But Bad Government Policies Are Making Inequality Worse By the Day

AP reported Tuesday:

The growing gap between the richest Americans and everyone else isn’t bad just for individuals.

It’s hurting the U.S. economy.

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“What you want is a broader spending base,” says Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

***

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

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Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a shift from a few years ago, when many analysts were divided over whether pay inequality was worsening.

Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

As one example, Paul Krugman used to doubt that inequality harmed the economy.  As the Washington Post’s Ezra Klein wrote in 2010:

Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

Krugman writes this week in the New York Times:

The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.

They’re wrong.

The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?

Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.

Start with the numbers. On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.

And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.

Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.

***

Inequality is linked to both the economic crisis and the weakness of the recovery that followed.

Indeed – as we noted in September – a who’s-who of prominent economists in government and academia have now said that runaway inequality harms economic growth, including:

  • Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
  • Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
  • Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
  • Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof
  • Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department,  Bruce Bartlett

Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire .  And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)

Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.

And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealth from the lower, middle and more modest members of the upper classes to the super-elite.

Category: Economy, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Mainstream Economists Finally Admit that Runaway Inequality Is Hurting the Economy”

  1. MikeNY says:

    Better late than never, I guess.

    Next question: how do you price social instability into the market?

    • rd says:

      Buy gold and store it in Swiss and other countries’ safety deposit boxes.

      The consequences are so big if it goes all the away to open revolt, revolution, civil war, or invasion by other countries that you can’t really price it unless you know who the winning side is at the beginning. In most cases, people are pleased just to survive.

      The inequality in the 1920s was largely solved by letting the weakest hands fail which in many cases included over-leveraged wealthy people. If your business was not something essential that you could find ready buyers for then it vanished as well. We started that process in 2008 (Lehman Brothers etc.) but the rentiers quickly were able to get the Federal government to backstop their losses to maintin the status quo. I doubt that will happen again if they have not stabilized the financial system.

  2. Eric Original says:

    I don’t see any “Austrian” economists on that list. That’s because they are first and foremost shills for the rich. Such a position would be a betrayal to their masters.

  3. stonedwino says:

    the only way to fix this is taxation. Inequality was almost non-existent to anything we have now in the US, back when top tax rates were 90%. Once the top tax rates started coming down, inequality has surged since the 1980′s as taxes for the top taxes brackets kept on coming down.

    We need new, much higher tax rates for millionaires and even higher for billionaires.

    “Money is like manure; it’s not worth a thing unless it’s spread around encouraging young things to grow.” = Thornton Wilder

    • san_fran_sam says:

      I can’t believe that i am saying this but, taxation is not the only way to solve this problem.

      Taxation is a means to fund the programs that support those below the poverty level. Programs like food stamps, subsidized housing, etc.

      A better solution would be to pay a living wage so that those who work don’t have to get on such programs to begin with. One means of this is stronger union laws. Strong unions counterbalance the power of strong corporations.

      Another would be to remove the tax benefits of executive salaries including bonuses and stock options. if you can’t deduct the costs, there is less incentive to overpay.

      Another way would be to limit the ratio of executive salaries to the average salary of non-management employees. Or combine that with salary tax benefit limit. For example, the CEO can only make 40 times the average salary of non-management employees. If they want to make more it has to come out of shareholders pockets.

      • the pearl says:

        One of the myths of CEO pay, at least in the mega public corporations, is that CEO pay comes out of cash flows which normally would be available for other employee wages. Most CEO’s pay comes out of the shareholder pockets in the form of options grants, restricted stocks, etc. For example, Elon Musk made 78 million bucks and only 38k was salary and bonuses. This is universally the case for most companies. This fact is conveniently left out of the debate because it destroys the narrative that the CEO’s are taking up all of the wages which would be normally available for employees.

        http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-You/100-Highest-Paid-CEOs

  4. stonedwino says:

    “Austrian” economics was born out of the Austro-Hungarian empire and has always been a “shill for the rich”…then again, I am Serbian and God knows we put a stop to that Empire once and for all with Gavrilo Princip. Too bad we couldn’t silence the Austrian economists too…

  5. scottinnj says:

    Eventually there will be a backlash. It will either be (a) eliminating carried interest and some sort of lifting the cap on salary for social security contributions or (b) guillotines. Hopefully our best and brightest can figure this out.

