The Economy Cannot Recover As Long As Inequality Continues to Skyrocket ... But Government Policy Is INCREASING Inequality

→ Washington’s Blog

The Economist noted in January:

Hu
Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn ...
have all worried, loudly and publicly, about the dangers of a rising
gap between the rich and the rest.

***

A new survey by the
World Economic Forum, whose annual gathering of bigwigs in Davos
begins on January 26th, says its members see widening economic
disparities as one of the two main global risks over the next decade
(alongside failings in global governance).

Numerous
prominent economists in government and academia have all said that
large inequalities can cause - or at least contribute to - financial
crises, including:

• Robert Shiller

• Joseph Stiglitz

• John Kenneth Galbraith

• Raghuram Rajan

• Robert Reich

• Mark Thoma

• Emmanuel Saez

• Thomas Piketty

• David Moss

• Kemal Dervi

• Michael Kumhof

• Romain Rancière

• Robert Wade

• David Ruccio

• Marriner S. Eccles (Federal Reserve chairman from 1934 to 1948)

Add Alan Greenspan to the list, who says:

Our
problem basically is that we have a very distorted economy, in the
sense that there has been a significant recovery in our limited area of
the economy amongst high-income individuals...

Large banks,
who are doing much better and large corporations, whom you point out
and everyone is pointing out, are in excellent shape. The rest of the
economy, small business, small banks, and a very significant amount of
the labour force, which is in tragic unemployment, long-term
unemployment - that is pulling the economy apart. The average of those
two is what we are looking at - that they are fundamentally two
separate types of economies.

And several IMF economists. As Bnet wrote in May:

New
research [shows] that high income inequality may actually hurt
long-term economic growth. Two economists at the International Monetary
Fund, Andrew G. Berg and Jonathan D. Ostry, released a paper
in April that concludes that countries with high inequality are more
likely to have shorter spells of positive growth compared to countries
with less inequality. That’s another way of saying that high
inequality hurts the economy.

Instead of looking purely at the
relationship between inequality and growth, Berg and Ostry examined
the relationship between inequality and the duration of
periods of positive growth. They measure a growth spell as a period of
sustained growth and estimate the effect of inequality and other
factors on how long growth spells last.

Their model included a
variety of factors that economics have previously found to affect
economic growth, such as external shocks, the initial income of the
country (ie., did it start out very poor or wealthy?), the
institutional make-up of the country, its openness to trade, and its
macroeconomic stability.

The finding: Only income inequality stood out “as a key driver of the duration of growth spells.”

The [economists] concluded with the following:

“The
main results in this note are that (i) increasing the length of
growth spells, rather than just getting growth going, is critical to
achieving income gains over the long term; and (ii) countries with more
equal income distributions tend to have significantly longer growth
spells. …. growth and inequality-reducing policies are likely to
reinforce one another and help to establish the foundations for a
sustainable expansion.”

Likewise,
economics professors Saez (UC Berkeley) and Piketty (Paris School of
Economics) show that the percentage of wealth held by the richest 1% of
Americans peaked in 1928 and 2007 - right before each crash:

The Washington Post's Ezra Klein wrote in June:

***

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.

The problem, he says, is finding a mechanism.
Krugman brings up underconsumption (wherein the working class borrows a
lot of money because all the money is going to the rich) and
overconsumption (in which the rich spend and that makes the next-most
rich spend and so on, until everyone is spending too much to keep up
with rich people whose incomes are growing much faster than everyone
else's).

(The graphics above are slightly misleading, as Saez notes that inequality is actually worse now than it's been since 1917.)

Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:

First,
the rich spend a smaller proportion of their wealth than the
less-affluent, and so when more and more wealth becomes concentrated in
the hands of the wealth, there is less overall spending and less
overall manufacturing to meet consumer needs.

Second, in both
the Roaring 20s and 2000-2007 period, the middle class incurred a lot
of debt to pay for the things they wanted, as their real wages were
stagnating and they were getting a smaller and smaller piece of the pie.
In other words, they had less and less wealth, and so they borrowed
more and more to make up the difference. As Reich notes:

Between
1913 and 1928, the ratio of private credit to the total national
economy nearly doubled. Total mortgage debt was almost three times
higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were
“no more poker chips to be loaned on credit,” in [former Fed chairman
Mariner] Eccles' words. And “when their credit ran out, the game
stopped.”

