Some interesting charts came my way today regarding the income inequality debate.
Let’s start with some charts, then explore the meme of the day that rising income inequality is behind “secular stagnation”.
The Financial Times article US’s flawed economic recovery divides Trump and Obama supporters has a pair of interesting charts on income growth and income inequality. Here is the first.
Income Growth
That is an interesting, albeit extremely biased chart. Had the chart broken out the top .01% instead, it is highly likely even the top 1% might have looked weak by comparison.
Of course the bulk of the gains went to the top 1%, as it should be. Were they supposed to go to zero-skilled teenagers removing baskets from automated fryers at McDonald’s?
Real Household Income
Here’s a look at the situation from an unbiased perspective courtesy of Doug Short at Advisor Perspectives: Monthly Median Household Income Since 2000.
At the median level, household income rose from $40,804 to $58,221. That’s a jump of 42.7%.
But inflation ate up the entire increase, and a tiny bit more, as the next chart shows.
The median household is actually worse off than 17 years ago. And many would dispute the alleged CPI, making matters even worse.
It’s safe to assume that at least 50% of households are worse to much-worse off than they were 17 years ago.
Progression of Income Inequality
Top 1% Share Synopsis
- Percentage of income going to the top 1% went from under 15% to over 20% at its peak in the Bill Clinton administration.
- Things spiked under George Bush but the chart shows the percentage income going to the top 1% finished the administration where it started.
- Under President Obama, the percent of income going to the top 1% went from about 18% to about 21%.
- The entire jump from under 15% to 21% of income going to the top 1% occurred under Clinton and Obama.
- Under Reagan, start to finish, the percent of income going to the top 1% went from about 10% to over 14%.
Secular Stagnation Thesis
Secular Stagnation Thesis
Brad DeLong discusses Larry Summers’ “secular stagnation thesis” in Three, Four… Many Secular Stagnations!
DeLong lists 17 reasons, and his number one reason is “High income inequality, which boosts savings too much because the rich can’t think of other things they’d rather do with their money.”
Pin the Tail on the Donkey
At no point does either DeLong or Summers pin the tail on this donkey. Neither can, because income inequality is a symptom of the problem.
That problem started the moment Nixon closed the gold window. The event is now described as “Nixon Shock”.
Indeed it was. Unencumbered by a need to redeem gold, credit exploded.
Credit Market Before and After Gold Window Closed
Gold Window Synopsis
- Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.
- To service that growing pile of debt, the Fed had to keep slashing interest rates.
- Instead of allowing consumers to benefit from technological advances that are inherently price deflationary, the Fed sought to increase inflation. This is to the benefit of the banks and already wealthy.
- A policy of 2% inflation coupled with no restraints on trade deficits (thanks to removal of the gold window), encouraged the outsourcing of jobs.
- After the dot-com bubble burst in 2001, the Greenspan Fed stepped on gas blowing the biggest housing bubble on record. Then the Fed bailed out the banks, the asset holders and the wealthy. This chain of events left the median person being worse off than before.
- Given that executive pay is based on performance, rising share prices further benefited the top 1%.
- Fed policy itself, coupled with rampant expansion of credit thanks to Nixon closing the gold window is totally responsible for the rising income inequality from 1971-present.
Attacking Symptoms
Instead of attacking the symptoms of the problem, as Summers and DeLong do, let’s be honest about the real problem. Let’s also be honest about the alleged scourge of deflation.
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Grasping Reality With Both Hands
Delong’s blog is entitled “Grasping Reality With Both Hands“. It would behoove, Delong, Summers, and Ben Bernanke to do just that.
A good starting point is “why” income inequality is rising as opposed to investigating ridiculous wealth-transfer schemes and government stimulus projects in a fool’s mission to fix a problem that Summers, DeLong, Bernanke, and Krugman all fail to understand.
Brad DeLong, Larry Summers, Ben Bernanke, Paul Krugman, Steve Keen, Michael Pettis, and anyone else, have at it. Where am I wrong?
Mike “Mish” Shedlock
All I know is this: the more politicians get concerned and create legislation to ‘fix’ this inequality, the worse it becomes. You could see this effect with the poverty rate as well, which was on a downtrend till the government decided to intervene to ‘fix’ the problem.
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The war on poverty has had the same results as the war on drugs and the war on terror…
underlying problem doesn’t get fixed — but government bureaucrats and lobbyists get rich
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Kings became rich because of government.
Has anyone done a study to determine how much of the 1%’s wealth is government based?
Government does pick winners and create losers.
