Toothpaste Tube Economics.

Mr. Lebowski: “The bums will always lose…”

http://www.youtube.com/watch?v=EEz-Czt69IU

The Big Lebowski, 1998

Posted here with permission by the author, our CEO, Tim Handley. Enjoy!

It is no surprise that there has been and continues to be a populist uprising in the Middle East known as the ‘Arab Spring’.  In the United States, we have a similar uprising on scales not seen since the Viet Nam war, and this is known as the ‘Occupy’ movement. The ‘Arab Spring’ and the ‘Occupy’ movement are quite analogous.  In both regions where revolution is either percolating or has boiled over, political and economic power is concentrated in the hands of a very few, and large numbers of people think that this isn’t just, but the few that hold the power are loathe for it to be relinquished.  You say you want a revolution?  Well, you know…  get ready because when on an unsustainable path, often there are shifts, sometimes seismic in nature.  As with plate tectonics, as pressure builds when one mass wants to move one way and another mass stands in opposition, there will be a rupture, and how cool is it that this is one letter away from rapture?  The next thing you know, there are people on the streets, tear gas canisters hitting and injuring veterans, and a bloodthirsty extreme right wing cheers as rotund police officers spray defenseless Sonoma State students point blank with mace.

This is quite predictable and should be expected to intensify.  None other than Alan Greenspan himself in his book, The Age of Turbulence, wrote that the only problem with unchecked capitalism is the tendency for a growing wealth divide – to which he offered no functional remedy – but did forecast that the logical outcome of this, historically, was a populist revolution.   And a populist revolution would likely be a substantial impedance to continued economic prosperity for our country, and unfortunately, one that could not be remedied by lowering some interest rates.  So, he thought toothpaste tube economics  (squeezing from the bottom to keep the top fat with the end result being the very top receiving the reward from the effort), could ultimately disprove the perfect nature of the capitalistic model.  I think Greenspan’s attempt at a solution had something to do with shareholder empowerment as a more viable alternative to government regulations as a way to ward off revolutions and other seismic shifts.  And since his book came out, he has testified before Congress how mystified he was at how little accountability to which the average shareholder held the average board of directors.  Oh how I used to hang on his every word!

About the wealth gap:  According to Robert Reich, the top 1 percent of income earners went from 8% of the total annual income in the mid 1970’s to 23% in 2007.  So today, 15+% of the country’s income now goes to a place where it doesn’t get circulated back into the economy with any scale.  In a best case, the rich guy stuffs his excess cash in his mattress (metaphorically speaking, of course, we’ll call the mattress ‘The Caymans’), but more typically, purchases assets which fuel asset bubbles, such as real estate, oil futures, etc.  Conversely, the middle class circulates its income back into the economy via rent, food, braces, shoes for their kids, etc., thereby sustaining merchants, vendors, contractors, restauranteurs, etc, and creating the multiplier effect that marks a robust economy.  As the middle class goes, so goes the whole economy.

So if the siphoning of wealth away from the middle class – the segment of the economy which provides the greatest multiplier effect – meant simply draining money from the economy, it would cost about $2.5 trillion dollars per year.   But, asset bubbles also impacts the cost of living for the middle class (gas and housing expenses, for example).  Combine lower income (15%) with higher cost of living, and you have  … downward pressure on the middle class.  At some point, as the middle class continues to shrink and the number of those that are living in poverty grows, they are going to call Bullshit! (revolution), just as has always happened in nearly every society where wealth gets concentrated in such a fashion.

Interestingly enough, the last time that income was as concentrated as it is today was … wait for it … 1928.  2007 and 1928 both saw the richest 1% earning 23% of the total income pie for the country.  In 1928, it didn’t end so well for the economy…  And in 2008, it didn’t either.

Sadly, it is the outsourcing of our jobs to other countries that helped create this wealth gap.  If you can hire for $10 offshore what you were paying $100 for domestically, you get to put $90 in your pocket, if you are the corporation.  Often this discount is enabled because in impoverished countries, you don’t have to spend money on things like, say, worker safety (I’m talking to you Tommy Hilfiger, Kohls, and The Gap… no sprinklers nor fire exits?  Really?) or environmental controls.  There is a win-win potential in this, especially if destitute countries get to enjoy an increased standard of living in the deal, which as a global citizen, I consider a good thing, especially if they use some of their profits for things like smoke alarms.  And of course our corporations win by making more profit.   But much like the impoverished country’s gains are tainted if they do not buy smoke alarms and increase worker safety, our gains are tainted when we fail to retrain the workforce that no longer has marketable skill.   And we are not.  Profits that are enhanced by global outsourcing should be levied, with the proceeds going directly into education.

Sadly, our country is moving in the opposite direction.  Taxes on the top earners and corporations is at a 60 year low, and education spending per capita is not far behind.  And our ranking amidst other industrialized countries reflects this trend, 14th in reading, 17th in science, and 25th in math out of the 34 countries measured by the Organization for Economic Co-operation and Development (OECD).  As the world economy becomes more seamless, we will have to compete for jobs from a larger pool of candidates, and the smartest will get the best jobs.  Further, as education gets squeezed, and teachers get furloughed, which among many other trends increases the chasm between the ‘haves’ and the ‘have not’.  Rich folks educate their kids outside of schools, poor folks can’t, they are too busy holding down two jobs.  Rich folks put their kids in sports and arts that used to be in public schools, poor folks do not, as these programs cost money.  Sadly, they even cost money inside public schools nowadays.  This vicious cycle shows no signs of abating anytime soon.   Extrapolating the trend puts is in a world where only the rich will be able to afford quality education, leaving the rest of the masses to populate the reality TV shows that keep the wealthiest prejudiced against the poor.  Boom times for Jerry Springer and Dr. Phil…

This runaway concentration of wealth is self defeating for the rich.  If they don’t get pinched by a revolution, lynch mobs in their gated communities, or a radical political swing in the other direction away from capitalism, there won’t be firefighters to rescue their cleaning lady, or teachers to teach their pilots’ kids how to do math, or people to police the streets of their chefs, or state services to provide licenses to their masseurs.  Inconvenient!

There is irony in the fact that a well informed electorate is the key to policy changes that would help this situation, and perhaps increment it toward solutions.  But thanks to a web of interrelated schemes that game the system to favor incumbent wealth, many of those that would be fervent supporters of the changes necessary to avoid revolution are channeling their rage at the very policies that would save the country.  (Why do I suddenly want to wear a sun hat with tea bags hanging from the brim?)    Fox news and Citizens United alone are probably enough to keep any meaningful economic reform from happening, but duping the dup-able.  “Those same hippies that want to fix this also want to give gay folks the right to adopt and marry, and want to take away our second amendment rights!  So we can’t have those kinds of people in office, just ask Hannity.  And why do I feel like I am in the bottom of a tube and being squeezed?  Keep the government’s hands off my medicare!”

Oh Fox, do you ever choke on the stench of all the red herrings you toss around?  You can only squeeze a toothpaste tube from the bottom for so long before it is spent.

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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