The reason for the growing income disparity

Up until the mid-seventies productivity gains meant greater increases in income which makes sense given that more productivity means that more money exists to pay employees, and since those employees are making more many they are more valuable.

Yet now wages are no longer tied to the value a person brings to a company.

So what caused this to change?

1-An increase in the number of potential employees world wide began to grow faster than productivity gains, because while productivity tripled in Japan, China, Korea, Taiwan, Eastern Europe, and more recently countries such as Brazil, these countries also began to require more and more jobs. At the same time the number of people in the U.S. looking for jobs began to grow for a number of reasons.

Bottom Line is that the more people who are applying for the same job, the less any company has to offer to fill the job with a skilled employee. So skilled jobs will pay less.

2-Inflation wasn't reduced as it should have been. 

Normally the decrease in income and an increase in productivity would have meant that the cost of living should have decreased as it became cheaper to build products. However, while many things such as computers, food, and other similar items have all fallen drastically in price the cost of living has not decreased substantially. Why not?

Housing

The rapid increase in housing prices meant that people had to pay more for a place to live which increased inflation and prevent costs from dropping to some extent.

Part of our productivity gains are going 

to pay for more expensive housing.

Technology 

In the seventies the average household owned a single TV, the price of which was decreasing every year. However with VHS/DVD/Blueray, HDTV, Cell Phones, Computers, Internet, Cable and more the number of things each household spends it's money on grows to replace dropping prices of other items. This also means that those providing services and selling products have to charge more in order to get the things they want.

College

Increases in tuition prices have mushroomed out of control, which in turn means that those who graduated have less and less money.

Health Care
People are paying for things they never would have dreamed of which is putting more strain on nurses and doctors who also have to pay higher tuition costs, as well as other factors are pushing up the cost of health care which requires business owners to charge more for their products in order to afford the care they need.

3-CEO Pay 

CEO's and other executives have taken substantial pay increases during the time in which wages have remained stagnant for most people. However, this rapid increase in CEO isn't substantial given the size of the overall increase in the amount of money made.
Further Executive compensation began falling in the late 1990's but this changed nothing as far as median income growth is concerned. 

http://www.economist.com/blogs/graphicdetail/2012/05/ratio-ceo-worker-compensation

4-Regulations

Regulation costs have increased over 7% in just the last four years, they now account for over 1.75 Trillion dollars in cost to businesses. Which means that 1.75 trillion dollars has to be taken out of peoples pay checks to pay for regulations. If your curious that is about $11,000 per person who has a job in this country (US is currently employing about 150 million people) That means that the seven percent increase in regulation just cost you about $800 in pay. 

(Source for regulation costs Washington Times)

5-Gas and Resource Prices

More and more people want to buy a limited resources, so what happens? Yes prices go up, and that's exactly whats happening with gas and those increasing prices are decreasing your wages.

6-Government Debt

The increase in government debt has pushed up inflation a lot by decreasing the value of the money you own.

Solutions?

Now we come to the fun part of every problem, the solution.

1-Decrease regulations and create smarter regulations.

Dropping the cost of regulations by 30% would see an additional $3,300 per worker added directly to the economy. What's more it would allow more businesses to start up and stay in the United States.

2-Give shareholders greater control over Executive Pay in order to try to keep costs down.

3-The government needs to stop artificially finding ways to increase the cost of housing. Housing isn't a winner for everyone, those who don't own houses are trapped outside the system and even those who do become burdened with greater risk when these bubbles pop.

4-Decrease the cost of college and healthcare (Most all current plans being tried increase these costs)

5-Increase peoples options in job training so that its easier to learn how to become carpenters, a skilled manufacturer, etc. 

Screen Writers are a Better Investment than Actors

Writers have a much larger influence over movies than actors do. To put this into numbers the top ten writers earned an average of over 161 Million dollars for each of their movies in the box office. At the same time the top ten actors earned a mere 72 million dollar average per movie.

Movies by the Best Writers earn twice 

as much as those by the top actors.

It is true of course that actors have more projects than writers, a lot more, but that shouldn't mean that their movies do more poorly on average especially  given the capital opportunities invested to secure them for a film. In the case of the top ten highest paid actors this investment is often nearly as large as the films promotional budget. In other words actors are valued as much as all pr and advertising, but imagine for a moment a film that did no advertising, showed no trailers, had no critics review it. How well could such a film do no matter who the actor was?

When its easy to see that the numbers don't add up why do these numbers continue?

