GREAT AMERICAN ECONOMIC RECOVERY AMD WEALTH DISCIPLINE – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

September 1, 2014 | Posted by bobbysrinivasan << back to blog

The US economy has solidly rebounded in Q2 FY 2014 with an economic growth rate of 4.2%. This was a big improvement after the Q1 negative growth. Even though, the low base effect is present, it is a welcome change. The major part of the economic growth could be attributed to the availability of enormous liquidity in the economy that has literally pushed the cost of funds to around 1% per annum. However, the benefits of the growth is confined a smaller section of the US population. Here are the facts.

The US census bureau recently released a report showing that the median net worth of American households declined by more than $5000 between 2000 and 2011, a drop of almost 7%. The report probably understated because it doesn’t include assets like pension funds, the value of life insurance policies and possessions like furniture and jewellery in the calculation of net worth. Adding those assets in to the mix would boost the median net worth of people at the top of the US income ladder quite considerably making inequality even worse. But the $5000 is just the change in net worth across the board. According to the report, changes in the household net worth between different levels of society were wildly unequal. The median worth in the top one-fifth of US households went up 11% from about $569000 to $630000. The next one-fifth also went up, arising 10% from $188000 to $206000. But the wealth drop in the bottom 60% of the US households was so great that it more than offset the increase in the top 40%.

The vast majority of households in the bottom 60% don’t have enough money on hand to cover three months of living expenses. Many have no assets at all and zero to negative net worth. They are one pay cheque away from a life of Third world poverty surrounded by the spectacular consumption enjoyed by the top 40%. As in many societies, US inequality overlaps strongly with ethnic identity. The average African American household has six cents of wealth for every $1 held by White households. For the Latinos, it is seven cents.

The question arises as to who will continue to drive the US economic growth. Often the income disparity increases the social unrest which will also increase along with it. The government which perpetually runs a budget deficit will be under pressure in the future to help the bottom of the pyramid to increase the social security benefits such as the food stamps.

Thomas Piketty, in one of his recent books namely “Capital in the Twenty-First Century” states and I quote, “that the modern economic growth and diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic predicted by Karl Marx…. The main driver of inequality – the tendency of returns on capital to exceed the rate of economic growth today threatens to generate extreme inequalities that stir discontent and undermine democratic values”.

The entire world is facing currently massive income and net worth inequalities. Sooner or later, this issue will need to be addressed and hopefully, all the developed countries join together in resolving this problem. Huge income and wealth disparities have led to civil war in many countries. This should never be allowed to happen again.

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