Wall Street & the Middle Class

John Cassidy’s “What Good is Wall Street? from The New Yorker is full of great parts. Here’s one:

During the credit boom of 2005 to 2007, profits and pay reached unprecedented highs. It is now evident that the bankers were being rewarded largely for taking on unacknowledged risks: after the subprime market collapsed, bank shareholders and taxpayers were left to pick up the losses. From an economy-wide perspective, this experience suggests that at least some of the profits that Wall Street bankers claim to generate, and that they use to justify their big pay packages, are illusory.

At the end of his piece, Cassidy links the stagnation of the middle class, which accelerated in the 1980s, to the simultaneous rise of giant Wall Street investment banking houses, derivatives traders, etc. I don’t think this causation hypothesis is entirely inaccurate, but I would instead emphasize Cassidy’s idea of a lack of societal contribution — as evidenced but he title, that’s the best take-away from the article.

So, what is the deal with the stagnation of the middle class? Krugman would attribute it to the loss of “strong unions, a high minimum wage, and … progressive tax system” that produced a broader distribution of wealth in the 40s and was dismantled in the 80s. I don’t disagree, but I think a force more powerful than government policies underlies the stagnation.

Certainly, the general declining trend of the US since the 1980s (punctuated by bubbles, growth, busts) is extraordinarily multifactorial, but I think Gladwell’s The Risk Pool points to an extremely important, always overlooked factor: our aging population.

This relation between the number of people who aren’t of working age and the number of people who are is captured in the dependency ratio.

Demographers estimate that declines in dependency ratios are responsible for about a third of the East Asian economic miracle of the postwar era; this is a part of the world that, in the course of twenty-five years, saw its dependency ratio decline thirty-five per cent.

The more people you have working to support those who can’t, the more resources you have left over to grow. As our nation grows older and lives longer, our dependency ratio rises, and our working population must first support the growing ranks of the dependent before it can put resources towards growing our economy.

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