And third, since the wealthy accumulated more,
they wanted to invest more, so a lot of money poured into speculative
investments, leading to huge bubbles, which eventually burst. Reich
points out:

In the 1920s, richer Americans created stock and
real estate bubbles that foreshadowed those of the late 1990s and
2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a
peak of 381.2 eight years later, before it plunged. There was also
frantic speculation in land. The Florida real estate boom lured
thousands of investors into the Everglades, from where many never
returned, at least financially.

Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.

I am convinced that a fourth causal
connection between inequality and crashes is political. Specifically,
when enough wealth gets concentrated in a few hands, it becomes easy
for the wealthiest to buy off the politicians,
to repeal regulations, and to directly or indirectly bribe regulators
to look the other way when banks were speculating with depositors
money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy.

As John Kenneth Galbraith noted in The Great Crash, 1929,
Laissez-faire deregulation was the order of the day under the
Coolidge and Hoover administrations, and the possibility of a
financial meltdown had never been seriously contemplated. Professor
Irving Fisher of Yale University - the Alan Greenspan, Robert Rubin or
Larry Summers of his day - had stated authoritatively in 1928 that
"nothing resembling a crash can occur".

Indeed, when enough money
is concentrated in a couple of hands, the affluent can lobby to
appoint to government positions, pay to endow prominent university
chairs, and create think tanks and other opportunities for economics
professors who spout the dogmas "everything will always remain stable
because we've got if figured out this time" and "don't worry about
fraud" to gain prominence. For example, Bill Black has written about The Olin Foundation's promotion over the last couple of decades of these dogmas.

As Joseph Stiglitz says:

One
big part of the reason we have so much inequality is that the top 1
percent want it that way. The most obvious example involves tax policy.
Lowering tax rates on capital gains, which is how the rich receive a
large portion of their income, has given the wealthiest Americans close
to a free ride. Monopolies and near monopolies have always been a
source of economic power—from John D. Rockefeller at the beginning of
the last century to Bill Gates at the end. Lax enforcement of
anti-trust laws, especially during Republican administrations, has been
a godsend to the top 1 percent. Much of today’s inequality is due to
manipulation of the financial system, enabled by changes in the rules
that have been bought and paid for by the financial industry itself—one
of its best investments ever. The government lent money to financial
institutions at close to 0 percent interest and provided generous
bailouts on favorable terms when all else failed. Regulators turned a
blind eye to a lack of transparency and to conflicts of interest.

***

Wealth
begets power, which begets more wealth .... Virtually all U.S.
senators, and most of the representatives in the House, are members of
the top 1 percent when they arrive, are kept in office by money from
the top 1 percent, and know that if they serve the top 1 percent well
they will be rewarded by the top 1 percent when they leave office. By
and large, the key executive-branch policymakers on trade and economic
policy also come from the top 1 percent. When pharmaceutical companies
receive a trillion-dollar gift—through legislation prohibiting the
government, the largest buyer of drugs, from bargaining over price—it
should not come as cause for wonder. It should not make jaws drop that a
tax bill cannot emerge from Congress unless big tax cuts are put in
place for the wealthy. Given the power of the top 1 percent, this is
the way you would expect the system to work.

(Congress is also exempt from insider trading laws.)

The
fourth factor exacerbates the first three. Specifically, when the
wealthy have enough money to drown out other voices who might otherwise
be heeded by legislators and regulators, they can:

• Skew the tax code and other laws so that they can get even wealthier

• Encourage
  a debt bubble (Bill Black has repeatedly explained that the fraudsters
  blow huge bubbles, knowing that the government will bail them out when
  the bust leads to defaults)

• Create new Ponzi schemes for speculation

(Admittedly, there might not always be a direct connection, but all of the factors are at least intertwined.)

Reuters discussed Reich's first three factors last year:

Economists
are only beginning to study the parallels between the 1920s and the
most recent decade to try to understand why both periods ended in
financial disaster. Their early findings suggest inequality may not
directly cause crises, but it can be a contributing factor.

***

There
is little agreement among economists about what precisely links high
inequality to crises, which helps explain why so few officials saw the
financial upheaval coming.

Rapid expansion of credit is one common thread.

***

Raghuram
Rajan, a professor at the University of Chicago's Booth School of
Business and a former chief economist of the International Monetary
Fund, believes governments tend to promote easy credit when inequality
spikes to assuage middle-class anger about falling behind.