    • the pearl says:

      One of the main myths of social security is that it is an entitlement program. Nothing is farther from the truth. Folks are “paid out” a stream of cash flows based on their earnings history. Any lifting of the cap on social security tax will simply result in those paying more, receiving more benefits. You are not going to decrease income equality unless you change the entire structure and mission of the social security system. Once you change the SS program from benefits being earned to being entitled you open it up to a nuclear attack by the far right. Anybody who has spent 15 minutes educating themselves on the SS program comes to the realization that they are being paid back their own money, even those on the right.

      • DeDude says:

        You are right that social security is paid for by those who receive the benefits. However it does have a redistribution structure to it such that if you have made half of the median salary for all of your life you get a higher % return of your money than if you made twice the median salary. Because of the cap on contributions those making 2-3 times median salary are carrying a lot more of the weight of this redistribution than those in the top 1%. Even worse, if you are making your money by capital gains (instead of gainful employment) you don’t carry any of the weight of this redistribution, because for some strange reason not all types of income is subject to these taxes.

  6. KJMClark says:

    The Krugman “conversion” is more interesting. I think his heart was telling him for a long time that inequality was a major part of the problem, but as of a few years ago, he at least claimed that he couldn’t see why that would be the case.

    It’s a bit nebulous concept. Why would the spending of the rich be less valuable than the spending of the rest? Isn’t it the same money either way? But the problem lies in behavioral economics, which is why he still doesn’t completely see it. The rest of us look at our dwindling (or disappearing) paychecks and either can’t spend money or absolutely refuse to. The rich look at their constantly increasing paychecks and both tend to save more and have the same not-interested-in-spending-it reflex, because things are looking bad all over. The net result is that concentrating the wealth and income means money velocity collapses during bad times.

    A missing component is that the “rest of us” are also more prone to advertising, so lots of people spent themselves into serious debt trying to be like the wealthy. Eventually behavioral economics will explain that – wealth disparity increases chances of bubbles. We’re dealing with the aftermath of those. The solution last time was to confiscate the excess profits of the rich to fund the war effort, and a massive world war to create spending. So far, we haven’t found any solution this time.

    • Biffah Bacon says:

      I feel like Krugman is a Reagan Democrat type, fiscally kind of tight but not cheap and desirous of some kind of narrative about economics that conforms with notions of rational systems. Like many academics and ivory tower types I think he has a difficult time comprehending the irrationality of the bulk of humanity and how that irrationality is reflected in the economic systems he studies.

    • DeDude says:

      The problem is that the rich tend to invest rather than spend a large fraction of their income. That is actually fine as long as there are enough productive investment opportunities created by demand. However, when demand does not keep up with increases in investment capital, then the excess investment capital creates bubbles. So the rules change depending on the specifics of the economy. When there is a shortage of investment capital (excess demand) increased inequity does not hurt the economy. However, when there is a shortage of demand (excess investment capital) then increased inequity does hurt the economy.

      • the pearl says:

        This is one of the smartest things I have ever read in the comments section of this blog. This is the type of thinking those group of economists should be engaging in rather than throwing darts at corporate logos.

      • the pearl says:

        This is a brilliant post.

  7. ashpelham2 says:

    As long as this is a conversation that only the law makers and the upper-upper-upper class are having, nothing changes. The bottom 90% continues to be enamored with much more important topics, like college football rankings and the latest video game systems.

