Income and wealth inequality are at least one thousand times worse than almost everyone imagines. In addition, time is quickly running out in order to be able to implement a solution. This essay contains a solution.

Inequality

Never doubt that a small group of thoughtful committed citizens can change the world; indeed, it’s the only thing that ever has. –Margaret Mead


Warning: By reading this article you risk learning why the stock market prices are soaring, why real estate values are rising, why the rich are getting richer and the poor are getting poorer; while the economy is underperforming, not enough jobs are being created, personal incomes are flat, and federal budget deficits are growing. You will also learn how to reverse these trends. You will become armed with facts, knowledge, and a coherent argument that cannot be denied. The final paragraph will ask you to stand up and align yourself on the right side of these issues, and on the right side of history. Your job, your future, and your family’s future are all at stake. But so is your country’s future and a way of life for hundreds of millions of others just like you. All are now at risk. And only you—the thoughtful and committed citizens—have the means, the opportunity, and the motivation to correct all of these pressing issues.
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Willy Sutton was an American bank robber in the 1920s and 30s. He spent more than half his adult life in prison. Legend has it that he never hurt anyone personally, and he refused to enter a bank if there were women or children present. When asked by a reporter why he robbed banks, he is reported to have replied “Because that’s where the money is!” This quote formed the basis for Sutton’s Law used by activity-based costing and management accounting: “Start where the highest costs are incurred.” Reduced even further, “Start with the obvious.” I call this approach my ABC analysis.

I will rely on the wisdom implicit in Sutton’s Law in this essay. The purpose is to lay out the problem and a solution that can be understood by many and used by a few decision makers to solve the wealth and income inequality issues primarily in America, but also in other industrialized nations.

Inequality refers to how income and wealth are distributed. In the U.S. both are skewed severely in favor of those at the top of each curve. The two measures are far more severely skewed here than almost everyone believes or understands. Wealth inequality is the biggest issue because we have $100 trillion (assets minus debts). But the top 1 percent of Americans hold more wealth than the other 99 percent combined. That is the problem. This colossal mal-distribution is by far the most perplexing economic issue we face today. It is inhibiting economic growth, causing unemployment, while producing rampant poverty with all of its social consequences. It is a bigger problem in the United States than in any other country: In a twist or irony, we simultaneously have the most wealth of all the countries in the world, and we have the most severely skewed distribution of our wealth. As a consequence poverty abounds here. Many of the world’s residents believe that most Americans are rich. At least some of us who live here know better.

Inequality is too benign a term to adequately describe the problem. Its extreme form has horrendous consequences. The rich are rich beyond their own imaginations, while the poor are so poor many have less than nothing. Many of the poor have more debts than assets, hence they have a negative net worth.

Here is the problem stated in three parts:

Part One: As serious as wealth inequality is today, in 50 years it is projected to be 32 times worse. This is a mind-boggling, but a legitimate projection. At a growth rate of 7.2 percent, wealth doubles every 10 years. Double $100 trillion five times and you arrive at $3.2 quadrillion. That number is 32 times larger than $100 trillion. [1]

Part Two: What is being done to alleviate or reduce present or projected levels of inequality? Nothing. The conversation is now on the table, but not one thin dime is being redirected from the top to the bottom now, nor is there one policy in effect, nor is one being discussed, that would change matters at any future time.

Part Three: Human history strongly suggests that if we (you and me) do not solve this issue quickly and affirmatively, we will all (those who are alive in the next 20 to 40 years) be witnesses to, and participants in, the bloodiest revolution the world has ever seen. That is a projection, not a prediction. “If” is the operative qualifier.

The solution to this problem also has three parts:

Part One. We must modify the tax code so that the wealthy pay their fair share. This is unlikely to happen any time soon.

Part Two. We must grow the economy so that all who are able can and will participate in that growth and in the wealth it produces. This can be done.

Part Three. We need to constantly work at educating everyone about the virtues of a more equitable distribution of income and wealth, and the perils of letting a plutocracy continue to become the norm. This will take a very long period of time.