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You may find this paper about inflation/deflation interesting as it explains why deflation can be a problem, and why inflation is routine in a monetary production economy: http://cfeps.org/pubs/wp-pdf/WP12-Wray.pdf
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Challenge to DeLong and Krugman and the rest of the list of welfare recipients:
get a job in the real world before you give any more “advice”
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The inequality is primarily a product of financialization and the fact that only a tiny minority has access to virtually free Fed money. This minority is not productive in any sense, they are in fact parasites. People doing hard, important work, including scientists, STEM teachers, doctors, nurses and other professionals, and many important trades, have not kept up either…..As Marc Faber has observed, the notion that pushing pieces of financial paper around is productive, especially to the extent that people doing it are paid millions, is simply absurd, and a sign of a collapsing civilization…..
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What if the collapse of civilization is the necessary result, regardless of policy? I mean, isn’t it possible that we have passed the point of no return?
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YES and we have been doing so since 1971. Mish’s excuse of the Gold window closing is coincidental with our economy turning a corner into decline, the real reason. Once that began we needed credit to fund the economic growth. Gold has had nothing to do with it. Gold can be arbitrarily priced because it has no economic imperative, it’s a free agent.
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It’s hardly coincidental. The closing of the gold window simply allowed the dogs to run free and opened the door to the beginning of the end. Would the elites have found some other way to advance their interests in the absence of the closure of the gold window? Perhaps. But it would still have been a damn sight harder.
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It’s even worse.
Civilization, as in a society largely shaped by actions of civilians freely undertaken, collapsed in the aftermath of the War between the States. Once slaves were “freed”, the apparatus created to fight that war, never receded. Slowly but surely beginning it’s journey to turn America from a civilization, to a totalitarian, progressive animal farm.
Milestones along this descent towards full bore progressive dystopia, were the Sherman act, the Fed, Women’s sufffrage, the New Deal, The World and Cold Wars, the Wars on drugs/poverty/terror……, the closing of the gold window and the “ownership society.” I’m sure there are tragedies I’m missing, but those are big ones. So, there’s really no meaningful “civilization” left to collapse. Just a chimera barely kept alive by pervasive indoctrination aimed at getting the saps to believe they are supposed to be grateful that their Massa is promising to use at least a little bit of lube.
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Want to shrink the “wage gap?”
Reduce the size and scope of government
Reduce taxes
Make it incredibly easy to start a business
Remove government protections of monopolits
Stop government picking winners and losers
Make businesses eat their bad decisions
No bailouts
No subsidies
National right to work
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The only thing missing is short term-limits, which is required if any of the other items hope to see the light of day.
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Cash basis medicine.
Cash basis education.
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So here’s the real world. The majority of rich people hold assets or business interests. That’s why taxing them does no good. They don’t actually pay a tax until they SELL- unless they receive dividends or cash in bonds at the end of their term. Bill Gates doesn’t have 70Billion cash. Neither does Warren buffet. That’s why Buffet has no qualms about taxing the rich. He lives so frugally he never has to cash out much to live. Now as far as government goes what is a tax on the rich but a transfer from one rich guy with a business to another rich guy with a government contract. Most rich people complain about taxes but that’s what most rich people make their money on. Pfizer, Tyson foods, Boeing, Lockheed. Whether it’s welfare or defense or healthcare, these guys all get near no bid contracts OR the make laws and money exchange systems that benefit themselves. How do we fix that? The welfare system is really a money transfer system from the middle class only. And that’s running out! So they moved to credit. Now the government borrows on the publics dime to keep paying the rich contractors. Poor people get “fed”/”paid” but it’s really just a transfer from the gov’t to the rich banker or business owner. THEY BOTH LIVE ON WELFARE!!’ RICH AND POOR!! Anyone with a small business gets taxed! Large businesses move profits overseas to more tax lenient places when they decide to cash out. We don’t have that luxury. How do we fix that?! When someone has the answer please run for office and don’t take a damn dime from those tbtf/tbtpaytaxes businesses!!
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I agree with a good portion of what you said. We know that the majority of people in the top 1% will pass their assets and business interests on to their kids … who in turn will stand to benefit from crony capitalism.
The main question we need to consider is what will a country like the USA do with the (household debt holding) bottom 90% of it’s people ? Abolish minimum wage ? Lots of 3rd world countries don’t have minimum wage laws ? Shrink the size of Government ? lots of 3rd world countries run skeleton Government work crews. Abolish taxes ? lots of 3rd world countries collect little in taxes.
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Wealth taxes. And it’s about time.
I bet if we add a national wealth tax the government gets real efficient fast. The workers complain but don’t have the politico’s ear. The wealthy do. Once they are paying their fair share they’ll make the politicians clean up the nonsense.
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LOL good grief
Can you read or think
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Good point. How about everyone with a net worth > $5 million hands over 1% every January 1st.