Our Beliefs Determine Our Reality

Case Study: Global Warming and the Weather

Many might ask how it is that even when faced with an ever growing mountain of evidence some still don't believe global warming is real? The problem is that evidence isn't usually what makes people believe what they believe. There are a number of natural biases built into humans that cause them to interpret data to fit their pre-exisiting beliefs and desires while avoiding data which would challenge them. Of course if you think I'm just going to accuse one side of this problem you don't know me either.
Those who believe in Global Warming are quick to blame every hurricane, every tornado, every blizzard on Global Warming. No matter how often scientists say that global warming wasn't responsible for the weather event. Yes many bad weather events are caused or made worse by global warming, but blaming every weather event on it is ludicrousness. The most deadly Typhoon in history hit Vietnam over a hundred years ago.

Here are the highlights from the Geophysics Fluid Dynamics Lab;

1-It is premature to conclude that human activities--and particularly greenhouse gas emissions that cause global warming--have already had a detectable impact on Atlantic hurricane activity. That said, human activities may have already caused changes that are not yet detectable due to the small magnitude of the changes or observational limitations, or are not yet properly modeled (e.g., aerosol effects).

This is not to say that global warming won't cause hurricanes and make them worse, in the next couple of decades, as their report goes on to say that;

2-Anthropogenic warming by the end of the 21st century will likely cause hurricanes globally to be more intense on average (by 2 to 11% according to model projections for an IPCC A1B scenario). This change would imply an even larger percentage increase in the destructive potential per storm, assuming no reduction in storm size. 

3-There are better than even odds that anthropogenic warming over the next century will lead to an increase in the numbers of very intense hurricanes in some basins—an increase that would be substantially larger in percentage terms than the 2-11% increase in the average storm intensity.  This increase in intense storm numbers is projected despite a likely decrease (or little change) in the global numbers of all tropical storms.

4-Anthropogenic warming by the end of the 21st century will likely cause hurricanes to have substantially higher rainfall rates than present-day hurricanes, with a model-projected increase of about 20% for rainfall rates averaged within about 100 km of the storm center. 

So as usual the far ends of both sides of an issue are wrong about that issue, because they both ignore facts.

Recognizing, Avoiding or Using Bubbles and Gold Rushes

A bubble is an over-excessive interest in a single or limited number of markets that ends with such a dramatic crash that the economy as a whole suffers. I use “gold rush” as a term for excessive growth in a specific industry which crashes but doesn't end in a general recession such as the temporary over-interest in Beanie-Baby-type plush toys. 

While there have always been bubbles and gold rushes, the increasingly chaotic nature of capital along with the increased number of people involved in the markets, will likely continue to increase the occurrence of bubbles and gold rushes. As time goes on, we’ll find more and more of the world’s capital is held by private people and is no longer under the control of major institutions. In other words, non-savvy investors will continue to have an increasing pull on where money goes, which means that decisions will be made by people with very little understanding of the market. Further, because these people can buy things instantly over the Internet, we’ll find that these transactions are able to occur so quickly that when people are prone to panic or to get excited about something, then money will move in mass regardless of what more-experienced investors and buyers might think.

Another challenge we’ll face is that there won’t necessarily be a substantial increase in the number of companies that exist simply because there are more customers or more regions to service. This means that while lots of new companies will enter most every industry, as the market for that industry grows in places like China, India, and Brazil, either the new companies will put existing businesses out of business or will go under themselves over next decade or two. This means that every new market presents dozens of gold rushes or bubbles. So your strategy has to be increasingly aware of the dangers and opportunities presented by the dozens of gold rushes which will alter society.

Avoid the Gold Rushes and Bubbles

Gold rushes and economic bubbles are emotional responses in which people over-exuberantly seek after something by investing more time and money in it than the market can return to it. I use the term “gold rush” to describe this because of the fame of the gold rushes in Alaska and California in which tens of thousands of people gave up everything to travel across the world in search for gold, but only a handful of people actually got rich in their search for gold. Similarly, Warren Buffett points out that thousands of car companies once existed, but most of them went under so now there are only a few major car companies. Most recently, thousands sought a safe investment in housing only to have that industry and the value of their property and the loans associated with housing collapse. Gold rushes lure people in with promises of easy riches that rarely ever pan out for very many people in the long term. Because a gold rush is something many people rush into but few people earn money on, a gold rush doesn't have to be large or global; it can also be small. A few years ago, dozens of new playing card and plush toy companies started up to take advantage of what seemed to be rapidly growing industries with a low barriers to entry, but most of these new companies eventually failed before these industries reached much more than a billion dollars in revenue. So while the social impact of most bubbles is minimal, their impact on the businesses connected with them can be substantial.


Identifying the Gold Rush

1) Rapid value increase.
Anything that increases in value rapidly is in serious danger of collapsing, but this is especially true if its value is increasing much faster than the money it’s generating. This is what happened with the dot-com bust. The value of the dot com businesses increased faster than their actual earnings did. It’s important to realize that this doesn't mean that the Web wasn't worth what people thought it was; it just took a lot longer for it to get there than it did for people to invest in it. Further before the dot-com bust, much of the value of the Web wasn't yet understood. Search Marketing, Rich Media, Social Networks, logistics networks to support large Internet retailers such as Diapers.com--none of these things existed in a substantial way before the dot-com bust. These were the things, however, that needed to exist for the Internet to meet its full potential. So without them most Internet companies crashed leaving many who entered it early without jobs and many of those who invested in it with huge financial losses.

