Ray Dalio, one of world’s richest men, recently published a think-piece on Linkedin entitled, “Our Biggest Economic, Social, and Political Issue” which, he writes, is wealth inequality: the disparity between the upper 40% and the bottom 60%. The media glommed on to this popular Progressive meme and it got a lot of attention because of his prominence.
Mr. Dalio runs the world’s largest hedge fund, Bridgewater Associates. According to their website they “manage about $160 billion for approximately 350 of the largest and most sophisticated global institutional clients”. Forbes says Mr. Dalio is worth about $17 billion. By any measure he is one of the most successful investors in the world.
I’ve followed him a bit over the years, including his ideas that culminated into his best-selling book, Principles, a guide to his philosophy of life, business, and achievement. He gave a pretty good TED talk on this subject. I like Mr. Dalio because he has shown the ability to think independently, often bucking the conventional wisdom, something I highly value.
His article recites the woes of the middle and lower economic classes of American society, many of which we have heard: income disparity between the 40% and the 60%; wealth concentration in the top 1%ers; lack of growth in earned income of the lower rungs; lack of savings for emergencies or retirement; loss of manufacturing jobs for the middle class; rising death rates and drug addiction of whites (especially men) without college degrees; rising divorce rate for middle-age whites without college degrees; a declining health care system; and a loss of trust in government, finance, and the media. There are lots of charts to support his assertions.
Where to start.
I have written about the “bifurcated economy” for many years. It is true that Main Street is not doing as well as Wall Street. Many of the problems Mr. Dalio cites are superficially true, but many are incorrect or overstated. We need to have an understanding of why these problems exist before we try to throw solutions at them.
Let me start with the supposedly declining middle class. Mr. Dalio believes the popular meme about the middle class’s decline. Not quite true. We’ve all heard the ditty about statistics: “There are lies, damned lies, and statistics”.
First, the “decline” is in part because these folks have gotten richer and moved upward in income (the $100,000 level) according to official Census data. Second, while wages have been rather stagnant, that fails to take into account the fringe benefits such as health benefits, pensions, paid leave, and transfer payments (Medicare, Medicaid, Social Security, etc.). If you add in this compensation it shows that the bottom income group had a 31% increase in total compensation over the period when they were supposed to have stagnated, and for the middle class, a 37% increase. Third, add on top of this, the influx of women and immigrants into the labor force which suppressed wages but created 30 million new jobs. For supportive studies, see below.*
If you delve a bit further into the issue, it turns out that income itself is not even the proper way to look at the issue. If you measure what people spend (consumption), over the past 50 years, the spending disparity between the top 10% and the other 90% of us grew just 7%. In other words, not a lot of “inequality” between the “haves” and the “have nots”.
Mr. Dalio goes into detail about the economic and social decline of lower middle-class whites. Much of what he says about them is true. I have written about these folks whom I call the “Dispirited Class” because of declining measures of income, illness, disability, addiction, death rates, obesity, withdrawal from the labor force, and lack of labor mobility. There is a common theme to these problems and it is not wealth disparity. The real problem is the lack of a good education from public schools and a corresponding lack of a college degree. People with college degrees tend to be in the upper 40% and have better outcomes. Even without a degree, people with a good high school education would be much better off. In other words, poor education is what leads to low income.
The education statistics are not encouraging. Recent national SAT scores have been the lowest in 40 years. Yet charter schools, even public charter schools, for example, take inner city kids and get them into college. Our public schools are failing these people. If Mr. Dalio is serious about bettering the lives of these people, perhaps he should look into funding private or charter schools for low income students.
Thus, “wealth inequality” is a false premise.
One would think that with all his resources he could have dug a little deeper into the data. So, to follow through on his Principles which values criticism of the boss, Mr. Dalio, you didn’t do a very good job.
What is puzzling is that he offers no solutions to these problems, other than to say, stay tuned to this channel. He does offer some hints as to the directions he is going: “directing resources so that they are used productively” and “productive wealth transfers.” In fairness, he says that we shouldn’t just give money to the lower 60% to spend, but rather allocate it “for improving production”. He urges policy makers, especially the Fed, to understand that things aren’t as good as they seem, and “keep an eye on the economy of the bottom 60%”, whatever that means.
This is a disturbing conclusion because it assumes the guiding, but heavy hand of government to make decisions about the allocation of capital. He also seems to think that the Fed can actually do some good. These are dubious solutions since history has shown that government is the worst at allocating capital to productive uses and the Fed has been the prime mover of boom and bust economic cycles.
If we wish to understand why the rich are getting richer in terms of assets, then one need only look to the $3.5± trillion that the Fed pumped into the financial economy during the Great Recession. Contrary to conventional wisdom, these new dollars aren’t evenly spread throughout the economy. They are first infused into the accounts of the Fed’s prime dealers (major banks). From there they are spread throughout the economy through loans. Since lending took a dive post-Crash, banks invested the funds in financial assets which is why we now see stocks, bonds, and real estate at all-time highs. Those folks who already owned financial assets benefited by the Fed’s inflation and saw their asset values skyrocket. This is the Fed’s modus operandi for reviving the bust from the boom they created which has created greater wealth disparity. But that is not the reason for the ills Mr. Dalio cites.
The solution to these problems is to create a dynamic, growing economy that allows all people to succeed. The best and most effective way to do that is to free capital, markets, labor, and education from that heavy hand of government. History has proven that letting entrepreneurs and capitalists like himself decide where capital should be invested is the best way to increase productivity and wealth for all actors in the economy.
For a contrarian thinker, Mr. Dalio has come up with a very tired conventional Progressive meme. I am curious why he focused on wealth inequality as the major problem in America. He of all people should understand that economic and social equality is an irrelevant concept: it has been with us for millennia and will remain with us for millennia. People have different abilities, goals, and drive. Unless there is some genetic breakthrough making us all Einsteinian clones, that won’t change.
I think the root of his discomfort is that in the next down cycle, the have-nots will rebel against the haves and elect someone worse than Donald Trump, perhaps a socialist like Bernie Sanders who will wreak havoc on the economy. I share his concern. But doubling down on ineffective solutions to the wrong problems will only hasten the worst outcome.
*From data provided by Professor Don Boudreaux (Café Hayek) of George Mason University:
Michael Cox & Richard Alm, Myths of Rich & Poor (1999).
Donald J. Boudreaux and Mark J. Perry, “The Myth of a Stagnant Middle Class,” Wall Street Journal, January 24, 2013.
Mark J. Perry, “Yes, the middle class has been disappearing, but they haven’t fallen into the lower class, they’ve risen into the upper class,” Carpe Diem, July 12, 2013.
Scott Winship, “Poor and Middle Class Incomes Have Increased Significantly,” e21, November 13, 2013.
Terry J. Fitzgerald, “Has Middle America Stagnated?” The Region, Federal Reserve Bank of Minneapolis, September 2007.
Terry J. Fitzgerald, “Where Has All the Income Gone?“ The Region, Federal Reserve Bank of Minneapolis, September 2008.
Ronald A. Wirtz, “Supersize Me,” fedgazette, Federal Reserve Bank of Minneapolis, September 2008.