The Indentured Future

"Future Industry" - photo Courtesy of NightHawk237 Flickr Stream

“Future Industry” – photo Courtesy of NightHawk237 Flickr Stream

Two weekends ago, President Obama provided a thoughtful interview to The New York Times about the frayed state of the country’s social and economic fabric. The president highlighted points about America’s widening income inequality, unemployment and our ephemeral belief in the American Dream. True, economic mobility is fostered with more employment and rising income levels, but to ascend the economic ladder, the colloquy should center on establishing paths of wealth creation.

Decades ago, the late Dr. Louis Kelso posited the theory of binary economics, simply stating that there were two types of “earners”: “wage earners”, those who work for a paycheck which alone provided the extent of their economic consumption, and “capital earners” who garner economic value from the “capital assets” they accumulate, such as savings accounts, stocks and bonds, real estate and other holdings. Capital assets gain in value independent of labor and over time capital earners accelerated their consumptive power far beyond that of wage earners. A social economist, Kelso’s basic tenet premised that broader capital ownership would enhance democracy. To wit, he developed mechanisms for “wage earners” to become “capital earners”, such as the Employee Stock Ownership Plan, wherein companies contributed to a benefit plan to enable wage-earning employees to purchase their employer’s stock, and share in hopeful appreciation of the shares.

Now consider the following: the top 1 percent of households own 35 percent of the privately held wealth of our nation, with the next 19 percent enjoying 55 percent. This means that just 20 percent of the country owns 90 percent of the wealth. This becomes even more skewed independent of home equity, where the top 15 percent own 95 percent of the financial wealth. Overlay this with the fact that 40 million children in the country presently live in low-income households, with 20 million subsisting below the poverty level. What does this growing disparity bode for the future of our nation? Might we echo the recent comments of rapper Jay Z that wealth inequality will lead to social unrest? In many ways, Dr. Kelso sang the same tune, albeit in a different key. This unlikely duet — Dr. K and Jay Z — should give us pause to reflect.

Broad asset building should be a key focus of the government. And to build assets, outside financing is typically required. Regrettably, our policies and practices tend to promote perilous financing behaviors, which exacerbate the wealth divide. Finance is a multilingual discipline of risk and return. One can use equity or debt. The former shares the fruits and the spoils. The latter obligates regardless of the outcome. In many crucial areas, we speak just one language.

To finance our desired future, we simply “borrow” it.

We have evolved into a culture of debt – we avail it, we advocate it, we incentivize it. Our “buy now, pay later” attitude permeates our system. In the anemic 1970’s, we introduced credit cards to stimulate consumption. We have a housing finance system that tacitly dismisses credit principles, providing loans at levels to cause undue risk for borrower and lender alike. We layer mountains of government-sponsored debt onto “wage earners” seeking homeownership. We even incentivize the use of such debt through interest deductibility. Do note, the U.S. is one of only four countries that still does so. Our monetary policy of low interest rates benefits borrowers not savers. Our best and brightest are saddled with a trillion dollars of student debt, which now requires the query of whether education produces a positive ROI.

Red has become the new black as debt provides a temporal increase in consumption, while transferring appreciation from labor to the capital side of the economy. Have we created an environment of investment or indenture?

The great empires of the world have somewhat consistent patterns of demise. A pattern shared by many is the overextension of credit through both public and private sectors. Might we be following suit?

We need to practice financing methods to enable the “wage earners” to acquire capital assets to become “capital earners” to balance our socio-economic framework, but in a manner that allocates risk and return on a more equitable basis. We need programs of investment enabling wealth creation, utilizing equity-like attributes of finance, rather than misguided extensions of credit that largely constrict. Critical growth and wealth creating segments of our economy, such as small business and housing, should employ improved risk-adjusted methods, which have witnessed the deleterious effects of excessive debt.

Opportunity for wealth creation is a credo of this country. It is incumbent on us all to instill forms of finance that enable, not disable, economic achievement for each and all, as only then will we start to repair the fraying of the fabric.

[Source: Steve Cinelli @ Primarq]

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