2) Lots of competitors but only a few possible winners.
Business tends to be about consolidation. Hundreds of car companies turned into three companies, for example. As a general rule, if there are a lot of competitors in a field that is new, most of them are going to fail to make money when the smoke clears. This means that while an industry can continue to grow in revenue, the likelihood of succeeding in that industry can be low. Online video went through this same thing with an untold number of companies trying to start streaming companies only to have their business fail even as the revenue that companies like YouTube, Hulu, and Netflix generated increased.

3) Barriers to real growth.
The growth of an industry is based on resources that may be limited or which have suppliers or governments which are likely to block its growth. This is essentially what the gold rush was. There was only so much gold to be had, so, in the end, only a limited number of people could get it. 

This same event often happens a lot at the local level. If a new major business moves in and promises to buy from three or four vendors, then dozens, sometimes hundreds of local vendors, will build their strategies around getting that limited pool of money, which means that dozens or hundreds of businesses will fail. I saw this occur in Philadelphia where Casino moved into the area, and suddenly hundreds of businesses were trying to build their strategy for survival around becoming one of the five or six vendors the Casino hired.

Another common, limited resource which far too many small businesses go after is Oprah. Out of the hundreds of businesses I’ve spoken with, nearly a quarter spent a significant portion of their time and PR strategy on trying to figure out how they might get on Oprah’s show. Yet she can only have a few hundred out of millions of potential guests a year.

4) Increasing amounts of excess product.
This occurs when something grows in such popularity that people build more of it than is actually needed. This can be said to be partly what was responsible for the housing bust. Millions of new houses were built that had no people living in them. In fact, more houses and condos were built than people would realistically buy. So eventually, the companies building houses had to go under, and the value of houses overall had to fall.

5) Creates its own change in society.
Some industries change society causing production costs to increase or prices to decrease. Take the consumer electronics market, for example, in which products such as microwaves saw rapid declines in the price points they could sell for as the number of companies competing in the industry grew to meet increasing demand. Ultimately, these lower price points destroyed the earnings that the companies which made them could expect, putting many of them out of business.

6) Over-zealous promotion.
When ads and news reports about how great a business field is to get into saturate the airways, when an business segment suddenly inexplicably gets its own category in financial news even though it only makes up a small portion of an overall industry or economy its likely that field is an economic bubble. Sure, exuberance can signal increasing value, but it also lures more people into a small industry than can actually make money at it. Remember that new entrants hurt your business’s strategy so it can become impossible to build an effective strategy in an industry that has thousands of new entrants every year.

7) Fads.
It’s often hard to predict what’s going to be a fad and what’s not. However, things like collectibles, fashion, and cultural movements are very often fads which pass with time. If you are over the age of 30, you should be aware that a number of cultural movements have come and gone in your lifetime or at least have shrunk substantially. Grunge, Gothic, Punk, and now Hipster movements have all seen their market base start to deplete or alter forcing those businesses focused on catering to these groups to alter or go under.

8) Easy to replace and pirate.
Replacement products and pirating have become a way of life and will likely destroy most creative industries. We have already seen the music industry crash due to pirating. Manga, which was also growing in popularity rapidly, has crashed in the United States due to online pirating of the books. Computer games could be next as people discover new ways to get their favorite products for free. Moving beyond the entertainment industry, creative industries such as web design and logo design could run into trouble as template websites grow in popularity making it easier for companies to replace or reduce the amount they pay these designers. Indeed, in the modern world, technology and global competition can threaten to replace the products of any American business.


Current Bubbles
There are three primary bubbles which currently exist; the "Green Economy," social media and China.
Green Technology is a bubble because it utilizes rare earths - a limited resource which hinders its growth and because only a small percentage of the businesses in Green Tech well succeed in developing a new technology while most well go under.
China is a bubble because China hasn't developed it's own brands and so the manufacturing which has allowed it to grow can be moved. Further so many people have rushed into the economy that they have over stimulated it which means that most of them have been failing and will continue to fail, even if China's economy continues to grow.
Social Media has created more excitement than it's current financial value should indicate. When the valuation of Facebook is believed to be approaching a hundred times their earnings it should become obvious that their value is over inflated. As of yet almost no one has figured out how to earn the amount of money on social media that it's valued at.


Embracing Gold Rushes and Bubbles

The idea that bubbles are all bad is an extreme oversimplification. Bubbles rapidly advance society and create infrastructure. What’s bad are the shattered dreams and lost jobs that happen after the bubble. So those are what we need to avoid while embracing the good aspects of bubbles.