Gates, Buffett and Bezos will cough up $2 billion annually between them. They won’t miss it. We can use the $$ as grant money for young people to start small businesses.
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What a bunch of morons here
If the super wealthy gave up 1% every year it would not do a damn thing. The deficit is hundreds of billions of dollars , and the debt in the trillions.
Minimum wages would rise by a few cents
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Sent this letter to congress
The US Small Business Administration (SBA) classifies numerous companies with over a thousand employees and/or revenues of many millions of dollars, as small businesses
(https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf).
How on earth can government regulations and tax policy not be crushing for the truly small business? It is time for the US government to stop it’s empty rhetoric regarding Small Businesses. Computers, automation, the Internet etc. are changing the rules of business, i.e. the business world is shrinking allowing more work to be done with less people and some of that work can now be done with cheap overseas labor, so government policy needs to and eventually will be forced to change. We need simple “trickle up” policy changes, policy changes to empower the locally based, truly small business (i.e. little guy) to fill in the gap with new locally based jobs. Truly small business do not have the time or the financial resources for government paper work or complex tax record keeping. A proposed policy change, hopefully revenue neutral, would be to have a standard business expense deduction of around 20% to 25% of gross business revenue with a maximum of around $12,000 for sole proprietors and around $16,000 for companies with one or more employees. Businesses in general and tech businesses in particular need books, manuals, computers, specialized hardware and software tools, in addition to paying rent, accountants, utility bills, travel expenses, payroll taxes, quarterly taxes, business liability insurance, medical insurance, etc. (hopefully you are seeing the big issue here). Adding to this burden, the tech industry is continuously changing, which requires many, many hours of quick skill changes and upgrades. One new hardware/software tool or computer language can be equivalent to a 1000+ page book of information to digest. Also, a tiny business needs to spend 110% of the time running, growing the business, and creating the employment opportunities of tomorrow. This leaves very little time, resources and basic desire to deal with the complex tax paper work and government record keeping.
Here are just a few examples of the recent tech job decline in 2015/2016 (Large companies get more press coverage) :
HP Announces 25,000–30,000 More Layoffs As Company Split Looms
Xerox cut 4,800 jobs in the first quarter as its moved ahead with its plan to carve out its outsourced business processing operations as a separate company by the end of the year.
In April, IBM reported its sixteenth straight quarter of declining revenue as its core software licensing and hardware business shrinks, which has resulted in numerous reported and unreported layoffs.
Intel announced plans to cut its workforce by 12000 people, 11 percent of its current headcount.
Microsoft to cut about 2,850 more jobs
Obviously, the present policy of “trickle down” government incentives for big companies and the “SBA” so-called small companies is not increasing tech employment opportunities. So maybe it is time to try some “trickle up” policy changes. This is especially important for the middle aged (50+ year old) tech worker, since the tech industry is full of age discrimination. A middle aged tech worker is considered a dinosaur instead of a wise experienced worker (contrast this to the political, medical or legal professions). Here are some examples from my personal experience: while applying for tech jobs, I was getting no interest from job prospects until I removed my first 10 years of job experience, and removed the dates from my college graduation information. Also numerous companies asked for voluntary discrimination compliance information at the end of their on-line job applications; with questions about race, sex etc., but they do not ask about age. Why is that? How do they know they are not discriminating against older workers. So Lets give the middle aged worker a chance to create their own jobs of the future, by reducing the weight of the government. Remember, the truly little companies are located in the US and can not outsource jobs overseas like the big and “so called small” companies have done, are doing and will do regardless of the many job creation incentives these companies receive from the government.
Thanks for listening to me vent
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Interesting comment. It was late last night and I was about to go to sleep. I was reading the comments and began typing, “is everyone here retarded.” Then I realized it was not my blog so I deleted it.
Glad to see you say it.
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To fix/reform anything that’s important, we must have short term-limits to reduce the lobbiest ROI.
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The only thing that would solve this is a Wealth Ceiling Act wherein no individual can hold more than, say, $50 million (or some such figure arrived at by calculations) in TOTAL wealth across ALL asset classes.This would lead to more investment opportunities for the rest of the population and more equitable development.Consider also the diminished opportunities for such individuals to indulge in crony capitalism & influencing policy making by governments.
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Nixon had no choice when he closed the Gold Window.
The event that caused it was that US Oil Consumption began to exceed production in the late 60’s. By 1970 production peaked but consumption continued to rise. So the US was forced to import millions of barrels a day. Even at the pre-OPEC price of $4-5 a barrel that adds up to billions per year which may seem cheap today but at $14 an ounce it would have meant the entire US gold supply would have been gone within a couple of years.
