index type market portfolios. Employees would not have control over the investment decisions eliminating all the “emotional” mistakes that have severely damaged many retirement plans.
Wall Street would be against such a program because it would take away their ability to earn fees on what would be a very large pool of capital. (But perhaps those on Wall Street, who believe they can “beat the market,” would be allowed to participate if they guaranteed that any underperformance would be made up out of their own capital.) Something tells me there would be few, if any, money managers who would accept such a condition.
The amounts contributed, the allocation to equities relative to participant age etc. etc., would have to be determined but I believe that would not be very difficult. Basically it would be a program that “enfranchises” most workers, allowing them to participate and benefit from our capitalist system.
A simple idea but it has to be a better way to go than simply redistributing income and/or wealth.