Monday, August 21, 2017
Restoring the US Middle Class - 5
In the interest of restoring a viable middle class to the United States of America, I will reproduce sequentially chapters of my book in this space. The title is 'Occupy Wall Street Plan 12: A Proposal for Twelve Specific Governmental Actions to Correct Some Economic Imbalances in the United States of America Kindle Edition'
The book is available as a Kindle book here : https://www.amazon.com/Occupy-Wall-Street-Plan-Governmental-ebook/dp/B00UK97C84/ref=asap_bc?ie=UTF8
My hope is that a more viable middle class will reduce class tensions.
NASA Study predicts end of civilization unless we equalize incomes: http://collectivelyconscious.net/articles/nasa-study-concludes-when-civilization-will-end-and-its-not-looking-good-for-us/
Occupy Wall Street Plan 12
5. Tax Away Great Fortunes, Great Incomes
Wealth Concentrations Reduce Wealth Generation
Huge concentrations of wealth and annual income harm our economy by diverting money away from risky investments in economic growth and into safety seeking investments.
It is well known that the primary criterion of investing is safety of principal. People with large amounts of money are risk averse and do NOT wish to risk that money in new ventures, preferring to find safer investments.
Our economy will grow faster and we will be more secure when we do not have extraordinarily large income and wealth concentrations. Then will capital have greater incentives to take risks and create growth.
The accumulation of great fortunes and large incomes in the United States has a deleterious effect on economic growth and job creation.
Wealth Creation Requires Risk
Economic growth and job creation comes from people who invest in businesses. It is well known that business investing is risky.
'Of all the new business startups, 1/3 eventually turn a profit, 1/3 break even, and 1/3 never leave a negative earnings scenario. According to a study by the U.S. Small Business Association, only 2/3 of all small business startups survive the first two years and less than half make it to four years', [http://www.gaebler.com]
And, since most jobs are created in small businesses, then it follows that economic growth and job creation requires risky investments.
Wealth Owners Want Safety, Not Risk
People who create large fortunes are mostly interested in preserving their capital. They become risk averse as their fortunes become larger. They do not want to invest in risky businesses.
This was first recognized by Keynes in his description of the Marginal Efficiency of Capital. In Keynes' graph, the Marginal Efficiency of Capital is a negatively sloped curve where higher returns are associated with lower capital amounts and lower returns are associated with higher capital amounts. In the graph the vertical axis represents percentage returns, the horizontal axis represents the dollar amount of capital and the MEC line represents the downward to the right sloping, negatively sloped curve of actual investments made.
We can see this demonstrated through classifying some investments as low risk and some as high risk in the United States today.
HIGH RISK INVESTMENTS ARE COMPARATIVELY SMALL - The total amount invested annually in venture capital business start ups and expansions, which are high risk, high profit investments is about $250 billion per year.
SAFE INVESTMENTS HAVE HIGHER DOLLAR TOTALS - At the other extreme, the value of United States Treasury bills is now about $15 trillion with some one or two trillion added each year. T-Bills are widely regarded as the safest investment in the world and are now paying about 2%.
All the gold mined in the world by 2009 was about 165,000 tons with a value of about 10 trillion dollars at $1,900 per ounce. Of that, some 19% is held by central banks as currency reserves.
The total valuation of homes in the United States is about $ 9 trillion after the price meltdown of the last few years. Residential real estate is usually considered a safe investment.
Commercial real estate is also considered a safe investment although somewhat more risky than houses. It is also worth about $ 9 trillion.
Although somewhat more risky than T-Bills, the NYSE is considered a safer investment than new business start ups for a number of reasons. The total valuation of all the companies on the NYSE is about $ 15 trillion.
In conclusion, it is clear both theoretically and practically that people with large incomes and fortunes do not wish to invest in business start-ups. Any activity that increases already large fortunes will take money away from people wishing to start new businesses, thus reducing economic growth and the Economic National Security of the United States.
Thomas Picketty Suggests Changes to Keynesian Model
However, the situation has changed so much that Thomas Picketty in his book CAPITAL IN THE 21ST CENTURY has documented that the return curve is now a positively sloped curve. This means that the more money you invest, the higher returns you receive. The likely cause of this revolution in the capital to return ratio is that the large fortunes are now so large that they can control the institutional environment so that the laws favor their investments over smaller ones.
While the large returns Picketty attributes to large capital accumulations suggest a possibility of wealth creation investments, the actual effect may be very different since the primary motive of wealth owners remains safety of principal. It is likely that the owners of large fortunes look for safe, low risk investments and manipulate the regulation environment so that the returns are increased.
The implications of this change have yet to be determined.