Then the US economy would have collapsed from a shock much larger than the one in 1974 from OPEC.
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It’s turtles all the way down.
Before Nixon, there was oil consumption. Before oil consumption, there was a baby boom. Before the baby boom, there was Bretton Woods. Before Bretton Woods, there was WWII. Before WWII, there was the Great Depression and the New Deal. Before that there was Smoot-Hawley. Before that there was the Roaring 20’s credit bubble. Before that, there was the Federal Reserve Act, the income tax and the 17th Amendment. And and on and on.
It is short-sighted and disingenuous to try to identify one cause for anything when history proves that reality is an endless series of causes that become effects that become causes.
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Hi James, interesting thread of history that you spin there. Indeed, there is unending complexity in understanding the world. I respectfully disagree, though, that it’s turtles all the way down.
There are root causes, for example, behind the sustained periods of exponential population growth of the human race. The world hasn’t seen a catastrophic population crash in generations.
Why not? Here’s one reason: Starting in the late 19th century and continuing into the present, we’ve seen an ongoing stream of miraculous advances in medical science. This has led to dramatically reduced mortality rates for childbirth, infants, and children, and longer lifespans in general.
As a result, most of us are able to live longer and happier lives as a result 🙂 And our institutions have evolved to placate the teeming masses. Permanently easy money is one of those policy adaptations.
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Nixon DID have a choice : mandating that vehicles and processes that consume crude in the USA be made more fuel efficient.That would have been the ethical way to go about it. Rather than by entering into an unholy alliance with one of the most despotic regimes ever to create the Petrodollar.
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I’m not an economist or finance person, but I’ve been reading your blog for several years and think I’ve learned a lot. I’ve dipped my toes in a couple times to make a comment or two, but most of this is way over may pay grade.
However, I have a son who is a sophomore in college and wants to study something in the business, economy. finance field. I know that’s abroad area and most people starting college really don’t know what they want to do, but I’m saving this post in particular because I think it’s such a succinct summary of what I think he needs to be aware of should he pursue his field. (I’m in science, so I don’t count.) 🙂
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Thanks – Appreciated.
I think this is one of my best posts ever. And I was purposely polite to Summers, DeLong, etc. I expect a response from Keen, and probably Pettis and Edwards – but I really want a reply from Summers, DeLong, and Bernanke. I do not expect Bernanke will reply even if all the rest do.
Mish
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If Bernanke replies we are throwing a kegger for you!
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If Bernanke replies, go peek through the drapes of the front windows of your house.
Any Men in Black parked out front in a car you’ve never noticed before?
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Mish, not sure if this is your “best post ever” but your position/explanation of this topic is nearly perfect. One comment said the closing of the Gold window was a response to a declining economy…maybe, but many other responses to a declining economy could/should have been implemented rather than the Nixon Shock. Nobody is perfect, I disagree with some of your takes, but I have an econ background and am in finance and I can tell everyone that you have this one nailed. Thank you for articulating it so well. My biggest frustration is that the world has accepted the idea that deflation is this horrible thing and 2% inflation is OK. Makes me mad every single day. Thanks again.
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Here’s a little something your son can think about… This is my son’s opinion. He has a finance degree, and decided to go to University of Michigan for his masters. He took 2 classes in his 1st semester and quit. Reason was their approach is strictly from a Keynesian viewpoint and they push the ideal that government needs to intervene/partnership in the affairs of business. If you go for an education and they are going to merely indoctrinate you at your own expense, it’s a waste of time and money. Find out the school’s political slant and method before you apply and start with a long list.
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I have to second what Greg wrote.
A good education is priceless. Paying to be indoctrinated into a cult is foolish.
There are lots of good schools that will teach your son an array of economic theories, and make him really think about the pros/cons of each. People who can think for themselves are desperately needed in businesses of all fields (not just finance).
Keynes (the person) would never approve of the indebtedness and cr-p that is peddled by universities in his name.
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I went to UofM and ended up changing schools because drive time/work schedule made it impossible. It was an excellent school back then. I had a hard time keeping up as most of the students were full time, not working, and mostly way smarter than me. 40 years later and I’d have to say that getting your money worth is worth than tough, My profession was engineering, now infiltrated with H1b visas. Meanwhile recent engineering graduates ended up working as waiters, as my son (finance) did for 4 years. My son finally took my advise 18 months ago, and quit working for money and jumped into a partnership doing real estate rehab/new projects and all he does is all the finance arrangements. He’s loving the hell out of it and I can see that things are lining right up for him. If things change, he has so many contacts that he could be doing something else in a couple of weeks.
