http://time.com/4327419/american-capitalisms-great-crisis/
Rana Foroohar (author of [Makers and Takers: The Rise of Finance and the Fall of American Business](http://www.amazon.com/dp/0553447238/)) argues that the financialization of the economy (basically the increasing power of finance and its increasing share of the wealth and income generated by the economy over the past several decades) makes the economy less healthy as a whole, and causes people to be less supportive of capitalism.
I gave up reading Time for the Economist about 20 years ago, so I don’t know if all articles in Time are content-free or if this is a particularly bad case.
There are many errors here. As one example, the author discusses how active asset management fees “are likely to confiscate as much as 65% or more of the wealth that … investors could otherwise easily earn”, but this ignores the reality that investing in stocks is much lower cost now than it was 40 years ago, before she thinks everything fell apart.
I work in Finance by the way, so I know there are specific problems that need to be fixed, but none of them are mentioned here.
I haven’t read the article, and maybe it touches on what I am going to write, but the problem is not the cost of trading (which has tjhplummeted in the last 40 years, between getting rid of fixed commission brokering, and then electronic trading, the cost of transactions for individual investors and institutions running pension funds and iras and such, is a fraction of what it once was).
I think there are two real issues that we are going to need to deal with economically:
1)With outsourcing and robots and technology taking more and more jobs, how are people going to make a living? Right now we are in a phase where jobs are disappearing via these and other paths, it is benefitting those at the top of the food chain more than the ordinary workers (the cheap cost of goods helps a bit, but that is offset by the lowering of wages, and more importantly that other things like health care, food, and other essentials continue to increase in price, further cutting into their personal economies. So what do we do? Do we tell people “well, if you want to live a decent life, become one of the top people” ? Do we recognize that labor and sustenance no longer are directly tied in what is happening, and figure out a way to provide for people without taking away dignity and such? And how do we do that? Do we do what Vonnegut had in “Player Piano”, where you had the managerial class (he called them engineers) and everyone else was doing either public works or was in the military?
2)The other problem is in the nature of compensation. Most working people get most of their salary from cash payments, a paycheck. The problem is increasingly that among the well off, the top level executives and managers, and among the top 1% where a majority of their income comes from investment income, is that the rate of pay from things like stock grants has increased at a rapid rate, whereas cash pay has declined in real terms. Cash pay tends to trend with GDP growth, which is anemic, and the cost of health care hasn’t exactly helped either…but the reality is that the top 1% have seen their incomes soar, in large part because their pay is based in investments/stocks (a typical CEO who makes like 10, 15 million a year, makes roughly a million in pay and cash bonuses, which has not changed in the last 30 years, rest is stock grants). It is one of the reasons for the discrepency we are talking about, and claiming that stock prices benefit all isn’t really true (the typical person in the US might own stock, but the typical size is about 1k, which is nothing), and many don’t have the money to put into mutual funds and the like, I think the typical person has less than 50k in an ira or 401k…
So is part of the solution to change the pay and not only have cash pay, but allow typical workers to make money via equity share, too? Should a CEO get a 100 million dollar stock payout, while the huge majority of the company gets nothing?
One thing that I and economists on both end of the spectrum agree on is that the Ayn Rand view that this concentration is as it should be isn’t going to work. Some pretty conservative economists have proposed that workers should share in the equity compensation, and that maybe, just maybe, to pay for it companies should think of reigning in CEO and executive pay to help pay for this, others have proposed some sort of base pay guaranteed to people, and then whatever they do to make a living only adds to that (which would obviously involve some sort of transfer of wealth by the government, whether direct payments or a pool funded by companies of some sort). What many of them are saying is that the current angry mood that is supporting, for example, Donald Trump, doesn’t bode well, that unless we address this it can get ugly.