Newly elected U.S. representative Alexandria Ocasio-Cortez (New York) has a point. At a recent Austin, Texas, Democratic Party confab she launched directly into one of her rallying cries: “While America is wealthier than ever, wealth is enjoyed by fewer than ever.” When Ocasio-Cortez went on to lament “an increase in homelessness in New York City among veterans and the elderly while penthouses sit empty,” I couldn’t help but reflect on the recent purchase of a $238 million penthouse condominium overlooking Central Park. In all likelihood, it often sits unoccupied. Could it be that she had the billionaire hedge fund manager and trophy-property collector in mind?

On that same weekend, the New York Times sympathized on a broader stage, buttressed with data from a joint New York University and Gallup poll. The rewards from the 10-year bull market in equity securities are so skewed that median family net worth is still down 34% from where it was 12 years ago. The top 10% of the wealth strata now own an epic 84% of America’s aggregate net worth. “Trickle down” remains the same pipedream that it was in the 1980s and 1990s. Only 38% of individuals 35 years of age or younger are involved in the stock market; this number was 52% at the peak of the last cycle.

Ocasio-Cortez is hardly the first to weigh in on this socially sensitive and divisive subject, concluding: “It doesn’t feel good to live in an unequal society.”

A Brief History of Wealth and Morality

Two and a half centuries ago, in 1759, Adam Smith wrote a relatively obscure, but no less momentous, prequel to his well-known An Inquiry into the Nature and Causes of the Wealth of Nations (1776) titled, The Theory of Moral Sentiments. Effectively laying the groundwork for his later classic on the “invisible hand” in economics, Smith proposed a theory of (a) how we come to be moral, (b) how this morality functions on both individual and societal levels, and (c) what forces are likely to corrupt our sense of morality.

Smith’s essential thesis is that our capacity for moral behavior is directly tied to our capacity to “sympathize” with other people. Thus, if we’re to address the acute financial disparities that currently plague our society, sympathy of the sort Ocasio-Cortez exhibits toward those on the losing end of the economic continuum is absolutely essential.[1] Moreover, the biblical admonition “To whom much is given, much is expected in return”[2] places an even greater burden upon the shoulders of those who have most benefited from current economic arrangements, all the more so if those benefits result more from their good luck than from their good efforts.

In 1925, Mahatma Gandhi retitled a list of seven social and political conditions that, left unaddressed, will destroy society.[3] The fourth of Gandhi’s “Seven Deadly Sins” was “commerce (business) without morality (ethics).” Like Smith, Gandhi believed that the capitalist system functions in a socially just manner only if it is built upon a moral foundation. In our post on Gresham’s Law, we make the argument that the moral code upon which commerce rests is forever under siege. Just as bad money drives good money out of circulation, the behavior of bad actors effectively lowers the ethical bar for all as others attempt to maintain market share. It was as evident in the subprime crisis as it is in corporate lending today. While certainly not an all-inclusive measure, the following CEO-to-worker compensation ratio table is a place to look for clues. Behavior has certainly changed in the last 50-some years. When there is no retribution for wrongs perpetrated, there is seldom repentance—and current trajectories can be expected to continue.[4] 

inequality

Figure 1: https://www.cnbc.com/2018/01/22/heres-how-much-ceo-pay-has-increased-compared-to-yours-over-the-years.html

It’s against this trajectory that Ocasio-Cortez and her self-described band of Democratic Socialists have taken action, if only rhetorically. The first of Gandhi’s aforementioned sins was “wealth without work.” He was not necessarily arguing against providing subsistence living standards for a nation’s poor, of course—the most controversial policy propounded by the new congresswoman. He was advocating for a society in which individual initiative and inventiveness are valued. The British colonists extracting whatever they could from occupied India certainly did not fit that model. Neither would the rentier class of our country today.

The relationship between a basic income and the first of Gandhi’s sins is less clear. It’s worth noting that Austrian economist and Nobel laureate Friedrich Hayek was wont to warn that we often settle for immediate remedies to thorny economic problems rather than taking the difficult road of removing the constraints that impede organic, sustainable solutions.

