Beware! Crony Capitalism At Work--- Behind The Prosperity In Washington And Wall Street

By Will Bonner, Executive Director, Bonner and Partners

The leader of the Roman Catholic Church threw his hat into the ring on the inequality debate this week.

"Inequality is the root of social evil," wrote Pope Francis via Twitter.

Meanwhile, the left can't stop singing the praises of Thomas Piketty's book on wealth inequality in the developed nations, Capital in the Twenty-First Century.

The book has become a rallying point for those calling for higher taxes on the wealthy, greater intervention in the economy, and a greater role of government in our lives.

Piketty's call for a global wealth tax has the American left quivering with excitement.

They are taking full advantage of the inequality hullabaloo. According to a report from the Daily Beast, equality cheerleader Paul Krugman will rake in $225,000 over nine months to "contribute to the buildup" of a new "income inequality initiative" by the City University of New York.

What Krugman won't be mentioning is the role of government in creating wealth inequality. As my dad wrote in Wednesday'sDiary:

Piketty's gripe, as near as we can determine, is that the rich get richer – especially when economic growth rates are low. And that capitalism can lead to extreme wealth inequality.Economic growth rates have been trending downwards for the last 40 years or so. And the average annual wage, adjusted for inflation, has stagnated. But Piketty claims the average annual rate of return on capital (from profits, rents, dividends, interest, royalties, etc.) has remained robust. As a result, private capital has grown as a percentage of national income. [...]Piketty thinks he is criticizing capitalism. But after the 1970s, real capital played a smaller and smaller role. It was replaced by credit and its sinister twin: debt.

How the Insiders Get Rich

You won't read anything about the US government's role in wealth inequality in the mainstream media.

The left acts like the government has dropped the ball by not taxing the rich enough... and not redistributing enough of the wealth. They ignore the fact that the government has been one of the greatest contributors to inequality in America.

You've probably never heard of DynCorp. But it's the top contractor hired to "rebuild" Afghanistan. The US government has paid the company $2.5 billion over the last 10 years. (Maybe DynCorp provides a great service. But certainly not anything I would want to pay for out of my own pocket.)

DynCorp is part of the military-industrial complex based down the road from the Pentagon in the suburbs of Washington, DC.

Coincidentally, this happens to be where the richest Americans live.

6 of the 10 richest counties in the US are around the DC beltway.

Compare the leafy suburbs of Loudoun County and Falls Church to the majority-black ghetto area around the Anacostia River. The DC area is the most unequal place in the US.

In 2013, the US government generated a record $2.7 trillion in revenue – up from $2.4 trillion in 2012...

One that counted 171,689 employees earning over $150,000 a year in 2010... up from just 12,000 in 2005...

The US economy is flatlining. But if you were in ZIP codes 20815 through 20147 – the greater Washington, DC area – you saw four times as much growth as the rest of America!

The Biggest Wealth Transfer of All
And what about further down the list of the richest counties in the US?

Of the top 20, a quarter of them serve Wall Street, the nation's second most profitable industry (after Washington, DC).

That's because New York and DC are the biggest beneficiaries of the largest wealth transfer scheme ever.

I'm not talking about inflation or taxation.

It's bigger than that... much less obvious... and far more dangerous. In fact, the average American barely realizes it is happening.

Don't you find it odd that Wall Street and Washington are booming, while the rest of the nation struggles to stay even?

Isn't it strange that they say the economy is "recovering," as most Americans earn less than they did before the recovery began?

You're right: It doesn't add up.

Inequality is a major problem in the US, but not in the way that the left wants you to think.

The Fed claims QE and ZIRP are there to help Americans find more jobs. But over the last 40 years – a time when the Fed took on a more active role in the nation's jobs picture – the results have been shockingly bad for regular American wage earners.

According to recent work on changes in male wages by Michael Greenstone and Adam Looney of the Hamilton Project (part of the Brookings Institution):

[M]edian earnings for men in 2009 were lower than they were in the early 1970s. And it gets worse. [...] Between 1960 and 2009, the share of men working full-time fell from 83% to 66%, and the share not making formal wages tripled from 6% to 18%. When you take all men, not just those working full-time, [you see] a plummet of 28% in median real wages from 1969 to 2009.

Where does that $45 billion go? The insurance companies and pension funds that sell bonds to the Fed use the new deposits to buy more financial assets.QE is supposed to be the weapon in the Fed's fight against unemployment. The Fed is still buying $45 billion of bonds via QE every month... in addition to holding short-term interest rates to the floor.

They use this newly created money to buy the real assets of America – houses, companies, commercial property, resources, farmland... everything. And that drives up the prices of everything for everyone else.

The Fed says QE is meant to help create jobs... and "stimulate" the economy.

It does nothing of the sort. Instead, it lines the pockets of those at the top of the heap.

That's the big reason for the wealth inequality in America today. The government actively supports these transfers to Wall Street. Wall Street lobbies Congress to keep the transfers going. And around and around it goes...

Don't be fooled by calls for the government to "do something." It's already doing plenty.

But, if you want to do something about your own personal situation... If you want to build wealth for yourself and your family... If you want to escape this system of inequality... Then, I urge you to read my report about how the ultra-rich got wealthy – the rich who don't need Washington and Wall Street.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access