"One way to paper over the rising inequality was to lend so that people could spend," Rajan said.

In
the 1920s, it was expansion of farm credit, installment loans and
home mortgages. In the last decade, it was leveraged borrowing and
lending, by home buyers who put no money down or investment banks that
lent out $30 for each $1 held.

"Housing credit gave you an
instrument to assist those falling behind without them feeling they're
beneficiaries of some sort of subsidy," Rajan said. "Even if their
incomes are stagnant, they feel really good about becoming
homeowners."

Another theory is that concentration of wealth at
the top sends investors searching for riskier interest-bearing
savings. When so much cash is sloshing around, traditional safe
investments such as Treasury debt yield very little, and wealthy
investors may seek out fatter returns elsewhere.

Mark Thoma,
who teaches economics at the University of Oregon, wonders if the
flood of investment cash from the ultra-rich -- both in the United
States and abroad -- encouraged Wall Street to create seemingly safe
mortgage-backed securities that later proved disastrously risky.

"When we see income inequality rising, we ought to start looking for bubbles," he said.

Kemal
Dervis, global economy and development division director at Brookings
and a former economy minister for Turkey, said reducing inequality
isn't just a matter of fairness or morality. An economy based on
consumption needs consumers, and if too much wealth is concentrated at
the top there may be times when there is not enough demand to support
growth.

"There may be demand for private jets and yachts, but
you need a healthy middle-income group (to drive consumption of basic
goods)," he said. "In the golden age of capitalism, in the 1950s and
60s, everyone shared in income growth."

The fact that economists
are even examining the link between inequality and financial crises
shows just how much the thinking has changed in the wake of the Great
Recession.

***

Ajay Kapur, a Deutsche Bank strategist, spotted the
inequality parallels between the 1920s and the most recent decade, but
didn't see the meltdown coming. The former Citigroup strategist
created a stir five years ago when he built an investment strategy
around his thesis that essentially divided the world into two camps:
the rich and the rest.

Kapur told clients in 2005 that the
United States and a handful of other economies were developing into
"plutonomies" where the wealthy few powered economic growth and
consumed much of its bounty, while the "multitudinous many" shared the
leftovers.

Plutonomies come around only once or twice a
century, he argued -- 16th century Spain, 17th century Holland, the
Gilded Age. The last time it happened in the United States was during
the "Roaring 1920s".

***

At least one new arrival to
Washington's policy-making scene, Fed Vice Chairman

Janet Yellen, has
expressed concern that extreme inequality could ultimately undermine
American democracy.

"Inequality has risen to the point that it
seems to me worthwhile for the U.S. to seriously consider taking the
risk of making our economy more rewarding for more of the people," she
wrote in a 2006 speech.

No One Likes Inequality

The father of modern economics - Adam Smith - didn't believe
that inequality should be a taboo subject. As Warren Buffet, one of
America's most successful capitalists and defenders of capitalism, points out:

There's class warfare, all right, but it's my class, the rich class, that's making war ....

Conservatives - as well as liberals - are against rampant inequality. If Americans understood how much inequality we have, they would be outraged.

For example, Dan Ariely of Duke University and Michael I. Norton of Harvard Business School demonstrate that Americans consistently underestimate the amount of inequality in our nation. As William Alden wrote last September:

Americans
vastly underestimate the degree of wealth inequality in America, and
we believe that the distribution should be far more equitable than
it actually is, according to a new study.

Or, as the study's
authors put it: "All demographic groups -- even those not usually
associated with wealth redistribution such as Republicans and the
wealthy -- desired a more equal distribution of wealth than the status
quo."

The report ... "Building a Better America -- One Wealth
Quintile At A Time" by Dan Ariely of Duke University and Michael I.
Norton of Harvard Business School ... shows that across ideological,
economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the real number is closer to 84 percent.

Worse Than Third World Banana Republics

Inequality in the United States is at insane levels. Inequality among Americas is worse than in Egypt, Tunisia or Yemen. As NPR notes, inequality is higher in America than in many Latin America banana republics. And social mobility is lower in America than in most European countries (and see this, this and this).

Inequality between Wall Street and Main Street harms the economy. For example, Steve Keen notes
that "a sustainable level of bank profits appears to be about 1% of
GDP", and higher bank profits lead to a Ponzi economy and a
depression.

