With everything that is currently happening in the world, you would think it would be easy to find a topic for a weekly economic newsletter. Trust me, it isn’t. If fact, it is incredibly difficult, as reading or watching the news can leave one wondering how to make sense of it all.
I would argue, the recent discord and disquiet has actually simmered in American society for years. It has finally come to a boil during this election year after an unprecedented, and very disconcerting, economic lock down. To say things, at least the mental health of American society, have fallen apart quickly would be an understatement.
According to realclearpolitics.com (RCP), on February 28, 2020, the poll averages for Direction of the Country were: 1) on the wrong tack was 54.5%, and; 2) on the right track was 40.2%. Obviously, these numbers don’t add up to 100%, which means 5.3% of respondents didn’t have an opinion. This was actually a slight improvement over the averages from February 27, 2019. Then, I suppose you could say, all hell broke loose in March, as states began to close down their economies and panicked consumers emptied stores of toilet paper, bottled water, and canned goods.
As of yesterday, June 18, 2020, the RCP pool averages for Direction of the Country were: 1) on the wrong track was 62.6%, and; 2) on the right track was 26.4%. The was the highest reading for wrong track since August of 2016, and the lowest for right track since the same month. Obviously, these are the worst observations during the Trump Administration, and they seem to be trending downward still. Whether they get to the weak levels of Octobers 2011 and 2013 is anyone’s best guess; however, the chart doesn’t look promising for the President and his prospects in November.
https://www.realclearpolitics.com/epolls/other/direction_of_country-902.html
Before anyone gets too exercised about that last paragraph, I don’t believe any one person or political party is the proximate cause today’s unrest. This has been festering under the surface of our society for too long a period of time. Essentially, whether we appreciated it or not, the United States has been sitting on a proverbial powder keg for a long time. This Spring’s economic dislocation simply set it off.
For some time, wealth and income inequality has been growing in our country. To be sure, people move up and down the wealth and income spectrums throughout their lives. For instance, my first W-2 job was making sandwiches at a golf course at $3.50/hour plus tips. My parents filed my taxes for me that year, and I was officially in the bottom quartile of income earners in the United States. 36 years later, I am no longer in the bottom quartile and my parents no longer file my taxes…although I sure wish they would!
Even so, the gap between the haves and the have nots, irrespective of individual economic life cycles, has widened over the years.
There is something known as the Gini Coefficients. According to investopedia.com, this is: “The Gini index or Gini coefficient is a statistical measure of distribution developed by the Italian statistician Corrado Gini in 1912. It is often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth.”
In 1967, when the Census Bureau apparently started studying income inequality, the US Gini Coefficient was .397. In 2018, despite decades of economic growth, it had climbed to .485. This is nothing more than the math. There isn’t any apparent politics in the calculations and no adjustments for race or regional differences, etc. As such, the numbers are what they are, and they tell us income inequality has increased over the last 50 years.
Typically, with some slight yearly variations, the US Gini Coefficient is similar to that of Peru, Argentina, Turkey, Thailand, and/or China. It is significantly higher than any other country in the G-7; it isn’t even close. What is the line from Animal Farm? “All animals are equal, but some animals are more equal than others.”
Intuitively, you could argue a country with no wealth or income would have a very low Gini Coefficient, and who would want that? Further, a very wealthy country could have a very high Gini Coefficient and that wouldn’t mean the poorest in that country are actually poor, in an absolute sense. Right? Of course, and I believe you could make a coherent argument that is the case in the United States.
However, wealth and income are incredibly relative in their roles in society and societal harmony. After all, while life wasn’t easy for French peasants in the late 18th Century, far from it, they were still better off than what would have been Stone Age tribespeople in the Amazon, New Guinea, and central Africa. Still, they revolted at the gross injustice of their society. The same could be said of the proletariat in St. Petersburg and Moscow in throwing off the yoke of the Tsar. Life was a real challenge for these factory workers in 1917, but it was undoubtedly better than it would be even today in places like Mustang District in Nepal or Cite Soleil in Haiti or Kibera in Kenya or pretty much any place in either Venezuela or Zimbabwe.
The problem with inequality isn’t that it exists. It is knowing it exists and having the belief there is nothing you can do about it. The wider the inequality, the greater the presumption of injustice or unfairness. When someone who works two jobs to provide just enough can look on their phones or television and see the almost gross and conspicuous consumption of wealth in the US, it fosters resentment. We can debate this for as long as you want, but our opinions won’t make it any other than thus. Inequality breeds resentment, plain and simple, and inequality has been growing in our country for years.
Please don’t take this to mean those who ‘have’ have done so unethically or even unfairly. Many, if not, most, have studied and worked incredibly hard to get to where they are today. It also doesn’t mean those who ‘have not’ haven’t contributed to their own lack of success. There is no shortage of people who have made bad decisions with their lives. It doesn’t really matter.
As a society, we have been able to kick this proverbial can down the road due to a general increase in overall living standards over the years. However, we all know this has become a bigger topic for debate over the last decade, which implies the problem has been getting larger…and it has. The sudden collapse in economic activity and the evaporation of tens of millions of jobs brought the cauldron perilously close to a boil. The death of George Floyd in Minneapolis took it over the top, and unleashed decades of pent up frustration like the country hasn’t seen since the 1960s.
Frankly, much of it was a long time coming, truly.
I will stop short of saying I agree with all of the demands I have seen and/or read. For instance, I personally don’t believe abolishing police departments and court systems would be effective in doing anything other than making current problems worse. However, the message should be clear to all of us: there is a large segment of our population who believes the system is stacked against them and is (or has become) disenfranchised with the American Way, and it cuts across all ethnicities. This a problem, and we should address it as adults. We need to agree on what ‘success looks like,’ and agree on a path to get there. We need to make tough decisions and demonstrate a willingness to think past ‘how we have always done things.’ Finally, and this will take a little time as things eventually cool down, we need to realize, as Americans, it shouldn’t be ‘us versus them’ in our society. It should be ‘us,’ potentially disagreeing at times but always pulling in the same direction.
IF we can pull this off, and there is no reason why we shouldn’t be able to do so as Americans have always done great things, we WILL increase living standards and decrease inequalities over time. However, this WILL require changes to how we currently do things and how we look at the world. Then, maybe just maybe, we can get those poll averages on realclearpolitics.com to start moving in the right direction. Laughingly, think how many more investment opportunities there will be at that time…always with the economics.
Have a great weekend.
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.