Authored by Paul Singer, excerpted from Elliott Management's latest letter to investors,
"[when inflation strikes] ...the normal yardsticks of risk, return and profit may be thrown into the garbage can. These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.
A SURE-FIRE CURE FOR INEQUALITY: CRASH AND DEPRESSION
Inequality has become a political theme. Some are using it as a stepping stone to political power, stating that inequality is unfair, getting worse and in need of redress. It is worthwhile to point out the facts.
In most of the world, inequality in fact is declining. More precisely, economic growth and the march of technology, medicine, agriculture, mass education, energy and transportation have in recent decades enabled hundreds of millions of people to make the journey from subsistence poverty to a middle-class standard of living. For billions of people around the world, that journey, and the benefits that people get from a mass rise in living standards stemming from freedom, technological progress and economic growth, are life-transforming, and are inestimably more important than the difference between the living standards of the wealthiest cohort and those experienced by the majority of people. Of course, in many places around the world, corrupt (or incompetent) rulers and oligarchs keep people mired in poverty and oppression. But in those places, it is tyranny and corruption, not “inequality,” which is the problem and the source of the need for “social change.”
Inequality as a political theme is primarily a focus of developed countries. Let us examine its shape and causes. Inequality is exacerbated when asset prices rise. When people save money, buy investable assets and those assets rise in price, inequality is exacerbated because those people have higher income (by definition) than people who do not have enough income to save and invest. The period from the end of World War II to the present has been characterized by growth, prosperity, no world wars or depressions, and rising asset prices. Savers and asset owners receive dividends and capital gains in addition to their ordinary income. Prosperity and bull markets exacerbate inequality. Crashes and depressions reduce it.
Tax policy also has a role, at least in America. In the 1980s, there were tax law changes in America which had the effect of transferring a significant portion of income from the corporate tax returns of privately-held businesses to the individual tax returns of their owners. To the extent that this tax policy represented merely a shift of the same income from corporations to individuals, it created an exaggerated picture of rising inequality.
The march of technology also has played a role. Technological change has created a new class of global entrepreneurs, as well as generally increased the earnings capacity of technologists. The economic value (and consequent wage ranges) of undereducated workers is in the process of declining compared with tech-savvy and highly-educated people. The changes to the income distribution caused by these forces are not small or incremental. Rather, they have demonstrated the ability to capture, destroy or reshape entire industries overnight in today’s world. The people (many of them highly trained) who build and invest in these disruptive businesses can become very wealthy, sometimes very quickly. But the masses who are disrupted by such increasingly rapid changes suffer if policymakers do not create responsive education and job-training paths for them to keep up and change jobs and careers. Technology will continue to be disruptive and exacerbate inequality (while reducing costs and increasing efficiency and effectiveness), but governmental policies could mitigate a good deal of the pain to employees in obsolete or “outsourced” industries and help people adapt to the world of the future. Such policies are currently inadequate, and most policymakers find it more politically useful to rail against “the rich” than to create policies that help the bulk of the people compete and prosper.
So who are “the rich?” In our December 2012 quarterly report, we did an analysis of the Forbes 400. By studying the origins of all on the list, we found that 256 of the 400 were self-made. Of those, 46 grew up in either poverty or the lower-middle class). Another 146 were raised in a middle-class home, without special advantages or circumstances. We recommend going back to read the piece we wrote on this topic, but the point was powerful and is worthy of repeating: America is not a place of static concentrations of wealth. Mobility, growth, freedom and innovation are alive and well in America, and they are the reasons that this country has been the greatest engine of mass prosperity the world has ever seen.
We see the current focus on inequality as primarily an ideological and political theme aimed at justifying higher taxes on the rich, which amounts to the confiscation of wealth and more votes for the politicians shouting these populist riffs, none of whom has proposed any actionable ideas about how to narrow the gap other than by redistributing wealth. We do not think that beating down the income or assets of rich people is going to help middle class or poor people become more competitive or prosperous.
Furthermore, we believe that by railing against the rich and decrying inequality, politicians are attempting to divert attention from their unrelentingly poor policies. Making unaffordable promises and engaging in truly vast expansions of government programs have transmogrified into post-financial crisis solutions to restore ordinary people’s income and positive expectations.
The most important thing we can convey about inequality as a current political theme is that it is sharply exacerbated by the current mix of governmental policies in the developed world, particularly in America. If policies were oriented toward unlocking America’s considerable growth potential (policies described elsewhere in this report), then the rise of asset markets would be balanced alongside considerable improvement in the economic conditions of the vast middle class. But that is not the case in America, where growth-suppressive policies exist alongside extreme monetary ease. The consequence of this combination is that asset prices have risen sharply (exacerbating inequality), with only modest second-order benefits for economic activity, while the middle class has suffered from poor overall economic growth and job prospects combined with significant increases in basic cost-of-living items. This terrible combination is at the root of today’s perception of growing inequality, but the policymakers who are causing this set of circumstances are the ones railing (for political gain) against inequality.
Bad business all around.