The last time income inequality reached levels not seen since the 1920s was a mere 11 years ago.

Then a financial crisis hit the global economy and it took $23.7 trillion worth of government capital and guarantees to keep things from getting even worse.

If a spike in income inequality predates economic contraction, a financial crisis is looming. After all, as LinkedIn reported, "UC Berkeley economist Gabriel Zucman says inequality has tripled since the 1980s -- with just 400 Americans possessing more wealth than the bottom 60 percent of earners."

Meanwhile, The Washington Post's Christopher Ingraham wrote that this extreme inequality makes things look like they did before the Great Depression. "That shift is eroding security from families in the lower and middle classes, who rely on their small stores of wealth to finance their retirement and to smooth over economic shocks like the loss of a job." 

While the typical US family's wealth -- assets like real estate and stocks less debt -- has declined, the wealth of the wealthiest ones has more than doubled. The median U.S. household wealth fell between 1983 and 2016 from $80,000 to $78,100 while the average wealth of the top 1 percent of households more than doubled, from $10.6 million to $26.4 million, according to The Post.

What's behind the income inequality? Is a nasty economic contraction is in our near future? What should business leaders do about it?

Wealth inequality happens because of rising household asset values coupled with tax cuts that favor the top 1 percent.

For instance, as I wrote in March 2007, income inequality in 2005 had reached a peak not seen since 1928 -- the year before the kickoff of the Great Depression. The top 1 percent got 30 percent of George W. Bush's 2001 tax cuts, according to the Washington Post.

A few years later, the 2008 financial crisis hit. People in the bottom 99 percent feared they were missing out on the rising real estate market. Subprime mortgages let them own homes that they could not afford.

Meanwhile financial institutions holding too little capital used borrowed money to buy subprime mortgage-backed securities. When borrowers defaulted, the value of those securities plummeted -- wiping out the banks' capital.

Could the Trump tax cuts -- which passed in 2017 and are not reflected in the wealth inequality statistics cited above -- cause a similar dynamic? I don't know -- but those cuts will make income inequality even more extreme -- with 82.8 percent of the gains from the Trump tax cuts going to the top 1 percent by 2027, according to Vox.

Is an Economic Contraction Looming?

The 2008 financial crisis was not the first one linked to fear of missing out by the bottom 99 percent.

The Great Depression was caused by a huge stock market bubble on which many had speculated using borrowed money. When stocks crashed, speculators went bankrupt.

The 2001 recession was caused largely by the dot-com crash -- which hurt many -- such as limo drivers in Manhattan who told me about their Internet stocks. 

Though some politicians are proposing higher taxes on the wealthiest, unless they cap private contributions to politicians, the wealthy will keep using their power to push government to lower their taxes and cut costly regulations.

My prediction is that wealth inequality will persist. Here are four very different strategies that business leaders can follow to take advantage of this trend:

1. Develop products and services for the ultra-wealthy.

If you can tweak your business model to offer high-priced, high-value services to the wealthiest people, your profits could soar.

Tap your network to get an invitation to pitch, say, from a lawyer or financial advisor who knows the person you're trying to meet. And conduct due diligence to keep from serving wealthy people who are stingy and treat suppliers with disrespect.

2. Offer better benefits and pay than competitors to workers who are sliding down the income inequality ladder.

You could pay your workers more than competitors do and give them a stake in your company's success to make them feel more loyal to your company and its customers. 

3. Develop contingency plans in case the economy suddenly slips into a recession.

If you think a recession is coming -- recessions averaged 11 months since World War II, according to the New York Times -- boost your cash now by cutting back on borrowing and lowering your fixed costs.

4. Consider placing financial bets on a rapid decline in the stock market.

Place a personal investment bet that the stock market will drop -- for example, you could buy so-called put options on the S&P 500 index which would go up in value if stocks collapse.

Published on: Feb 18, 2019
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