Memorize this paragraph. I doubt if there is anyone who does not understand there is wealth and income inequality, always has been, and always will be. That is not the issue. Wealth, however, is measured in stocks, bonds, and real estate. Each represents savings. Savings do almost nothing in generating economic growth. Spending creates economic growth, jobs, personal incomes, tax revenues, and prosperity for all. A dollar that is spent turns over 6.2 times per year, hence it creates $6.20 of GDP, $5.27 in personal incomes, and $2.48 in new tax revenues (local, state, and national). A dollar that is saved goes into someone’s account or real estate and earns a return to that person, but it does almost nothing for the economy, for jobs, or for taxes. One trillion dollars in new money that is put into circulation will generate $6.2 trillion in new GDP, $5.27 trillion in new personal incomes, 5.2 million new jobs, and $2.48 trillion in new tax revenues. Do nothing more than this, and 90 percent of our economic issues will fade away. But without critical tax reforms, all of the good from such an injection can and will be reversed. And without education, even tax reforms can be reversed, hence the need for a three-part solution.

The Critical Step. The Federal Reserve creates money. They order the Treasury to print specific amounts of new money. They make that money available to banks via their 12 regional Federal Reserve banks. Commercial banks borrow from the Fed, and then the process of inequality begins. Instead of lending most of that money to individuals and to small businesses so that economic growth can happen via spending, bankers direct most of all new money into their own investment accounts, or into the hands of large corporations where it also finds its way into stocks, bonds, and real estate. That path creates wealth for the wealthy, but almost nothing for everyone else.

Why do bankers help the rich get richer, while ignoring the economy and jobs for the many? They say lending to individuals who spend for economic growth, jobs, and new tax revenues is too risky. They are correct for two not-so-obvious reasons: First, they borrow at 0.25 percent, and they invest it at a 30 percent annual rate of return(currently). What’s more, they can divert all the risk to taxpayers. Remember “too big to fail?” The Fed has shown a willingness to bail them out when they screw up—with taxpayer dollars. Alternatively, when they lend money to you or me, they can only charge us about 2 to 6 percent. And they know that we spend our money, and that only creates economic growth, jobs, income, and taxes. And so given the choice to a) help themselves to huge risk-free profits, or b) to help you and me and the economy at a the modest return of 2 to 6 percent, they choose the greedy path to riches.

Therein lies the problem—and the solution follows with equal clarity. Understand it, memorize it, and the solution becomes crystal clear: We need to get most of the new money created by the Fed into the hands of small businesses and individuals.

Still, if this were an easy problem to solve, others would say so—in books, articles, or other publications. To my knowledge there are none. Let me state that another way: There is not a single solution to this issue in front of us now in spite of all the immensely intelligent and talented people who inhabit this land. Part of the reason must certainly stem from fear—to come forward with this solution would surely put that person’s job and income at risk. (I am retired and do not frighten easily). In addition the rich and powerful do not like solutions to issues that they perceive as a benefit rather than a problem.

This solution will necessarily be difficult to implement. I can only lay out the broad vision of what needs to happen. How we get from where we are to where we need to be is a matter for many others to come in and work out the details. Such a project would first need to have authenticity. It could start as a Presidential Commission with the role of defining the problem, laying out the necessary steps in solving it, and the benefits that would flow to everyone by the implementation of a master plan reduced to a simple format. It helps to quantify the issues.

Wealth is currently growing at about 7.2 percent per year. In round numbers that translates into $7.2 trillion per year, $600 billion per month, and $20 billion per day. Ninety percent of those dollar values are flowing to the top 10 percent. Imagine a giant vacuum hose with tentacles all over the country sucking up $20 billion daily and depositing $18 billion into the accounts of the very wealthy. Imagine loud sucking sounds everywhere, with streams of money being pulled out of the economy and into those streams—and only occasionally a few pennies fall out of a stream and they roll over to you. At the end of the day, the wealthy would have another $18 billion, while all others would have $2 trillion. That division comes to about $12 per person in our group.

Why is that division so severe and its tentacles so firmly in place? It is that way because a lot of laws are in place that make it happen that way. One of the major laws in that collection, however, is one that is not in the books. It is this: Too big to fail. Monopolies, oligopolies, and misdirected market forces are facts, but they are not laws. A better axiom is this: Too big to fail is too big to exist. Banks and corporations need to be limited in size in order to bring about the most important element in any market economy: competition. Size does matter. And smaller is better. Breaking up the Fortune 500 into the Fortune 5000 would be a good start. The Fortune 50,000 would be even better. Our 7,500 banks need to be converted into 75,000 facilities that operate more like credit unions, each serving a local community. Credit unions are run much more efficiently than are banks. But credit union presidents are not paid $10 million or $50 million per year. Such a breakup would put more money into circulation, less power in banker's hands, more competition among lenders, and more competiveness among corporations.

