Economic Inequality & You
Change is all around us every day. We vote for new elected officials. We look for new jobs. We move to new homes. One year the nation becomes obsessed with cupcake shops. The next year, Hamilton. None of this is inherently good or bad, but change on a societal level – from trend following to job hopping, can be costly.
The beauty of the global economy is that nothing works in isolation anymore. Your move may prompt your friends to move (or perhaps it was vice versa). Jobs will flow to where people congregate and people will flock to jobs. Typically an equilibrium will be found where potential job seekers will only move somewhere more expensive if the job pays more or if they can keep their same standard of living through some other route.
And this concept, bundled with the general availability of land throughout the past few thousand years has kept our cities growing, our suburbs bustling, and our rural areas inexpensive enough for those who work there. How bizarre then that this trend seems to have come to a halt. With the rise of telework, more and more people should be able to live wherever they choose. You can work for a company based in New York City without having to pay NYC prices.
And yet it appears that the exact opposite is happening. Young people, drawn to cities, are choosing to spend their money in proportions that would flabergast their elders. Housing is king. A tiny studio in the heart of the city that eats half a month’s paycheck or more is not uncommon in the largest cities. Unsurprisingly, this phenomena, coupled with the desire to eat locally sourced or organic or trendy food, means that two of the staples of survival, housing and sustenance, are now more expensive than they’ve been in modern history.
This is good news if you own an apartment complex in New York City. This is bad news if you’re the global economy. There’s a quantifiable cost to this societal change. The way we organize our lives today has led to an abysmal 5% national savings rate, which from a historical perspective is basically unprecedented, financial crises aside.
It’s not exactly popular to say, but perhaps our inability to save is one of the key reasons for economic inequality today. As Thomas Piketty explains in his 2014 book Capital in the 21st Century, the world is divided into two types of people, capital and labor. Capital (people who make money with money) have historically received better returns than Labor (people who make money with their time). This is simple and understandable. There have always been more people with free time to devote to work than there have been people with money to supply that work.
Think of it another way by taking the long term view. Supply and demand. There are a lot of people chasing jobs. But not everyone has enough money to get into the capital markets. So there’s a higher supply of labor and thus labor can expect to be compensated less well than if there were hundreds of jobs and only 1 person applying for all of them. Since jobs don’t fight over people nearly as often as people fight over jobs (the only obvious exception is in the tech industry today where too few people have the qualifications needed and salaries are increasing rapidly), labor gets paid less than capital.
Ok so back to societal change. Many of us have organized our lives in a way that prevents us from saving much money. We still have our time, but without money we can’t move ourselves from the low paying group of people called labor into the high paying group of people called capital. So those who have capital become even more valuable while labor becomes even less valuable. You’ve heard this before – the rich get richer.
Is this the only contributing factor to economic inequality? Of course not. The world is a different and unique place from any other point in history for a variety of reasons. But it’s nevertheless true that capital has more opportunity than labor. I can buy a stock in a British company tomorrow if I think it’s a good investment. But it’s a much longer process to get visas and passports and approvals to work for that same company since I’m an American. Labor has restrictions – capital knows no bounds.
So when thinking of the best way to address economic inequality, there are probably a dozen or so levers we can pull as a society. Higher or different taxes on financial transactions. Lower barriers to talent moving across borders (much like what the EU has). Better educational systems…just to name a few. But there comes a point where we also need to gaze inward.
Every dollar we don’t save properly is another dollar not chasing investment opportunities and growth. When you don’t have money, all you’re doing is making the people who do have money more powerful. Perhaps it’s not the easy thing to do, saving more money. I’m sure you can come up with 100 excuses in the next minute for why you don’t have any money. As a financial planner trying to sell clients on saving more, I guarantee you I’ve heard them all. But you know who doesn’t make excuses? Capital. Capital makes money. So do yourself and the global economy a favor and increase your savings rate today. It’s the patriotic thing to do.
Nathan is the Chief Financial Advisor at Monte Largo Financial