Money and the Way Forward

Ms. Ocasio-Cortez, I sympathize with your sensitivities captured in the phrase “It doesn’t feel good to live in an unequal society.” I am also painfully aware of the capitalists who have plundered and exploited without regard to their obligation to their fellows and their planet. But I challenge you to be wary of which means you use toward your social end. It is not yet clear the extent to which your recently proposed policies will require deficit spending, but sound monetary policy is the context necessary for the ameliorating of financial disparities.

In 1971 during the administration of Richard Nixon, long before Ocasio-Cortez’s generation, we saw the consequences of abandoning a commitment to virtuous money. In fact, the status quo with which Ocasio-Cortez takes such ardent issue is actually the maturing of that abandonment after its coming of age during the endless Fed “put.” Any future policies that continue this process of debasing our money, though they might be targeted to the populace rather than the plutocrats, are the epitome of short-sighted and as futile as rearranging the deck chairs on the Titanic.

To quote Ayn Rand:

Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, “Account overdrawn.”[5]

History can be harsh to those who have yet to learn its lessons. In July 2009 Anna Schwartz, then 92, Milton Friedman’s co-author of the monumental A Monetary History of the United States, 1867–1960, was equally harsh with Fed Chairman Ben Bernanke, accusing him of sins of both commission and omission. In a New York Times op-ed piece titled “Man without a Plan,” Schwartz was highly critical of the Fed’s decision to cut interest rates to zero and expand its balance sheet by trillions of dollars. Schwartz elaborated:

Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up. This results in excesses, and also increases the severity of recessions that inevitably follow when the bubble bursts.

As for omissions, she also faulted Bernanke for being silent during the buildup to the mortgage securitization crisis. Most applicable to the current environment, she expected the Fed to be aware of the effect these new instruments (i.e., today’s proliferation of low-grade corporate credit in all its manifold iterations) would have on normal transactions and to “speak up about them.” After all, she noted, “the Fed is the manager of markets.”

Finally, she argued that the Fed misread the situation when the credit markets became dysfunctional and normal channels for borrowing broke down in late 2008. She argued it was a solvency crisis, whereas the Fed treated it as a liquidity event. It was the mysterious new instruments that confounded investors, leaving them in the lurch as to what they were worth, if anything. The capital adequacy of the financial institutions was the real issue. Apparently not understanding the problem, Bernanke was unable to convince the markets that the Fed had a plan, leaving the impression that he was flying by the seat of his pants.

I don’t think it takes a leap of faith to imagine what Schwartz, who died in 2012, would have to say about the comportment of the current well-intended but likely in-way-over-his-head Fed Chairman Jerome Powell. Given that she and Friedman laid the blame for the Great Depression at the door of the Fed, the foibles masquerading as Fed policy in recent years would likely leave her livid.

Ms. Ocasio-Cortez, the battle you are fighting might be right-sized if framed in the context of the greater monetary war under way. The last peak in extreme income and wealth disparity was in 1928. The gap was closed in the 1930s as the rich became relatively poorer faster than the poor themselves. That did not resolve the crisis of the lower class, but the episode demonstrates that financial excesses had to be cleansed before real growth—the driver of class mobility—returned to the economy. 

As the venerable nonagenarian Schwartz might advise, make sure you fully understand the conflict in which you find yourself before you choose your pitchfork.


[1] Such “disparities” are diverse. Recent years have seen revitalized discussion on race, gender, and other social structures that intersect with financial opportunity. Because of those intersections, economic metrics can be useful in accessing the extent to which other disparities are being addressed.

[2] Luke 12:48b.

[3] “Seven Social Sins” was from a sermon delivered in Westminster Abbey on March 20, 1925, by Anglican priest Frederick Lewis Donelson. On October 22, 1925, Mahatma Gandhi published the same list under a different title in his weekly newspaper.

[4] Executive compensation is an easy target, but it’s also an oversimplification of what might be an unexpected underlying cause. More on that subject in an upcoming post.

[5] Ayn Rand, Atlas Shrugged, (1957).


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