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Agree on the H1B visa’s decimating industries. I work in IT and estimate that if H1B visa’s were eliminated salaries would probably go up 20-40%. They are kept artificially low because of the import labor. Also has impacted “careers” because some many companies would rather hire “contractors” (on visas) vs “direct hires” … getting hired directly into an company in IT is very, very difficult even if you have the qualifications and experience … as a contractor … you are on the hook for your own healthcare, retirement, vacation,etc.
Many in IT are hoping Trump makes good on his promise to reduce H1B visas. Then if he taxed IT work outsourced to countries like India … many companies would in turn bring work back to the US. This would have an amazing effect on IT. IT salaries … like most …see Mish’s charts … have not increased in real terms in many, many years. That would change immediately if Trump were to implement those policies.
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One of the problems of removing any anchor of reality to a currency is that it also removes an obligation from the currency (credit) issuer to worry about co-operating with the society they live in and concentrate on security (private armed police and walls) and the control of opposition (surveillance and incarceration). It seems that end game point of collapse must occur as the 0.1% are hopelessly outnumbered but maybe they see an escape in robotics , AI and genetic manipulation – or anything!
Power corrupts and power has never before had such overwhelming tools at its disposal to quell all opposition – except that from natural law, the fitness of capitalism (if that actually is relevant in a master servant situation) and in the end, an unyielding evolutionary imperative (and failing that, impatient greedy grasping children might just be a systemic risk to establishment ‘success’).
If we continue on the current course this will not end well for most people, many have said that before 🙂
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To say that they don’t understand is wrong. They do. But like most members of the elite class they have the ability to continue the game to their benefit. Maybe they drive it off of the cliff(I suspect they will). Most of them will have prepared. The rest of the “great unwashed masses” will be left to fate. What comes after? How about SDRs.
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Major world crisis are symptoms of infighting among the 1%. Maybe isolationism would be the best policy for peace.
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“A good starting point is “why” income inequality is rising as opposed to investigating ridiculous wealth-transfer schemes and government stimulus projects in a fool’s mission to fix a problem that Summers, DeLong, Bernanke, and Krugman all fail to understand.”
These folks understands, or are blind demagogues. Either way, their objectives are the same – to protect their jobs, perks, and power; which means logical arguements are a waste of time.
You also have the issue that plagues many western thinkers, and non-thinkers that are trapped in Marxist/linear thinking that favors simplistic “if this, than that” logic. Because this thought process ignores the interaction of multiple variables it is guaranteed to be wrong, yet it is what’s used by politicians and others to sell everything. How else does one explain the continued belief in gloBull warming?
Term-limits takes care of the politicians, and educating the masses on cycles and the interconnectivity of everything will obliterate the demand for the blather that comes from ivory tower theoriticians with zero practical experience.
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Good comment blacklisted. Promoting competition by rigorous legal protections of small business (through fair contract terms rather than the current corporate do-as-I-say open slather) and getting rid of anti-competative structures by the dismantling of vertically integrated self serving monopolies would be better than forced wealth transfer. Stop accepting fake chinese walls erected between bank/trading departments might help too.
That doesn’t get over the problem of the growing irrelevance of the work force though, or a compromised political class.
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To summarize: during presidencies that promoted big government and Chicago style government corruption … the economy became more and more like Chicago. Crime, poverty, murders, joblessness, failing schools, debt, and corruption.
Same garbage in, same garbage out.
.
Eight more days until the piece of sh!t Obama leaves office!!! Good riddance to a horrible man
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It has been shown that lowering marginal tax rates does in fact motivate people to earn more. For some reason we have applied this knowledge only to high income people. Low income people actually have a much, much higher “tax rate” when one factors in benefits that are lost as income rises. The result is that low income people are caught in a welfare “roach motel”, and have no way to escape. If they earn more, their benefits fall, and it’s just not worth the effort.
So, we cut the marginal taxes on the wealthy, and their income rises. We give extremely high effective tax rates to lower income people, and their income does not rise. Why is this surprising?
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Big taxes on everyone, rich and poor alike, has destroyed Chicago (and Detroit and NJ and CT and …)
As long as you have big government, someone has to pay for all that corruption
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I have been a proponent of “opportunity tax” for a long time. It seems to me that there should be a separate graduated tax on the idea if developing mega funds from presenting a plan that results in mega-millions from presenting the pal to the USA or from the USA on an international basis. A progressive tax allows for the first mega-millions to be made at low tax rates and the high mega-millions to pay a higher (to much higher) rate. The basis for this argument is that the USA offers a platform that exists in only a few other countries.
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You have always advocated big corruption? And you are proud of that?
I am guessing you live in Chicago or San Francisco.
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“Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.”
