(noun, etymology Dutch from ‘boedel’: estate, possession, inheritance, stock.). 1. Crowd, pack, lot, as in ‘the whole boodle.’ 2. a. Counterfeit money b. Money acquired or spent illegally or improperly, particularly when used in bribery for political purposes. 3. Slang for money in general.

The Great Gapsby

Posted on: Jun. 28, 2011  |  By: Ronnie Kahn  |  Category: General

Living in Los Angeles, I am inundated with stories in the papers about Frank McCourt, the owner of the Dodgers baseball team.   His fate seems to also be aligned with the other news in the form of the nefarious Momar Gadhafi of Libya as they both try to cling to power with institutional forces trying to beat them down.  The papers also love to talk about the divorce proceeding between Frank and Jamie which was the first episode that started the Dodger’s soap opera.  It seems that Jamie lives on over $500,000 per month.  The working stiff proletarian plebeians among us seem to think this monthly nut just a bit excessive.  I guess sadly with a penny less, all her gold would tarnish.  Not only is it difficult for most of us to fathom this level of spending but it is also difficult for most of us to imagine getting away with paying no income taxes either.  Not only is there vast income inequality in the U.S. but there is a lifestyle gap in that could the McCourt’s even conceive of how to live on the money that most of us do in order to make ends meet.

Each year, my daughter’s and son’s old high school does what a lot of other schools do.  They review, read, discuss, and even do a play of scenes from Fitzgerald’s The Great Gatsby in addition to an evening, with parents invited, made to feel like one of the book’s elaborate dinner parties.  The lesson the students seem to get out of it, other than the faculty are making us read another book, is about class differences.    No, not the seniors against the juniors kind of class but the material wealth kind.  One side of town, East Egg is pitted against the other side of the tracks in West Egg.  What is often overlooked by students  is the comparison between the country as it was then and as it is now.  In those days, there was one of the highest rates of income inequality in U.S. history and it seems we are right back there in affinity to that era.

Why the gap in income has become so wide is difficult to pin down.   There are complicated interrelationships with our economy that were not around in the 1920 Gatsby era.  As usual, economists are all over the map on what are the primary sources of the inequality.  Here are some common culprits:

