Peter Thiel of Paypal and Clarium Capital fame had a very good interview in The American Interest recently. I highly recommend reading the entire interview since Thiel has a very good grasp on the macro and the micro. The part that really jumped out at me was this comment on the cause of the increasing inequality we’re seeing in American society:
“Peter Thiel: I don’t entirely agree with that description. My claim is not that there has been no technological progress, just deceleration. If we look at technological progress during most of the 19th and 20th centuries, it brought significant disruption. If you built horse buggies for a living, you would be out of work when the Ford Motor Company came along. In effect, over time labor was freed up to do more productive things. And on the whole, people got to be better off. I think the larger trend is just that there has been stagnation. There are debates about how to precisely measure these statistics, but the ones I’ve looked at suggest that median wages since 1973 have been mostly flat. Mean wages have gone up maybe 20–25 percent, which is the greater inequality, an anemic 0.6–0.7 per year. And if you confiscated the wealth of all the billionaires in the United States, the amount would pay for the deficits for only six months. There has been this increase in inequality, but it’s a secondary truth. The primary truth is this truth of stagnation.
As for why inequality has gone up, you could point to the technology, as you just have. You could also point to financialization of the economy, but I would say globalization has played a much greater role because it has been the much greater trend. Even though there have been a lot of bumps in the road, your “End of History” strikes me as very much true today. Globalization has been incredibly powerful, far more so than people could have realistically expected in 1970. The question is, what is there about globalization that creates a winner-take-all world? There certainly has been a labor arbitrage with China that has been bad for the middle class, as well as for white-collar workers, in the past decade or two. “
This brings a lot of topics together. I agree that America’s global competitiveness is increasingly at risk. I think this is apparent in our decline in GDP relative to the rest of the world as well as our growing trade imbalance. The point that I think he downplays in the interview is the effect of financialization. We live in this bizarre positive feedback loop where we have become so phenomenally wealthy that we demand that our wealth be protected. So the demand for services from Wall Street has surged to levels that have at times dramatically skewed the US economy. And you can’t demonize Wall Street for profiting from growing demand!
Clearly, this imbalance has been obvious in recent years and was a leading cause of the debt crisis. But I also wonder about the many ways that this growth negatively impacts other industries and facets of the economy. How many would-be entrepreneurs have we lost to Wall Street over the years? How many PhD’s do we remove from science and math based employment to help protect or build wealth every year? How much do we skew the imbalance by paying people gobs of money to protect paper wealth? The intangible losses here are colossal. Almost unfathomable. And the effect ripples through the entire economy making us less competitive, less productive, less wealthy (in real terms) and causing greater inequality.
The most disheartening facet of this discussion is that the only fix appears to be time and education. The government can’t make the demand for Wall Street’s services disappear, nor should they. To me the only true fix to this problem is a smarter consumer. We cannot and should not try to eliminate Wall Street. It is an important cog in the machine. But we can and will be smarter about the ways we deal with Wall Street resulting in what should become a smaller, leaner and more productive Wall Street. Unfortunately, the world is far from understanding the modern monetary system, the world of finance and even household balance sheets. Hopefully, time resolves this imbalance and not one of the historical fixes that Thiel cites – war, revolution or deflationary collapse….I am hopeful, but we’re running out of the thing we need most – time.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.