From https://en.wikipedia.org/wiki/Economy_of_the_United_States…
The United States’ GDP was estimated to be $17.914 trillion as of Q2 2015.
So while credit grew nearly 38 times GDP grew nearly 10 times.
Is this simple maths beyond the understanding of Summers, DeLong, Bernanke, and Krugman?
A sensible question to ask would be is something amiss? Can doing something differently yield better result?
But then these guys think they are all knowing.
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“Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.”
From https://en.wikipedia.org/wiki/Economy_of_the_United_States…
The United States’ GDP was estimated to be $17.914 trillion as of Q2 2015.
So while credit grew nearly 38 times GDP grew nearly 10 times.
Is this simple maths beyond the understanding of Summers, DeLong, Bernanke, and Krugman?
A sensible question to ask would be is something amiss? Can doing something differently yield better result?
But then these guys think they are all knowing.
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Credit was born to artificially induce growth at the expense of debt. Thus we began a world where growth was essential to maintain debt. Thus the Kensyians were in vogue because their views fit world views as long as growth continued. As growth stagnates, the system begins to collapse. No one, not individuals, corporations or governments want to pay as you go. If you do, you must settle for less. Who wants that when they can have more with debt.
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“Of course the bulk of the gains went to the top 1%, as it should be. Were they supposed to go to zero-skilled teenagers removing baskets from automated fryers at McDonald’s?”
This really is lame rationalization. If all the burger flippers, janitors, office clerks, fruit pickers decided their time was actually worth real money – because ultimately what we sell is our time regardless of skills – then industry would grind to a halt.
What makes a CEOs time more valuable than a janitors? Nothing but what society values it at which is arbitrary in a sense.
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May have been true in the past (with successful unionization) but with robots available through cheap, easy financing, those low-level employees are more marginal than ever.
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‘Given that executive pay is based on performance, rising share prices further benefited the top 1%.’
It seems to me that executives whether they perform or not. I have to see an exec who failed not walk away with a small fortune and the entire stock based compensation system is rigged to pay in almost every instance since holding periods are ridiculously short.
I agree however that deflation is the solution and with most of your other points on asset inflation which benefits the wealthy.
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Indeed. Although they always say it is related to performance, there are thousands of very public cases where they made out quite well despite terrible performances by any reasonable standard. “Performance” is often no more than a rationalization.
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I don’t see the confusion. Never before have things been so globalized that someone can create something and immediately have billions of customers. The extreme wealth opportunity never existed previously the way it does today. Facebook is the perfect example. In 2017, if you hit the cover off the ball, it is going to be a monster shot, not just out of the park, but probably into the next state.
Why do people so love nefarious explanations?
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Not only that, it is manufactured in conditions favorable to a high rate of return. Four or five decades ago, unions could see a company doing well and negotiate more money and redistribute profits. Now products are made in places like the 3rd world or RTW states where the people working have no such power.
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The peak was during the mandate of G W Bush (share over 20%). Your argument is politically biased. In the last part of GW Bush mandate the share drops due to the 2008 financial collapse and the 2009 recession. They were ‘outlier’ moments. The comparison can’t be done without taling in account the contexto big differences. Anyway the PEAK was in G W Bush.
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My argument is politically biased? what a crock of Sh*T.
I merely pointed out the facts and the trend.
You missed the whole point of the article.
I blamed Nixon – a Republican – not because he is a Republican, but because of what he did.
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My point is about ONE aspect of your argument and your “blue” comments in the first chart and in the Synopsis regarding Clinton and Obama. You did not mention the PEAK during the second mandate of GWB. You compare the end of mandates, when it’s clear that the peak was in the second mandate of GWB and the downward curve at the end of GWB mandate was due to the crisis. But it you do not want to recognize that you must correct your comments in the charts and one ppoint in the Synopsis that’s your problem. Bye, nice week end
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Inequality overstated?
http://www.econtalk.org/archives/2017/01/mark_warshawsky.html
“Using data from the Bureau of Labor Statistics, Warshawsky shows that because health care benefits are a larger share of compensation for lower-paid than higher-paid workers, measures of inequality and even measures of economic progress can be misleading or distorted.”
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I think that a large factor in the stagnation might be the income difference between young and old. Young people are not making as much because new jobs are in lower paid fields, and old people don’t spend as much. This phenomenon is causing the young to not make families and to save more.
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“Neither can, because income inequality is a symptom of the problem.
That problem started the moment Nixon closed the gold window.”
The problem began before that, as one has to consider why Nixon closed the gold window. He didn’t close the window just for the fun of it.
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Excellent analysis, Mish. I would love to see Doug Short’s charts broken down by public sector and private sector incomes.
