Everyone should budget their money and time. Budgeting is simply about knowing how much you have, how much you will have, and how much you will lose. Everyone has expenses...
To save the middle class is the latest “rebel yell” coming from former US Secretary of Labor Robert Reich. In his most recent commentary dated 1/30/15, he elaborates on many items from the financial stock market crisis to insider trading laws claiming these are the reasons for the destruction of the middle class.
Being a former labor secretary, Mr. Reich must have realized that since the 1950’s, the world economy is competing at a much higher standard than before. In fact, many non-US companies can claim to be the best in their industry. If we can agree on this single competition issue, then the baseline for setting the US middle class is at its peak of achievement. This is very difficult comparison. Thus, the standard to keep the middle class the way it was will be difficult in any scenario. Below are my counter points to the destruction of the middle class.
BALANCE SHEET RECOVERY: The economic theory being used is not for someone that doesn’t save or have money already in bonds and stocks. To boost the economy, an easing of the monetary supply, or “free money”, was introduced. This spurred growth for most of the large companies and produced significant gains in the stock market. Tax breaks for dividends, interest, and capital gains produced additional income for the stock holder by saving on taxes. This produced a wealth gap that exceeded any wage income increase over the same period of time. For the middle class to increase its wealth, the only option is for wage increase. In many studies, the real wage increase has been non-existent since the 1980’s. This limits the growth potential of the middle class. Coupling tax incentives with the lack of wage increase from the 1980’s produces a crippling blow to the long-term growth of the middle class.
HOME OWERSHIP BUBBLE: The intent by the US government was correct, to assist US citizens to obtain home ownership. The data supports the claim that the middle class has difficulty saving money in order to invest their way out of the middle class. The strategy of incorporating home equity as a wealth driver is an excellent idea. This became a slogan after 9/11 to spur the economy and focus the citizens on positive influence during the War on Terror. The financial institutions developed many products, some risky, to boost home ownership sales. This was achieve but at a cost. The housing bubble caused the financial crisis in 2008 mainly due to the lack collateral on the risky loans, gross negligence compliance and oversight, fraud by government officials at Fannie Mae, and the implied backing of all loans by the US government in case of default. This Ponzi scheme was documented in detail by many books including Andrew Ross Sorkin’s “Too Big To Fail”.
COMPLIANCE & COLLATERAL: The financial crises of 2008 could have been averted with the compliance institutions requiring proper collateral for risky investments / products. The sad truth to the story is that new legislation was not necessary to fix the problem of under collateralization.
LARGE BANKS EQUATE TO CRISIS: This is an interesting assumption, along with a lack of statistical data, to indicate there is correlation. Since the US banks are not the largest in the world, we could gather data from other banks to see if that produces correlation. Also, before the 2008 crisis, we did not experience any comparable issues. The only explanation is that they didn’t occur due to the proper collateralization of they just never happened in the first place.
RISKY BETS: If there are so many financial risky bets in the market, why haven’t we seen any repeated occurrences of a financial crisis? Also, why haven’t more banks enter bankruptcy if there are risking money loosely, shouldn’t their bad bets cost them money and eventually their status as a bank?
BAD TO BE A GOOD BUSINESS PROFESSIONAL: Every business school teaches the basic fundamentals of business: buy low – sell high. Let the banks figure out the best way to operate.
INSIDER TRADING UNFAIR FOR PEOPLE WITH ANOTHER JOB: Information is only as good as the source. I equate this to the driving to work story. If we take the same path every day to work, by the 500th time we will be able to know where the road twists and bumps before they occur. This is simple to understand: the more you practice, the better you become. The analysis or insiders work on these financial issues daily and will benefit from the constant exposure that the middle class investor does not see. The middle class investor made a decision long ago not to work in the stock market; thus the exposure to the inherent detail or insider data cannot be gained. This is why financial advisors are available as a service to assist investors that cannot commit full time to investing.
TAKING BRIBES: In the article, there is an implication of non-transparency at the very least up to and including taking of bribes. In truth, I don’t believe Mr. Reich means this but his tone is crossing the line of professionalism and more into the environment of entertainment. I would suggest being credible in your statements by using facts and documented evidence than conspiracy theories. Again, this unprofessional approach does not help the middle class, only prolongs the denial of the group recovering from the status decline since 1980.
RECOMMENDATIONS FOR IMPROVEMENT: There are easy remedies for this issue on the struggling middle class. Here are some I would adopt immediately focusing in on the recovery as an Income Statement / wage strategy. The goal is to have people enter and prosper in the middle class.
- Utilize real data before making a decision on the macro economic issues instead of hunches and emotions.
- Install and support the compliance legal measures to support strong collateral backing of all financial products, even risky ones.
- Institute all policies toward assisting people that can benefit from an Income Statement economic policy, which includes lower income taxes for the middle class and review of the benefits of those that do not pay income tax.
- Enhance the middle classes ability to save by providing 0% tax on all invested income which includes dividend and capital gains.
- Adopt an employment immigration bill that would encourage and accept workers for certain jobs deemed as strategic to the growth of the country. This will improve wages for everyone.
- Motivation through real actions: the middle class needs to understand that the standard from the 1950’s is not a real standard today. By working hard and utilizing the strategies listed above, the middle class can return to a similar place like in the 1950’s.
- Books to read: There are several excellent books describing the financial crisis and statistical data to support the expert’s analysis. I would suggest several books including: Andrew Ross Sorkins’s “Too Big To Fail”, Maria Bartiromo’s “The Weekend that Changed the World”, Henry Paulson’s “On the Brink”, and Alan Greenspan’s “The Age of Turbulence” and his white papers on “Activism” and “The Crisis”.
Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior
The following blog is the opinion of Gary Kapanowski and Garykapanowski.com. It is the sole intent to broadcast this opinion from Gary Kapanowski and Garykapanowski.com exclusively and not to reflect on any other institutions or organizations associated with Gary Kapanowski or Garykapanowski.com.