Hope+for+a+narrower+wealth+gap,+Ann+Crotty,+Business+Report

Business Report, February 7, 2007
=Hope for a narrower wealth gap - or just cash in=


 * Ann Crotty**

"The poor always ye have with you" according to the Bible, which is quite a depressing thought. But not quite as depressing as something I recently came across, which is that "the super-rich you always have with you".

You know how you have these silly ideas about how eventually right prevails over wrong and good over bad. Well, I've often thought that over time, in a reasonably sophisticated democracy, the extremes of wealth and poverty will coalesce into an economy or society in which there are no extremes or in which extremes are limited.

A society in which there are very wealthy people and very poor people, but in which there are not the sort of life-threatening gaps between these two groups that were apparent centuries ago throughout the globe and still evident in many regions today.

Centuries ago the gaps could be explained by the fact that the poor had little or no political power. As the poor gained some political power, it was reasonable to assume that the discrepancies between the super-rich and the superpoor would begin to fade.

Not to the extent that well-placed, hard-working entrepreneurial types would not be well rewarded, but to the extent that the size of the rewards could be reasonably easily justified and explanation for these rewards did not rely on reference to the workings of a whimsical marketplace.

And as you look around 21st century capitalist society, and contemplate the number of individuals who are now considerably wealthier than many nation-states, you assume that over time this will resolve itself, because, after all, most of us are now living in a democracy, and so the huge wealth traps of the pre-democracy period can only be transient aberrations.

But it seems that the only way these wealthy individuals will become less enormously wealthy is by giving away their money, as Bill Gates and Warren Buffett have done.

Buffett has long said that the source of his huge wealth lies in the inefficiencies of the free market economic system in which he operates. He expects no diminution of this inefficiency and believes that the system will continue to misprice and misallocate resources inefficiently for the foreseeable future. In an effort to address some of the consequences of this inefficiency, Buffett decided to give away his fortune.

This is good and bad news. Good, because it means that some supposedly good causes will enjoy a huge injection of funds. Bad, because if Buffett is right, the inefficiency, mispricing and misallocation of resources will be with us for the foreseeable future. And so too will the super-rich who benefit from this inefficiency and who, unlike Buffett, believe it is their just deserts.

These super-rich dominate the plutonomies of this world. And according to a report written some time ago by equity analysts from Citigroup, these are the individuals who are driving the powerful economies of the US, UK and Canada.

According to these analysts, we must forget about all this silly talk of global imbalances Instead, we should embrace the efforts of these super-rich plutocrats whose spending is accounting for a substantial chunk of the economic growth in the US, UK and Canada.

The top 1 percent of households in the US account for more than 20 percent of overall US income, which is about the same share of income as the bottom 60 percent of households. The situation is similar in the UK and Canada, which are the key plutonomies of the globe. Plutonomies, as defined by Citigroup, are the economies that are powered by the superwealthy.

Citigroup argues that the spending power of this group is responsible for the current account imbalance in the US and the slump in its savings rate. The savings rate of the very rich in the US fell from 8 percent in 1992 to 2 percent in 2000.

As Citigroup puts it: "In a plutonomy the rich drop their savings rate, consume a larger fraction of their bloated, very large share of the economy."

The Citigroup analysts reckon we should not be troubled by any possible imbalances stemming from this situation as long as the conditions in which the plutonomies have been nurtured are sustained.

If they are sustained, then the super-rich will continue to have overwhelming consumer power, and presumably, the rest of us should focus on buying shares in luxury goods firms such as Richemont, Kuoni and Bulgari.

What Citigroup doesn't dwell on in much detail is how sustainable plutonomies are in an age of democracy. The Gilded Age and the Roaring Twenties both ended in severe depressions, followed by war and enormous social and political upheavals.

Meanwhile, as they contemplate an economic life dominated by the super-rich, the sad old Marxists among us should perhaps consider buying Richemont shares.


 * From: http://www.busrep.co.za/index.php?fArticleId=3667533&fSectionId=560&fSetId=662**

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