DeLong rejects your reality and substitutes his own. I will also add that none of these alleged economists even mentions the fact that over the last 17 years sales tax RATES and property tax RATES have increased almost everywhere.
On the face of it, there really isn’t anything wrong per se with real incomes remaining constant – it is probably the typical state of things in human history since the end of the Dark Ages. The real problem goes ignored: we’re talking about GROSS incomes, not net incomes. When you look at NET real incomes they are steadily falling because of the increased taxation. Despite the cries of these Democrat-centric quasi-economists to raise taxes on the rich, nearly every tax increase they propose is AIMED at the bottom 99%. And when pressed on such hypocrisy, every one of these schmucks’ only response is their support of the even more-damaging Tobin Tax.
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Assume that personal incomes for salary and dividends is capped at 1KK $ by government fiat. How does this help those at the bottom of the wage scale.?? thanks Barry B
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“Of course the bulk of the gains went to the top 1%, as it should be. Were they supposed to go to zero-skilled teenagers removing baskets from automated fryers at McDonald’s?”
Are we making an assumption that the top 1% are higher skilled than teenagers? Have Sam Walton’s children actually accomplished anything on their own? Even the Koch brothers inherited most of their wealth.
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“My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.”
And always will go unanswered. Keynesians don’t believe rising prices provide an overall economic benefit. Monetarists do.
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Keynesians do believe that massive debt deflation is bad due to the horrible effects on innocent people. But that doesn’t mean they believe the converse is a positive thing.
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“Where am I wrong?”
Where are you right? You haven’t shown any real causal relationship between closing the gold window and income inequality. Wages should increase because of increased productivity coupled with labor having the ability to transfer some of the profits of increased productivity into wages. That’s the only way income inequality doesn’t get out of hand.
You need to show how closing the gold window broke the relationship between increased productivity and increased wages (which is what really happened). You haven’t shown that in your analysis. So your analysis is neither right nor wrong. It is just conjecture.
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Actually, he did:
1.Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.
2.To service that growing pile of debt, the Fed had to keep slashing interest rates.
3.Instead of allowing consumers to benefit from technological advances that are inherently price deflationary, the Fed sought to increase inflation. This is to the benefit of the banks and already wealthy.
4.A policy of 2% inflation coupled with no restraints on trade deficits (thanks to removal of the gold window), encouraged the outsourcing of jobs.
5.After the dot-com bubble burst in 2001, the Greenspan Fed stepped on gas blowing the biggest housing bubble on record. Then the Fed bailed out the banks, the asset holders and the wealthy. This chain of events left the median person being worse off than before.
6.Given that executive pay is based on performance, rising share prices further benefited the top 1%.
7.Fed policy itself, coupled with rampant expansion of credit thanks to Nixon closing the gold window is totally responsible for the rising income inequality from 1971-present.
There is no requirement for Labor to transfer increased productivity into increased wages as falling prices will do that all by themselves.
So, going off the Gold Standard increased inflation which transferred these productivity gains from the poorer to the richer. Increased debt load meant decreased interest rates which especially hurts people on fixed incomes, and the poorer–not to mention rewarding speculation and bond speculators tend to not be the homeless guy sleeping in the back alley. Also meant increased taxes, again a burden falling disproportionately on the poorer. Out-sourcing of jobs meant less competition for labor and thus downward pressure on wages.
This is all up there, and more. Does he really have to spell it out as simply as possible? One presumes Summers et alii have the skills to make the obvious connections.
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“Wages should increase because of increased productivity ”
That is usually NOT true. You assume productivity = worker productivity but that is not the definition. You have to look at HOW productivity increased.
For example, if a computer programmer learns an additional language, he has increased his productivity and his wages will probably increase. (There could be an offset as his skills in the languages he learned originally become obsolete and have less productive use. Think buggy whips.)
If productivity increased by replacing an unskilled laborer with a machine, the unskilled laborer sees a wage decrease and the machine does not earn a wage. Productivity has increased.
So monetary values being equal, productivity gains in aggregate more often than not should create price decreases (and a wage is just another price) in aggregate because the majority of productivity gains are due to technological advance rather than an increase in an individual’s skills.
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As typically the case someone went on rant while twisting what I said.
The big rant included “Is that supposed to mean that all income gains from …”
Somehow my comment regarding “most” of the gains got paraphrased into a ridiculous rant about “all” of the gains. (emphasis mine). I do not have time to debate such nonsense.
Comments deleted
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While I agree with your general thesis about debt, the expansion of debt preceded the closing of the gold window. By the time it got to Nixon he had a choice of triggering a deep recession or getting on the bandwagon (“we’re all Keynesians now”). If you make the left Axis of the FRED graph (TCMDO) logarithmic you don’t see much of an inflection as the window closes (there is some), it is concave-up until Volker (easier to see if you use the slider to narrow the window (x-axis) to about 1985). You get a little concave-down with Volker and then it turns up again about 1991-1992.