    If the Chinese came ashore tomorrow in large enough size, they’d have 75% of this nation over-taken in time for lunch. Americans just don’t care enough to do anything about their current situations.

  8. crabman says:

    Why is it so difficult to see the obvious? The only way you can produce more is if someone consumes that extra production. Most consumption comes from the middle-class, so if their ability to consume doesn’t increase with economic growth, the economy will suffer. Duh.

    WW2 – ~1980 : Incomes grew with productivity, the economy was never better.
    ~1980 – 2007 : Incomes fell behind, but households made up for it by borrowing and spending.
    2007 – Present : Borrowing stopped and the economy is stuck in a multi-year slump because of low wages.

    There are three ways to fix the current situation, but only one is realistic and sustainable:
    1. The wealthy and corporations need to consume much more. (Not gonna happen)
    2. Americans need to start borrowing again (not sustainable).
    3. Middle-class incomes need to increase as a share of GDP. <– Only realistic fix.

  9. sellstop says:

    “Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.”

    In the link that that led to in the article above I found no mention of how the weakness in labor unions has impacted earnings. Union weakness was pushed in the Reagan administration, by that great leader. Americans were ripe for that exploitation at the time as we were in the late stages of a large inflation. Unions were blamed for that inflation because they had the power to demand cost of living raises. So they got the blame. Conveniently for the business interests. Much the same as the unions of govt. workers have gotten the blame for govt. spending of late. (Not reduced tax revenue)
    Union strength is how workers are able to stand up for themselves. In a free country, and a free market economy, unions should be part of the free market. They are part of the balance of power that insures that the gains from productivity are not all gains from lower wages. And the true productivity gains in a society should be shared by society. Not just shareholders in a corporation.
    And as far a diversification goes, why should workers be depending on a 401k type stock ownership plan when being a shareholder is to align yourself with the raw corporate interest. And in a country that has the largest portion of it’s savings in the stock market is it any wonder that our elected representatives come to pass laws favoring shareholders?
    Just thinking…

    gh

  10. SumDumGuy says:

    I’d personally rather see us go after the top 0.1% wealthy class rather than the 0.1% incomes. In other words, target trust fund babies more than your Elon Musk’s, LeBron James, and (whomever else fits the bill, lol).

    I mean, income taxes are progressive. Capital gain taxes are barely so. Income should be treated as income, or maybe even in reverse. What’s better for a society – people making money by working or people making money from their passive investments? It should at least be at the same rate, IMHO.

  11. lburgler says:

    It also harms the rich, b/c their business futures begin to look precarious and unsustainable, which causes anxiety and rich nation protectionism.

    Also, it’s the rich that have arguably been whollaped with the most severe inflation probably ever seen.

    The rich may have seemingly infinite wealth, but they live in finite space and lust after finite goods–perhaps even by their own determination–they obsess about having ‘the best’ and will pay whatever they can to get it.

    Since they are often buying good from each other, however, the money never quite trickles down, hence perpetuating the vicious cycle.

  12. bonderman says:

    The era of automation combined with offshoring has displaced many of the low and moderate skill jobs with automated systems. This will only increase. Think about it. Robots are a front loaded cost with minor operating and maintenance costs. They don’t require a medical program, 401K, ESOP, human resources department, cafeteria,, parking space, vacation, etc. They also have no interest in joining a union.

    Handouts should be the last resort. What’s needed is a major revamp of the educational system to train (and retrain) people to think and focus on upgrading skills. The present system is far from what’s needed. However, meaningful change is unlikely to occur without better parental guidance and involvement A little more of the “Tiger Mom”.

    Too many of today’s children grow up surrounded by a shallow culture of celeb magazines, violent video programs and over stimulating video games and yet we ignore their antisocial effect on a child’s perceptions and values. “Why study to become a chemist or doctor when I’ve got a shot at pro ball or movies?” That attitude is more likely to yield a job at WalMart (until self checkout totally replaces checkout clerks).

    .

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