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Easy Money, Pretentiousness, and Inequality: A Theory (December 30, 2013)

Posted in Equality and Inequality

I have clear memories of economics lectures from my paternal grandfather in the 1950’s and 1960’s about what would be the result of what he referred to as “easy money.” He was talking about borrowing and inflation, the cheapening of currency which makes it more widely available in ever increasing amounts. Borrowing and inflation were minuscule at that time compared to what we have experienced in the decades since.

One result we have that he probably didn’t think of was the ever widening spread between rich and poor. My theory is that there are two basic approaches to use of money and that both approaches are available to both rich and poor. One approach is to spend and to borrow if necessary to support the spending. The other approach is to save and invest. (My granddaddy took the second approach and never spent frivolously.) Of course it is only this latter approach that results in capital formation and investment in job producing businesses and industries. Without that, we would all be reduced to doing each other’s laundry, cleaning each other’s houses, and mowing each other’s lawns…with manual push mowers or sickles.

It is a fundamental truth that whatever money is available may pass through the hands of those in the former group, the poor, (sometimes in futile attempts to be pretentious and showy), but will always end up in the bank accounts and portfolios of the latter group, the wealthy, (some few members of which regrettably live pretentious and showy lives). The final result is that the rich become richer and the poor stay poor. And, the more money there is, the bigger the gap between the two becomes and the less purchasing power money has.

Government can try, and is trying to solve the “inequality problem” by pumping more and more money to the poor, but that money, which is mostly confiscated from the middle and upper middle class tax payers, or borrowed from China, will almost always flow quickly through the hands of the poor and end up in the hands of the wealthy. Only a very few poor recipients will take full advantage of the opportunity, declining opportunities to spend and stashing some of the extra money in the bank, and will eventually leave the ranks of the poor so they can join the middle class and help pay the taxes to flow through the hands of the poor and end up in the hands of the wealthy. Granddaddy was, in his youth, a very poor man who eventually, beginning around age 40, was able to accomplish that.

Government could have restrained soaring inequality in 1935, just before Granddaddy reached his 40th birthday, by establishing individually owned Social Security accounts, all funds invested in global bond and equity indices, each person having his or her own Social Security account with its own balance available with restrictions to provide spending income in retirement or to be left to his or her spouse or children. But that would have put the future excess Social Security Tax collections off limits to the federal government. The government would have been unable to borrow and spend the money leaving in its place nothing more than IOU’s promising to replace the borrowed funds with future tax collections. And all that money would have remained with the folks who needed it rather than ending up in the bank accounts and portfolios of those who save and invest rather than borrow and spend. Inflation would have been much lower and the purchasing power of a dollar would be much greater today.

(And if, in addition to that, government had avoiding artificially inflating education and health care spending, we could have been enjoying a lot more equality and a lot less social spending and taxation and borrowing today.)

And there would be less pretentiousness.

Oh those could haves, would haves, and should haves. At least I know Granddaddy knew what he was talking about (on this subject at least) and was right. I hope someday my grandchildren will be able to say the same about me.

A pretentious, showy life is an empty life; a plain and simple life is a full life. – Proverbs 13:7

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