US economic policy encourages inequality of wealth

My topic today: US economic policy encourages inequality of wealth. 

In the Melania post, I quoted from Michael Wood's book Domesday: A Search for the Roots of England, on ancient Rome:

The long-term effect of Roman government, then, may well have been to concentrate land in the hands of the governing aristocracy at the expense of the mass of the population at large.

We do the same thing. And it will end the same way, decline and fall, if we let it continue.

 

In the Homelessness post, I quoted from HUD on the Housing Choice Voucher program. The main points are:

• "The housing choice voucher program is the federal government's major program" for housing assistance;
• "A family that is issued a housing voucher is responsible for finding a suitable housing unit"; and
  
• "A housing subsidy is paid to the landlord directly".

The wealthy are paid by the government to provide housing for the poor. That's a generalization, yes, but it's not an incorrect assessment. The long-term effect of the US government, then, may well be to concentrate wealth in the hands of a governing aristocracy at the expense of the mass of the population at large. Just as Michael Wood said of ancient Rome.

As if by the force of gravity, wealth attracts wealth. Policymakers make use of this principle to get things done. But their method is not a good one, because it accelerates the concentration of wealth. It moves the economy closer to the event horizon. It turns the trajectory of society directly toward the black hole.

Left to its own devices, the concentration of wealth would ultimately bring a Dark Age upon us. But we don't let nature take its course. No. And we don't do what we must: We don't create policies that undermine the natural process and keep capitalism at an early stage of development. No. Instead, our politicians create policies that accelerate the concentration of wealth. 

Civilizations die by suicide.

The housing voucher program is just one example of the bad method politicians use to solve our problems. (But let me stress that their method does not solve these problems. It only lets us cope with them. It helps us cope with what people see as problems (such as homelessness, unemployment, and financial crisis), but it does not solve the problems within the economic system that give rise to what people call problems. The economic system, could it speak, would say that what people see as "problems" are its solutions to imbalances in the system, primarily monetary imbalances like extreme inequality and excessive debt. If we would fix the imbalances, the economic system would have far less tendency to produce results that people see as problems.)

(And isn't that the whole point and purpose of policy.)

The housing voucher program is just one example. Another is the TARP program. The "Troubled Asset Relief Program" was created in response to the 2008 financial crisis. Investopedia says "TARP stabilized the financial system by having the government buy mortgage-backed securities and bank stocks." In other words, the government bought up financial assets that were failing to produce the expected income. 

Ordinarily, when the income from an asset falls, the selling price of the asset falls to minimize the change in the "return on investment" ratio. (I think I'm right about that.) The government must have been over-paying to buy these assets, so that the investors selling them could minimiize the losses that would have made the crisis worse. (I think I'm right about that, too. Otherwise, there would have been no reason for the government to get involved. They could have let asset prices fall until other private investors thought those assets were a good deal.)

To minimize the damage to the economy, the government overpaid to buy "troubled" assets from the people who were wealthy enough to have them. The government paid high prices to buy bad assets from wealthy people. Nothing wrong with that, huh?

The "mortgage-backed securities" that Investopedia mentions went bad because homeowners were having trouble making the mortgage payments. An alternative to TARP would have been for the government to make the debt go away by paying down the mortgages for the homeowners. In other words, pay the people who were too poor to pay their own mortgages instead of paying the people who are so rich that when they get in trouble the whole economy goes down.

Those mortgages were bad only because the payments were not being made. If the government started making the payments, the mortgages would no longer have been bad. The troubled assets would no longer have been troubled. See what I'm saying here? And the wealthy people would have ended up with the money anyway, just like they did under TARP. So where's the problem?

"It's just wrong for the government to pay off mortgages for people."

There is merit in the objection to the government making mortgage payments for people. There is also merit in the objection to the government buying bad assets at high prices from wealthy people. Together, these objections mean that the government must never again let such a situation arise, where all the solutions are objectionable.

It means tighter regulation of the finance industry is required, and immediate response when financial "innovation" creates financial "products" that escape the scrutiny and reach of regulators. The rule of thumb is obvious: Financial innovation is always intended to make more money for somebody in finance. More money going to people in finance means more money coming out of the nonfinancial sector, which is the productive sector where output is created.

We also need less government policy that encourages borrowing. The encouragement of borrowing is good policy for a low-debt economy like the US in the 1950s, but not for a high-debt economy like the US since the 1970s .

Also, the regulators should not be people from banking and finance. Regulators who think like bankers are a big part of the problem.

Hey, maybe homeless people should be hired to regulate finance. They need jobs right?

 

The economy cannot speak. At least, it doesn't speak English. But you know, if you pay attention to your dogs you can learn to understand their way of telling you what they want. It's no different with the economy. But you have to listen.