  • Tax Rates and Political Access:  While Obama campaigned on taxing higher income earners, that promise was squelched by political forces.  Bush era tax cuts were extended.    It is often quoted that in the Eisenhower era; the top tax rate was ninety (90) percent.  The top tax rate is currently thirty-five (35) percent.  In addition, low capital gains rates favors investors over wage earners which is at historic lows going back to the Gatsby era.  Money also buys political access which concentrates power where legislation and tax laws can be enacted that favor the political contributors.
  • Labor Unions and labor weakness:  Organized labor covers far fewer employees now than in prior years.  There were large national unions in Gatsby’s era.  There are now fewer unions to use collective bargaining to negotiate higher salaries and benefits for employees.  In addition, many manufacturing jobs have been lost while immigration brings in a supply of labor that generally, rightly or wrongly, works for lower wages regardless of skill levels.
  • Gender:  Along the same lines as immigrants, more and more women have entered the workforce yet they generally work for lower average pay than male counterparts.  Many women will either work closer to minimum wage or work part time, due to family caregiving needs, which lowers wages or keeps wage averages down.
  • Globalization:  As mentioned under labor weakness, many jobs have been outsourced overseas and new jobs created have been lower paying service sector jobs.   Globalization helps to keep prices down for consumers, which helps make wages stretch farther, on the other side, there is pressure to lower wages to keep those prices rock bottom.  With increased trade and globalization, there has also been a global shift in wealth to emerging countries.  While many of these countries standards of living are still poorer than the U.S., they have growing areas of class strength.
  • Technology:  similar to the effects of globalization, improvements in technology improves productivity without having to hire more workers or having more demand for highly skilled workers from an employer’s perspective.
  • Commodity Costs and Currency Exchange Rates- the costs of commodities may cause consumer’s to pay more for such items as gasoline and coffee and currency rates can have an effect on stronger imports or higher prices for consumers.  For example, a stronger dollar can keep the price of imports down which helps consumers but, especially in a recession, a weak dollar can help to make our exports more attractive.  With both commodity and exchange rates, price manipulation by trader’s can enrich the few at the expense of the many.  Trader’s, who are mainly not regulated, can use leverage and shake confidence to spook markets into selloffs or devaluation.  This also holds true for hedge funds that use leverage to push wealth for the few over the many.  In each of these cases, there is a moral hazard that when the leverage can’t be met and the assets cannot be repaid, the government or some other institution pays the price without these individuals being on the line personally.
  • Banking Deregulation:  Banks have been given freer rein to hold smaller amounts of reserves and use leverage (buying something by only paying a small price) or make riskier type of investments.   This concentrates wealth in the hands of financial institutions and their sales force (see compensation below).
  • Corporate Profits:  If corporations put shareholders first and keep worrying about profit margins then there will be downward pressure on wages.  Also, if a company like Wal-Mart, using cheap overseas labor, materials, and distribution methods, offers dirt cheap prices then other companies must lower prices in order to stay competitive.  This helps consumers but hurts employees.
  • Compensation and Cult of the Celebrity:  Corporate compensation and financial compensation in the form of salaries, options, and bonuses makes superstars out of the few and leaves fewer resources for the many.  This combines with our cultures obsession to make a celebrity out of athletes, movie stars, and even corporate CEO’s.  This compensation drives up prices for ticket sales to cultural entertainment events as well as products.  Corporate boards rubber stamp CEO compensation which is most times not market driven.  CEO’s may be good at management but it is very difficult to predict which products or services will be successful yet they are paid disproportionately to merit, in some cases, regardless of failure or success.
  • Health and Wealth:  there is a correlation between having money and having access to quality health care.  This translates that there is a longer life expectancy for wealthier individuals.  Healthcare inefficiencies affect costs which drive up premiums.  Those with smaller incomes will pay a disproportionally higher amount of their salary meaning that they have a hard time paying the premiums.
  • Internet:  Just as the wealth gap widens so does what goes viral on the internet and everything either becomes a sensation overnight or languishes in anonymity.  They call this effect a power law distribution or long tail economics.  Instead of a bell shaped curve, there is huge demand on one side which then drops off radically into a curve that looks a long low tail where such things as books and blogs hardly have any buyers or hits.  Companies like Amazon and Netflix make money from the low demand side of the tail by providing a lot of volume of the lesser known products.
  • Cultural Narrative:   the story of money downplays the social complex connections and interactions to a simpler story of each person being the lone hero who is responsible for the cause of their own success.  We live in a consumer society where using credit to buy things that are wanted but not needed lead to higher interest payments and less savings being available to grow.  Media images bombard us with products and status.  This can be combined with other forms of debt such as the high costs of college and large purchases such as cars and homes.

This list is by no means complete.  This is not to mention how interrelated many of these are and how each one causes effects with each other and then many of the rest.  The problem comes about in that there is no feedback that can isolate which area is effecting another and how dramatic a change can come about from slight changes in any one.  There is no way to tease out a true cause-and-effect.  There certainly is enough data to see the symptoms and many changes but how do you predict what a chess match checkmate will look like when the match is in an early stage and you cannot even predict what pieces will be left near the end.  Add to this that most individuals, rich and poor, do not feel they can make a difference in the way income inequality shakes out.  What seems to be left for everyone seems to be like the characters of Gatsby.  They all seem to want what they can’t have or can’t get.

There are no comments yet, add one below.

Leave a Comment

Understanding Money Connections • Building Mutual Trust • Creating Economic Substance

© Boodle. All rights reserved.

The views and opinions expressed on this website and blog are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. The representative and author does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions. Past performance does not guarantee future results.