Positive Aspects of Bubbles to Take Advantage Of

1) Bubbles can rapidly advance society.
Imagine where we’d be without the railroads or the thousands of entrepreneurs who worked to find better ways to create automobiles. Think about the Internet and how much that has advanced many aspects of society. At least in cases not involving speculation or limited resources, bubbles come into being in part due to something expanding faster than the rest of society can support it. The dot-com bubble is a good example of this in which IT companies came into being and developed new technology faster than society adopted those technologies or people were able to figure out how to make money of them.

2) Bubbles create infrastructure.
Bubbles leave behind a new infrastructure that can be used not only to recover from the bubble but to continue to drive the economy. Railroad mania created the infrastructure for American manufacturing to grow. The Mississippi Company bubble advanced paper money which helped improve commerce. There would likely be no Google without the dot-com boom, and imagine for a moment what California might be like without the Gold Rush that went bust. Silicon Valley is in California for a reason. Would it exist if California weren’t a highly populated state?

Warning! Not all bubbles create great infrastructure, however, as the government tends to outlaw certain things after their bubbles burst, typically involving finance. Imagine if after the dot-com bubble, the government had outlawed Internet companies, or if after the railroad bubble railroads had been outlawed? This is exactly what happens every time there’s a finance bubble.
Why do you need to know this? Because with the government tying the hands of the infrastructure that drove the economy or an industry for years, economic recoveries take longer. So you need to react differently to these types of bubbles than other ones.


Taking Advantage of a Bubble

Taking advantage of a bubble is tricky at best. Again, the reason it’s a bubble is because so many people are rushing into it that most of them won’t earn money. There have been, of course, a number of millionaires who came out of a bubble even as their companies failed. Further, the chaos-created bubbles give companies an opportunity to move ahead of their competitors or to consolidate and solidify their position as a leader.

1) Get in early or late.
The first thing you need to determine with any bubble is if you should jump into it early on or later on. Technology is often easier for late entrants rather than early ones. GM came after Ford and hundreds of others and superseded them, and Toyota came way after all of them. More recently, Google, Facebook, and a number of the other new online tech companies entered the field after the dot-com bubble had collapsed to become the most successful companies in their industry. Entering late offers the following advantages: it allows the new entrant to see how the existing companies are weak; those coming in later can learn from a number of failed strategies and have more of a knowledge base to build their initial strategy on.

In other fields, those coming in early have the advantage. Coke in the cola industry comes to mind. They gained the early mover advantage because there was so little difference between them and competitors that being first gave them the right to call themselves the original. Further, coming in early can allow a business to earn a war chest or to spend on infrastructure which will allow them to survive after the bubble pops as Amazon.com did during the dot-com bubble.

2) Take advantage of the infrastructure once it is in place.
At the end of a bubble the infrastructure is in place to continue growth in an industry. At the end of the dot-com crash, Internet companies started finally making serious money, and people had just started to really use the Internet in large numbers. Thus, web designers among others were able to continue work after the dot-com bubble if they had developed a good skill set. At the end of the railroad bubble, companies started making a fortune using railroads in manufacturing. Auto repair places still continued after and because of the auto bubble because the number of cars sold didn't decrease when most of the companies making cars failed.

Again, I would caution you to think about how the government will react to a bubble bursting because if it chooses to prevent the use of the infrastructure to create businesses and improve the economy as it does all too often, then you won’t be able to take advantage of this infrastructure.

3) Sell to the bubble.
The people who grew wealthiest from the gold rush were not looking for gold. They were the people selling flour and shovels to the people who were. In order to go into business in bubble companies, and depending on the size of the bubble, it can be possible to earn a lot of money selling these things to them. After all, a bubble exists because people are investing more in an industry than that industry will return. So if your products or services are what they are investing in, you will earn much more than they do.

There are two things to realize when you’re doing this, however. First, there is a danger that those selling to the bubble will increase so much that this will become a bubble in and of itself, and second, there is a danger that when the bubble bursts, the market for your products will dry up. So you must prepare for this by using your money to take advantage of the aftermath of the bubble or to expand your business so that you are less dependent on it.

4) Prepare for the recession.
The end result of many bubbles is a recession or an industry slump, and it’s during a recession that most firms pull inwards making them less able to develop their brand, innovate, build their customer base, or respond to changes in the market. Further, during a recession, many companies make serious mistakes which put them out of business, leaving an opening for someone else to step in. This means that a company that is able to act quickly and nimbly in a recession and has a plan to build its market share and innovate new products can come out of the recession much larger than when it went into it. Bain states that it’s during such times that smaller companies are best able to pull ahead of their larger rivals. So by seeing a recession coming, you can begin to save money and plan a strategy to replace companies which can’t compete once the recession occurs.