Concave-up means increasing at an increasing rate.
If you add GDP to the graph it is pretty instructive. Expanding credit is like a drug. Fun to start, hard to kick. Notice that after 2009 it turns concave-up again.
I believe the income inequality is because we made credit our “most important product”, and money is flowing to the people who use and manage the credit.
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The median household income: After correcting for inflation, you could also suggest a more complex picture, namely that up until the Great Recession — the Bush Depression — real income was flat, and worse more and more income was tied up discharging loans. We then had a deleveraging recession in which personal income fell, but the fraction of income going to pay loans also dropped. For the past five years, real income has finally been climbing at 2% a year in real terms (that’s your graph). Real income happens to be back to where it was before the recession started, but now we hit the great unknown: Will real income now go flat again (bad), or will we keep seeing 2% a year increase in real incomes, meaning a 16+% increase over the forthcomingTrump administrations?
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Well the problem Mish describes (closing the gold window) can also be seen as a symptom of a bigger problem: the misplaced trust Joe Average has in a bunch of men in very good suits talking financial gabba gabba.
But hey, at least Joe didn’t really loose much in the last decades, it’s just that his increased productivity benefits just the 1% of 1%.
The real risk is that this tiny group will also become more and more powerful. There is the NSA automated spying going on already, that’s half of what’s needed to gain full control over the masses. Soon there may exist swarms of tiny drones capable of killing a man, all under control of some very small group.
Oh wel… I’ll stop there (or my post will be removed).
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Thanks for trying to protect the average person from the horrors of inflation Mish. We need more people like you defending us.
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One has to remember that when dealing with the goverment, there’s one golden rule… There’s NO MONEY in fixing problems…That’s why nothing meaningful ever gets done.
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Here:
Is Steve Keen stating what he believes.
We need to separate correct policy after a private debt run up has occurred (like now) from correct policy when private debt is subdued (like it was after WWII) . In this regard government needs the flexibility to deficit spend so that private debt can be reduced. This is where we are now.
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Classic Keynesianism i.e. we can’t let capacity adjust to true demand, we need to artificially boost demand in order to avoid a reduction in capacity (recession), while the private sector clean up their balance sheets.
Steve Keen has been on-song by sounding the debt-berg alarm but he is, at heart, a died-in-the-wool Keynesian and all his solutions are couched in those terms.
Economic quackery at its finest.
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Private debt is indisputably the controlling variable for unemployment. Unemployment is indisputably the unforgivable sin of policy makers. We will not get out of the mess we have created until private debt comes down. I hear you saying bring it down by default and mass bankruptcy. This will turn our country into Argentina if not Venezuela. Good luck with that.
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We either recognise and tackle the problem or the market will resolve it for us. The 2nd option will be the most disorderly, for obvious reasons, and therefore the most damaging. You make it sound like we have a choice. We don’t.
While there will be short-term pain as the mal-investment is liquidated, there is no reason we cannot get back on our feet fairly quickly. If the socialists were to get their hands on power in the midst of such a crisis, then yes we could well start to take on the appearance of some of the aforementioned banana republics.
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Shouldn’t your debt chart be on a log scale?
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Stagflation and Secular Strangulation are caused by exactly the same thing. And of course, it wasn’t Nixon closing the gold window (Nixon closed the Gold window exclusively because of the Pentagon’s far flung military exploits, e.g., the Korean and Viet Nam wars, and our overseas military bases).
SS was predicted in the late 1950’s. It has to do with the Keynesian delusion that banks loan out the savings placed at their disposal. No, CBs always create new money when they lend/invest. CBs do not loan out existing deposits saved or otherwise (from the standpoint of the entire economy anyway). So, all bank-held savings are lost to both consumption and investment, until their owners spend/invest them directly or indirectly.
I.e., all savings originate within the payment’s system. And savings are never matched with investments, except outside of the payment’s system (via non-bank conduits). Saver-holders never transfer their savings out of the payment’s system unless they hoard currency or convert to other national currencies. Savings are not extinguished by activating them outside of the payment’s system (where a contractual transfer of ownership, or shifting, within the payment’s system takes place).
The conflict between stagflation and SS was resolved in 1981 (with the saturation of financial deposit innovation, the widespread intro of ATS, NOW, and MMDA accounts). As DD Vt plateaued, so did savings velocity. The remuneration of IBDDs exacerbates this phenomenon. The, a fait accompli, 1966 S&L credit crunch (lack of funds, not their cost), is the macro-economic paradigm and precursor.
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