Ha! Very good observation about the link between keeping m high and encouraging owners of capital to invest and inequality. In fact, in our current world, capital is owned by only the upper half of the population and depending on the country, highly concentrated in the top 10% and top1%. MEanwhile, the majority of the population will ear…
Ha! Very good observation about the link between keeping m high and encouraging owners of capital to invest and inequality. In fact, in our current world, capital is owned by only the upper half of the population and depending on the country, highly concentrated in the top 10% and top1%. MEanwhile, the majority of the population will earn income which is essentially linked to inflation (at best). And the savings they have are typically predominantly invested in savings accounts and bonds, so they earn r. The government needs to create conditions in which m is high in order to be able to finance excess spending. But it also needs r to remain low, thus reducing the growth of savings for most people and the rate at which wages increase. Thus, a tendency to excess spending by t he government leads to higher inequality in the long run.
One way out of this mess is to tax the rich and give it to the poor. Even Thomas Picketty has recently shown that this doesn't help alleviate income inequality. To top things off, it reduces the availability of capital for investments which should increase m, but lowers the overall tax revenues from capital gains taxes, business taxes and income taxes since less capital is employed for growth. This, on average leads to higher government deficits and an incentive for governments to repress r even more. In an abstract way, that is what happens in countries that go overboard with income redistribution such as the former communist countries (but not Sweden etc. which are doing fine).
A way out of this misery is to encourage everyone in the population to invest in stocks and earn m. This is effectively what governments have been doing for decades now through pension plans and education in retirement investing. There is some progress visible in household portfolios, particularly in countries with low equity market participation such as Italy or Germany, but not much. And of course, by encouraging general participation in equity markets, more investors with less savings are exposed to the bubbles and bear markets in equities which more long-lasting consequences for their financial wellbeing.
Ha! Very good observation about the link between keeping m high and encouraging owners of capital to invest and inequality. In fact, in our current world, capital is owned by only the upper half of the population and depending on the country, highly concentrated in the top 10% and top1%. MEanwhile, the majority of the population will earn income which is essentially linked to inflation (at best). And the savings they have are typically predominantly invested in savings accounts and bonds, so they earn r. The government needs to create conditions in which m is high in order to be able to finance excess spending. But it also needs r to remain low, thus reducing the growth of savings for most people and the rate at which wages increase. Thus, a tendency to excess spending by t he government leads to higher inequality in the long run.
One way out of this mess is to tax the rich and give it to the poor. Even Thomas Picketty has recently shown that this doesn't help alleviate income inequality. To top things off, it reduces the availability of capital for investments which should increase m, but lowers the overall tax revenues from capital gains taxes, business taxes and income taxes since less capital is employed for growth. This, on average leads to higher government deficits and an incentive for governments to repress r even more. In an abstract way, that is what happens in countries that go overboard with income redistribution such as the former communist countries (but not Sweden etc. which are doing fine).
A way out of this misery is to encourage everyone in the population to invest in stocks and earn m. This is effectively what governments have been doing for decades now through pension plans and education in retirement investing. There is some progress visible in household portfolios, particularly in countries with low equity market participation such as Italy or Germany, but not much. And of course, by encouraging general participation in equity markets, more investors with less savings are exposed to the bubbles and bear markets in equities which more long-lasting consequences for their financial wellbeing.