The recent news on Lloyd Blankfein in financial tabloids strikes a particularly sour chord among most citizens of the United States, and many in the Western world. In case you haven't seen the news, or the details, the Chairman of the Board and CEO of Goldman Sachs (GS), arguably one of the world's most successful financial companies, was paid a respectable $9m in stock options as his 2009 bonus. Goldman Sachs' PR team and the Financial Times have spun this as a sizable reduction in pay packages, comparing it to Blankfein's 2007 bonus of $68m in cash, stock and options.
Regardless, the fact remains that he's making about $8.95m more than most other American citizens. On top of that many of his day-to-day expenses are subsidized by his company. And speaking of his company, the Financial Times cited recently that Goldman's salaries, bonuses, benefits and other compensation costs for its 32,500 employees amounted to $16.2bn in 2009. That's just below $500k a person. Conclusively, on average, Goldman Sachs employees make about $450k more than most other American citizens.
This is striking evidence to a massive imbalance in income levels across the country. Many political, financial and economic commentators and figureheads have been speaking increasingly about the Wealth Gap; it has been a focus of some debate over the future of the United States. Income disparity is not healthy for a society or for a society's economy as it polarizes opinion, fosters a tribalistic class- or caste-based system, and encourages special interests. Conversely, a society displaying income equality generates more competition, innovation and positive economic growth.
This subject was last touched upon widely in August of 2009, when Berkeley's Emmanuel Saez updated his essay "Striking it Richer: The Evolution of Top Incomes in the United States". Several public figures, including the one and only Paul Krugman, espoused on the issue. Ironically, Krugman, a Keynesian, posted the information with only brief fanfare, commenting that the figures are "truly amazing". I would be shocked if he misunderstand the underlying economic implications. The graphs follow:
This concentration of economic power is not limited to the United States. Successful Wall Street barons frequently work for several years at a leading investment bank before returning to their country of origin to enter politics or finance, often to great success, due to their significant international connections. This has led to the creation of an international elite with roots in Wall Street's banking culture and a globalized income inequality.
The father of liberal economic thought, the great Ludwig von Mises, has much to say on the matter that is considerably relevant. In "The Foundations of Liberal Policy", he writes that income inequality provides a strong pillar for the open society. It presents a standard of luxury and a lifestyle of the rich that the financially destitute enshrine as a goal. Von Mises presciently notes that many lifestyle standards once considered luxury are now considered common: eating utensils, household bathrooms, privately owned vehicles, and personal computers, to name a few.
Pertinently, I seek to keep this discussion within the framework of the United States, where income inequality has caused serious anger among the lower economic classes, as they are further distanced from a standard of living that the government says it is aiming for. This pressures the government into action, or perhaps gives the government an excuse to act, in order to appease to public demand. However, the methods utilized by the government to attain these goals lead to other ends. Perhaps the most important and consequential method is credit expansion.
Much has been written on the topic, but perhaps it is most appropriate to simply provide a few snippets and allow the reader to invest further time at his own expense:
Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.
-- Ludwig Von Mises, Planning for Freedom, p.189
No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.
-- Ludwig Von Mises, Planning for Freedom, p.63
What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.-- Ludwig Von Mises, Human Action, p.559
Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.-- Ludwig Von Mises, Human Action, p.788
Economists may be right in asserting that the present state of banking makes government interference with banking problems advisable. But this present state of banking is not the outcome of the operation of the unhampered market economy. It is a product of the various governments' attempts to bring about the conditions required for large-scale credit expansion.-- Ludwig Von Mises, Human Action, Ch. 17
Considered in the perspective of the lightening rod debate on the death of capitalism and free markets, these points have dire significance. They are evidence to the fact that capitalism is dying in the United States. Critically, one must realize that its passing will only herald the onset of an increasingly interventionalist (read: totalitarian) state. As history has shown, these never last.
Disclosure: None
