There’s a tendency for the wealthy to be conservatives and “hard money” advocates. More generally, it is often assumed that a “big government” takes from the rich to give to the poor. So, it would make sense to assume that the wealthy are the ones most hurt by a bigger government. But is this really true? I don’t necessarily think so. For instance:
1. Wealth inequality in China, a country that can certainly be thought of as being a “big government” system, is among the highest in the world and rising faster than almost any other country on the planet according to Bloomberg. Their state run form of capitalism certainly isn’t trickling down or spreading evenly across the population. So this would seem to contradict the view that a “big government” system necessarily leads to equality.
2. We know, from a decomposition of the Kalecki profits equation, that:
Proﬁts = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
From that, we can break-down the situation in the USA and conclude that the government’s deficits were one of the key drivers of corporate profits in the last 5 years:
Since corporate profits are one of the main drivers of stock prices and the net worth of all individuals (particularly the wealthy) then we know that “big government” has actually helped the wealthy to a disproportionate degree in the last 5 years.
3. What about the Fed? The Fed is often portrayed as an entity keeping interest rates “artificially low” thereby taking the interest income that so many wealthy people enjoy from their substantial fixed income portfolios. But what if stock prices and bond prices have been bolstered in recent years by Fed policy? Bonds, on average, have compounded at 6% per year since 2008 while stocks have compounded at over 20% per year since the market low. The wealthy, who hold most of these assets, have benefited from the “manipulation” more than anyone.
These “soft money” policies, including QE, “interest rate manipulation” and massive government deficits, aren’t the types of the policies the rich should dislike. The rich shouldn’t just thank the government for much of what’s occurred in the last 5 years. They should be begging for more of it.
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.