In terms of growth, the economy grows by the amount of money that is put into circulation. The simplest yet the most important statement that explains how money works is this: money times its circulation equal sales; or M1 X V1 = GDP. In putting this relationship into practice we need to get more money into the hands of spenders, and less money into the hands of savers. To achieve this end we would need to give the Federal Reserve a new mandate. They would need the authority to mandate that banks must lend more to small businesses, to business start ups, and to individuals, and lend less to large corporations. Notice the benefits: We would see a huge increase in employment, huge increases in personal incomes, much lower budget deficits, and soon to become budget surpluses. Concurrently, we would see large reductions in all the components of poverty: crime rates, imprisonment rates, illiteracy rates, suicide rates, teen pregnancies, mental health issues, obesity rates, life expectancies, and upward mobility rates.

Who or what is blocking all of these favorable outcomes from happening? Large banks and large corporations are the biggest factor (Too big to exist); laws and those who make the laws that favor big corporations over all others (Collusion); knowledge about these issues (Education); and the will of those who care needs to be stimulated (Empowerment).

The biggest changes in the tax code that would affect wealth accumulation would be these: A new tax on security transactions, and a limitation on inheritances.

Most wealth is in the form of stocks, bonds, and real estate. All are taxed are rates substantially lower than is income. A tax of just 0.5 percent on transactions involving gains on each, for example, could produce an additional $730 billion per year. That is a good number to shoot for. It could be incorporated in stages over a short time period.

Inheritances could be limited to no more than $5 or $10 million per person. We would need to eliminate the possibility of huge inheritances such as the $140 billion wealth estate now enjoyed by the Walton family, heirs of Wal-Mart founder, Sam Walton. How to prevent such a huge accumulation is certainly within the abilities of financial lawyers.

There you have the outline that shows why we need to shift the income and wealth distribution curves from extremely top-heavy to moderately top-heavy. By following this outline, incomes and wealth for the bottom 90 percent would rise, while the same would diminish and level off for those at the top. Prosperity would prevail, the savages of poverty would recede, a bloody revolution would be thwarted, and we all could leave this land in far better economic shape than the one that we inherited. TCEE are the outline’s initials: Too big to exist, Collusion, Education, and Empowerment.

All of my numbers are in the public domain and are easily verified. I am careful to avoid exaggerated numbers and rhetorical hyperbole. The coherency of my facts, data, analysis, and conclusions are in your hands for examination and evaluation. The rest is up to you. Only one candidate for President is making any of these issues known. His name is Bernie Sanders. He has little chance of winning the nomination or the Presidency. But his ideas on this subject must become part of the national conversation. Keeping the conversation alive and in the public consciousness is essential to getting something done. If nothing is done, the bloody and dreary outcomes noted earlier are almost certainties.

Let us therefore never forget: This is a most propitious moment in human history. The two Great Experiments of 1776, first enunciated by Thomas Jefferson in our Declaration of Independence, and by Adam Smith in his treatise, the Wealth of Nations, found their roots in America, they flourished in America, and they led to the most bountiful nation that ever existed in human history. We who live here, regardless of our disparate beliefs or creeds, have nevertheless all contributed to building our immense wealth, our standing institutions and the freedom we cherish. All are the envy of the world. Whether in education, health care, the arts and sciences, or in outer space, each institution is an unparalleled marvel for all the world to see. We—together—produced all that we can see, all that we can count, all that was passed on to us, and all that we can and will pass on to our children. The ambitions, the industry, the genius, and the blood, sweat and tears came from all of us. We praise the leaders of industry as well as the leaders in all fields of endeavor for their sterling contributions. But we praise our own efforts even more. We understand that we have reached a crisis in how our income and wealth are distributed, and whether freedom itself can survive. It is now time to re-evaluate, to re-think, and to re-apportion the same wealth and income that we all created in a manner that reflects our needs, our just due, our heritage, our honor, and our sacred trust. To do less is to dishonor ourselves and to put our nation and our future in peril. We can solve these issues, and we will solve them. So help us God.
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[1] Wealth projection for the U.S. is based on the compound annual growth rate found in the U.S. Household Net Worth data, Federal Reserve’s Flow of Funds Report during the past 50 years. This rate (7.2 percent) shows total wealth will be approximately $3.2 quadrillion by 2065.