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What could come next

What could come next

| October 08, 2020

Morgan Housel is in my opinion not only a very bright guy but a terrific writer and a big thinker. Oversimplified, Morgan says  everything is connected to everything else, with a particular emphasis on World War II. I enthusiastically encourage you to read his entire post, In this post I want to concentrate on demographics and economic inequality.

Again it is oversimplified to say demographics drives everything, but that's not too far off. What particularly drew my attention is the explosion of people in the older age bands. Which, I am only speculating, is truly different this time, as we sometimes say in Finance. Among any number of other points, more working age people I expect would be associated with larger GDP and perhaps growth of GDP as well.

The challenging other side of that coin is that, as a country, paying for Senior Citizens is expensive.

Now let's consider economic inequality. A much broader term than simply "income" inequality because it would incorporate "wealth" inequality as well.

Back to Morgan. He talks about Frederick Lewis Allen describing what happened after the Gilded Age:

"But a revolution it was. Top income tax rates went from effectively 0% to 94% inside of three decades."

"To grossly simplify, here’s the historical path of how the balance of economic power toggles between social poles: Person creates a great business, gets rich.

  • "More wealth enables power, including regulatory influence, corporate governance deficiencies, and wage negotiating leverage.
  • Those powers create super wealth, and lower-income workers begin to say, “Hey, the reason you’re super rich is because you got all these powers from being merely rich, and some of that super wealth looks like rent-seeking rather than creating value.”  
  • People say, “This isn’t right. You can’t do this.”
  • Super wealthy person says, “Too bad, this is the way things work.”
  • People feel demoralized, undignified, and like the whole system is stacked in favor of a few.
  • They eventually have enough, and coalesce as a group to become powerful enough to force change, typically with taxes, minimum wages, and labor unions.
  • Super wealthy person says, “This isn’t right. You can’t do this.”
    Source: Morgan Housel



So putting all this together, what might be coming next. Higher income taxes seem almost a foregone conclusion. At least maybe back to where they were before Trump administration.  Many of us, including me as an amateur interested in things economic would not want to see rates going back to 94%. On the other hand, then sooner or later we might - this is much more uncertain - be looking at something more that would transfer some capital as well.

And ... somewhat speculative but not very much, I believe we will see some significant changes in health care, which, probably will also require additional tax revenue of some kind.

By the way, while some of the above may sound more "Blue" than "Red" from the political perspective, I think what I have broadly described is politically inevitable. Regardless of who wins the 2020 election. I feel many share my view that we as a country grow the economic pie more with the (regulated but) free-market system than other economic systems. Economic growth lifts all boats.

Stay tuned!

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