Re-cutting the Economic Pie
By Mark Paustenbach
During one of the more leisurely days of Christmas vacation this year, I flipped on the television and CNBC, NBC’s cable channel devoted solely to financial and economic matters, came on the screen. Normally I would have changed the channel, but having spent the last few weeks at school working feverishly on final papers and exams, I relished the opportunity to learn about what was going on in the world.
The first thing I noticed was how well the stock market had done. Living in the Silicon Valley, I knew that the information technology sector of the economy was making billions of dollars from Internet start-up companies going public on the NASDAQ. However, I didn’t realize exactly HOW well. Yahoo!, is a good example of this booming new industry. Yahoo! runs the most visited website on the Internet. Although the company has no real product to sell, its current revenue is generated from selling advertising on the many web pages that branch off its popular main site. Investors hope that the site will eventually become a "super portal," the favorite site for consumers, so that they can corral them into seeing and eventually buying their products.
The company, based only a few miles away from my house in Santa Clara, California, was now trading at roughly $420 dollars a share, up from $150 dollars a share only a few months earlier! With that thought, I abandoned my previously planned trip to the supermarket to buy another 100 Powerball tickets, and took all of my spending money for the rest of the semester and purchased a single share of Yahoo! stock.
My next thought was of all those people who were making obscene amounts of money from this incredible surge in the stock market. Who exactly was laughing all the way to the bank? Well, mostly the upper-middle class and the rich. The poor, as usual, have been left behind, way behind. According to figures obtained from the Congressional Budget Office (CBO) and discussed in a recent column by former Labor Secretary Robert Reich in The American Prospect (January 3, 2000; pg. 64), the richest 2.7 million Americans will have as many after-tax dollars as the lowest 100 million put together at the end of 1999. Since Bill Clinton’s inauguration, the incomes of the richest 20 percent of the population have risen twice as fast as those of the middle fifth of the population.
These figures are even more staggering, considering that they refer only to increases in salary. The real economic gains that this country has made can be seen more clearly in the stock market. In this setting, it is only the richest Americans who have access to stock options. Those worth billions in the Silicon Valley, have their worth tied up in stock. These earnings are not counted in the aforementioned statistics. It is also important to note that the middle class has seen their modest stock portfolios soar as well since mutual funds have rode the wave of success as well. However, over 40 percent of the growth in the stock market that has occurred, has benefited only the top 1 percent of Americans.
Many would assume that as a "bleeding heart" liberal, I would call for an increase in capital gains taxes or even a one-time tax of 15 percent on the richest 1 percent of Americans, the kind of proposal that one-time Presidential hopeful Donald Trump was pushing for. Many contend that the very richest Americans would be unconcerned if they were taxed an additional one percent and that such funds would be an incredible windfall for the poor. Or, some would argue that as a staunch conservative, I would call for a decrease in taxes so that the wealth can "trickle down" to the less fortunate, as the Laffer-curve-toting Ronald Reagan advocated. Both of these solutions are the ones most often touted by politicians and poll-tested by their media handlers for public viability. But, they are only short-term solutions. They are discussed for a short period, and then abandoned when the public psyche switches to something else like violence in schools or who the sexiest man alive is.
More importantly, both of these solutions only work as long as the stock market is doing well. While the poor are waiting for the normally sluggish intervention on the part of the government, the upper-middle class and the rich are utilizing the free markets to gain an even larger economic advantage. Government always reacts, but rarely is proactive. Why should they? Either Americans cannot relate to how poor a number of their fellow Americans really are, or they don’t want to be bothered.
Instead of relying upon the government, we should be supplying the less fortunate with the tools to compete financially. Why are the rich doing well while the stock market surges? The answer is simple: they own stocks, they invest, and they save. The poor have little or no opportunity to do such things, ergo their circumstances make it difficult for them to participate in the modern economy. I will use a story to illustrate my point.
Two summers ago, I was working in Boston and needed money fast. I only had a hundred dollars when I got there, and I needed to cash my check so that I could go to an upcoming Red Sox game and get some groceries. I tried to cash my check at banks located in Boston, but was told that I needed to open an account to do so. However, my bank was located in Maine and its nearest branch was in Worcester, Massachusetts. I didn’t have a car, so I trudged a few blocks from where I was staying to a check cashing business. I needed the money right away, and so I did not care exactly how much I would be ripped off. That is, until it happened. The check-cashing establishment had charged me 3 cents for every dollar I cashed. Therefore, from my first check, of $600 they had siphoned off $18.
