Closed circuits

Further to the previous post about the disparity between record profits and high unemployment, a good post from Frank Pasquale about the closed circuits of spending among the super rich in the US.

The economy has now reached a “new normal” of soaring profits and stalled employment. Why aren’t stock market gains, bank bonuses, and rising CEO pay translating into more jobs for American workers?

Firms could be buying more labor-saving technology or speeding up production. They may also be investing overseas. Brazil, India, and China have more growth potential than the US. As Keynes stated, “Owing to [a developed economy’s] accumulation of capital already being larger . . . the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate.” While American securities markets have long been reputed to be far more transparent and law-governed than “developing” markets, the gap may not seem so great nowadays. This will be a painful transition for the U.S., all the more so due to our repeated failure to follow stabilizing models of industrial policy. But it is an overdue “rebalancing” of global economic flows.

More troubling is the possibility that buying power is being segregated by the very wealthy into closed circuits of spending and investment (among themselves). Inequality has now become so extreme that it’s difficult to imagine how, say, America’s Fortunate 400 could spend their money.

Pasquale goes on to argue that spending among the super-rich consists primarily of finance financing itself, with little flow-through to the rest of the economy besides the comparatively limited trickle from luxury markets.  Go read the rest.

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