A Two-Tier Economy Creates Inequality
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Is Monopoly power one of the reasons that the equity markets remain high nearly 10 years into a bull market? It
is something I have begun to wonder about recently, since a lack of wage inflation is a key reason that the Federal Reserve is not moving faster to raise interest rate. A rate rise off the black of inflation is one of the most reliable ways to pop a market bubble. Yet many economists believe that one of the reasons that wage growth –a typical driver of inflation –remains relatively flat despite unemployment being at nearly pre-crisis lows is because of job-disrupting technology itself.
There a are a few sectors, like finance and information technology ,which have seen strong wage growth .yet they create relatively few jobs .finance takes 25 percent of all corporate profiles while creating only 4 per cent of jobs ,since it sits at the centre of the deal making hourglass, charging whatever rent it like. Meanwhile, wealth and power continue to flow into the technology sector more than any other –half of all American business that generate profits of 25 percent or more are tech companies .Yet the tech titans of today –Facebook, Google, Amazon-create far fewer jobs than not only the big industrial groups of the past, like General Motors or General Electric, but also less than the previous generation of tech companies such as IBM or Microsoft.
What’s more, it is not just the top sectors that control the majority of corporate wealth ,but the top companies
themselves.teh most profitable 10 per cent of US businesses are eight times more profitable than the average company .in the 1990’s that multiple was just three. Workers in those profitable businesses are paid extremely well, but their competitors cannot offer the same packages. Indeed, research from the Bonn-based Institute of Labor Economics show that the differences in individual workers’ pay since 1970s is associated with pay differences between –not within –companies
Another piece of research, from the Centre for Economic Performance, shows that this pay differential between top-tier companies and everyone else is responsible for the vast majority of inequality in the US.
One of the key reasons the top sectors and the top businesses can take so much of the economic pie is that they are the most digitized .haves and have –more in digital America shows; industries that adopt more technology quickly are more profitable. Tech and finance sit at the top of that chart, but sectors that actually create the most jobs-such as retail, education and government-remain woefully behind the curve in terms of incorporating digital technology into their business models .That means you end up with a two tiered economy: a top level that’s very productive, takes the
majority of wealth, and creates very few jobs, and a bottom one that stagnates
This creates strange new markets dynamics and exacerbates the disconnect between Wall Street and Main Street that was already well under way since the 1980s .the markets can do incredibly well, even if the majority of workers don’t ,because they are increasingly driven by a small handful of top –tier companies in the information technology business. This is not just a phenomenon in the US. Technology has become only big story in the markets, in high grown countries such as China, where the weighting of tech stocks in major indexes is similar to roughly 25 perce3bnt you see in the S&P 500.
Tech stocks –with the exception of the big platforms companies such as Google, Amazon, Facebook, and Apple which control vast amounts of data –seem overvalued to me. Yet the only things that I can see that would prick that bubble is as significant move away from easy monetary policy-which cannot happen at the moment policy-which cannot happen at the moment for reasons already discussed –or a shift in the regulatory environment for technology .while that probably will not happen in the next couple of years, it is interesting how quick the reaction can be from investors when they think the playing f
A few weeks ago, the Chinese’s internet company Tencent saw its stock price fall quickly on the news that it would limit users less than 12 years of age to one hour of play on its most popular game .This followed criticism after the death of a 17-year- old who had been playing the game for 40 hours straight and reports of another teenager who broke his legs after jumping from a window when his parents stopped him playing .Extreme, but perhaps a harbinger of things to come as the public begins to understand the cognitive effects of digital technology.
No wonder some big tech companies are trying to shift the “winner –takes-all” narrative and focus on their role in supporting larger economic ecosystems. In China, Alibaba is leading an effort to connect broadband into more than 1000 rural communities, in order for local merchants to have access to the digital technologies that have become the only real place that wealth and profits live these days. In a more economically bifurcated and politically polarized world, there are plenty of good reasons from them to do so. Perhaps the US tech giants should take heed.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or
any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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