What surprised me even more than the hefty handling fee was that this company did a brisk business in this economically depressed neighborhood. Most people were relying upon this business as if it were a bank. Whereas most Americans deposit their paychecks directly into their bank accounts, these people were having their checks cashed all at once, every two weeks. They could not access an ATM, and credit cards are either hard to come by or would charge incredibly high interest rates to those with bad credit. The implications of this practice are enormous.
First, you are being charged a fee for cashing your paycheck. Most normal banks would allow the consumer to make money via deposits and interest, not lose money. Furthermore, if one has their entire months’ salary handed to them, in cash, they are much more apt to spend it faster. This was most evident in the fact that the same company that cashed my check also offered a wide array of lottery tickets for people to buy—presumably right after they received their money. If, however, their income were put away in a bank, then it would be much easier to ration that income and budget it wisely.
Secondly, if one has no place to put their money, then it is not growing. Keeping the money under a mattress or in a cookie jar does not allow that money to make more money. The lack of banks in poor sections of a city or in a rural town would lead one to rightly believe that Salomon Smith Barney or Charles Schwab is not itching to build its newest branch in the same area. These brokerage houses see a lack of investment and no desire to save. With the billions of dollars being made in the stock market, I doubt highly that anyone in Jamaica Plains, East St. Louis, or Watts or any economically depressed area, bought America Online or Netscape early when they were valued at less than $50. Those people had the revenue and the means to invest in stocks only a year or two ago thus they have seen economic rewards.
These companies have produced record growth for their shareholders and vast fortunes for those lucky enough to buy shares when they were first made available. Even the less-fortunate had invested in more traditional companies, like General Electric or Hewlett-Packard, their money would have grown tremendously.
To counter my seemingly socialist or radical proposals, some may say that the current economic boom will eventually help everyone in the country, as prosperity will trickle down creating a tight labor market. Opponents would contend that the service sector of the economy would widen as the economy booms, allowing people to move up into higher paying jobs. However, the majority of the economic rewards will go to those at the top of the employment food chain as economic rewards will go to those who engage in truly "entrepreneurial activity" — because they do get golden parachutes when they fail! As much as I hate to reenter a debate about executive pay, it is again those who have access to stock options who are making truly vast sums of money. The gains most will make will be small. My hope is that we can allow more to share in this prosperity, and endow many with the essential tools to compete financially.
Instead of dwelling upon figures, we should be looking for ways to address these inequities. I do not foresee a marked tip of the economic scales via increased access to the stock market; however, there are a number of beginning steps that we can take. We do not need to make sure that includes sitting upon a diversified stock portfolio for progress to be made. There are small steps we could make to begin the process of widening the economic miracle to include more Americans.
For one thing, the government could take only a small amount of money to induce more banks to offer services to those who have not traditionally been afforded such opportunities. They should offer a full array of services, including savings accounts, checking accounts, retirement planning, and even access to the stock market. This may seem like rudimentary banking services to most Americans. But sadly, for many Americans, this is far from a reality.
It takes generations for society’s values to change. In this manner, it will take a while for saving and investment to take hold in many communities. However, proposals such as the one promoted by the American Enterprise Institute’s Norman Ornstein called "Kidsave", are steps in the right direction. Ornstein’s program would have the federal government open an account with $5000, for each child in America. The creation of these accounts would encourage saving and investment, and would do so at an early age. Even if this $5000 simply sat in its original account, and earning only a nominal rate of interest, the money would grow to hundreds of thousands of dollars by the time the children had a family.
Alan Keyes, the perennial Republican candidate for President, says that African-Americans should have received tax breaks following the civil rights movement—which would have led to more freedom than civil rights legislation. I do not necessarily agree with his assertion that civil rights legislation should be considered secondary to economic freedom, as I think that racial barriers must be torn down before economic success can be fostered. However, I am of the firm belief that economic success is of fundamental importance, if one is to step out of a cycle of poverty and a history of societal marginalization.
As we enter the year 2000, the economic possibilities for those in the United States with even a basic understanding of money management are tremendous. If we continue to cool our heels and allow only the already prosperous few to gain financially then we are not allowing the American dream to be fulfilled for everyone.
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