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American future economic conjecture

From Piketty’s view about the American economy, I think the most likely outcome during the next 20 or 30 years will not be very good, may be massive bankruptcies, wars and revolutions. Although we had a period which called Golden Age, when the income inequality was very low, and the economic growth stayed in a high rate. However, the 1945-1975 period high-speed economic growth was not normal, it was just a historical exception. From Michael Lewis’s book Boomerang, we knew that as recently as 1980s, Ireland was one of the poorest countries in the world and it became the richest country in 2007. However, when the financial crisis occurred in 2007, the Irish economy suffered a devastating blow. The strength of Ireland had not recovered yet.

There were many serious problems we are face right now. Economic growth is usually driven by population growth and production efficiency. However, both of these conditions have slowed in the United States over the past decade. The newest data from National Center for Health Statistics shows that the number of American babies born in 2017 fell by 2% from 2016 to only 3.85 million. The birth rate has been falling for three consecutive years and reached the lowest point in the recent 30 years. The Fed raised its short-term economic growth forecast to 2.7% in March this year and 2.4% in 2019, in part because of the government's tax cuts. However, the Fed’s longer annual growth forecast is 1.8%, reflecting the resistance of the population. In addition to the reduction in labor, an aging society will delay economic growth as fewer and fewer people buy homes, cars and other expensive items. As people age and prepare for retirement, savings usually increase. Piketty’s the second fundamental law of capitalism β = s / g explain this situation. In the long run, the capital/income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g. Based on the historical events, the capital/income ratio β would be high when the country faced the financial problems. For example, in 1990s, Japan faced a housing bubble, the capital/income ratio reached to 700%. Japanese people lost confident the government and saved their money as much as they could, the Japanese economy almost destroyed. The capital/income ratio for America today is about 500%, which is closed to the point in the World War I. Something must be happened so it can change this situation.

The income inequality is another serious social and economic problem. Inequality reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income. However, income inequality exploded in the United States since 1980. In the U.S. the top 10% people own about 50% of total income in 2010. The top 1% even have 20% of the total income. For the bottom 50% American people, they only have 20%. So, this means, the top 1% people have the same income as bottom 50% people have. This gap may become larger with the time pass. The top 10% people may have more than 60% of the total income in 2030. Piketty believes that, “the increase of inequality in the United States contributed to the nation’s financial instability.” The share of top 10 percent peaked twice in the past century. One was in 1928 (before the Great Depression), another one was in 2007 (before the financial crisis). One main consequence of the increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt. Especially, for some banks and financial intermediaries which wanted to earn good yields on the enormous savings injected into the system by the well-to-do offered credit on increasingly generous terms. If the increase in inequality had been accompanied by exceptionally strong growth of the US economy, things would look quite different. Unfortunately, this was not the case: the economy grew rather more slowly than in previous decades, so that the increase in inequality led to virtual stagnation of low and medium incomes.

One of the main reason we focus on the income inequality is that the extremely inequality will threat the democratic politics. If most people in the society want to be benefited by the inheritance rather than fight by themselves. Then, more and more people will be disappointment about the situation, even result in the revolution. For example, during the war period, the compression of the inheritance flow owing to the shocks was nearly twice as great as the decrease in private wealth. And for people who were born in that period mostly (may not be true) worked very hard to accumulate the wealth. However, for younger people who was born after 1970s, inheritance will once again play an important role in their lives. The majority of the society want to have a better life by the inheritance. American people are living under a democratic society now which means, everyone have the equal right. However, the living conditions for each person are different. This causes a sharp contrast. According to the Forbe’s 2018. We saw that Walton family who were the owner of Walmart have several people are the richest people in the world. They are not the founder of Walmart, but they enjoyed the inheritance from Sam Walton, and have the highest living conditions. Obviously, most people are envying these people. Also, in the long run, the rate of return of capital is greater than the growth rate. Compared to the small capitalist, the bigger capitalist has higher rate of return on capital. The bigger size of the capital, the more chance to invest. Also, the more wealth they have mean they can endure higher risk which always lead to a higher payback. This situation will make the rich people richer, the poor people poorer.

Unfortunately, the society still not find a good solution to solve these problems effectively. We can only see the inequality in the U.S. become larger and larger. The country is in a huge fiscal deficit. The budget for national defense stays very high compared to the education and public wealth. The American government should more focus on the domestic problems instead of showing muscle to other countries.

Citation:

Piketty, Thomas, and Arthur Goldhammer. Capital in the Twenty-First Century. The Belknap Press of Harvard University Press, 2017.

Lewis, Michael. BOOMERANG: Travels in the New Third World. W.W. NORTON & Company, 2012.