Moreover, as the Atlantic points out, inequality is fracturing the nation geographically as well:

Most
stories about inequality in America miss an important point: rising
disparities are not just about investment bankers versus auto workers.
They’re about entire communities of “winners” and “losers.” And as
these communities continue to diverge, the idea of “an American
economy” looks more and more like an anachronism.

Economics professor Robert Frank noted last year:

In a recent working paper
based on census data for the 100 most populous counties in the United
States, Adam Seth Levine (a postdoctoral researcher in political
science at Vanderbilt University),
Oege Dijk (an economics Ph.D. student at the European University
Institute) and I found that the counties where income inequality grew
fastest also showed the biggest increases in symptoms of financial
distress.

For
example, even after controlling for other factors, these counties had
the largest increases in bankruptcy filings.

Divorce rates are another reliable indicator of
financial distress, as marriage counselors report that a high proportion
of couples they see are experiencing significant financial problems.
The counties with the biggest increases in inequality also reported the
largest increases in divorce rates.

Another footprint of financial distress is long
commute times, because families who are short on cash often try to make
ends meet by moving to where housing is cheaper — in many cases,
farther from work. The counties where long commute times had grown the
most were again those with the largest increases in inequality.

And as WBUR reports:

Two
British epidemiologists say inequality is a public health issue, a
national health issue. From crime rates to drug use to teenage
pregnancy to heart disease and more, they say, the evidence shows
inequality makes countries sick, even the rich.

Government Policy Is Increasing Inequality

The New York Times notes:

Economists
at Northeastern University have found that the current economic
recovery in the United States has been unusually skewed in favor of
corporate profits and against increased wages for workers.

In
their newly released study, the Northeastern economists found that
since the recovery began in June 2009 following a deep 18-month
recession, “corporate profits captured 88 percent of the growth in real
national income while aggregate wages and salaries accounted for only
slightly more than 1 percent” of that growth.

The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007-2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.

***

The
share of income growth going to employee compensation was far lower
than in the four other economic recoveries that have occurred over the
last three decades, the study found.

Robert Reich has noted:

Some
cheerleaders say rising stock prices make consumers feel wealthier
and therefore readier to spend. But to the extent most Americans have
any assets at all their net worth is mostly in their homes, and those
homes are still worth less than they were in 2007. The "wealth effect"
is relevant mainly to the richest 10 percent of Americans, most of
whose net worth is in stocks and bonds.

AP writes:

The recovery has been the weakest and most lopsided of any since the 1930s.

After
previous recessions, people in all income groups tended to benefit.
This time, ordinary Americans are struggling with job insecurity, too
much debt and pay raises that haven't kept up with prices at the
grocery store and gas station. The economy's meager gains are going
mostly to the wealthiest.

Workers' wages and benefits make up
57.5 percent of the economy, an all-time low. Until the mid-2000s, that
figure had been remarkably stable -- about 64 percent through boom and
bust alike.

David Rosenberg points out:

The
"labor share of national income has fallen to its lower level in modern
history ... some recovery it has been - a recovery in which labor's
share of the spoils has declined to unprecedented levels."

The above-quoted AP article further notes:

Stock
market gains go disproportionately to the wealthiest 10 percent of
Americans, who own more than 80 percent of outstanding stock, according
to an analysis by Edward Wolff, an economist at Bard College.

Indeed, as I reported last year:

As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.

***

(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)

Professor G. William Domhoff demonstrated that the richest 10% own 98.5% of all financial securities, and that:

The
top 10% have 80% to 90% of stocks, bonds, trust funds, and business
equity, and over 75% of non-home real estate. Since financial wealth
is what counts as far as the control of income-producing assets, we
can say that just 10% of the people own the United States of
America.

The New York Times notes:

The
median pay for top executives at 200 big companies last year was
$10.8 million. That works out to a 23 percent gain from 2009.

***

Most ordinary Americans aren’t getting raises anywhere close to those
of these chief executives. Many aren’t getting raises at all — or even
regular paychecks. Unemployment is still stuck at more than 9
percent.

***

“What is of more concern to shareholders
is that it looks like C.E.O. pay is recovering faster than company
fortunes,” says Paul Hodgson, chief communications officer for
GovernanceMetrics International, a ratings and research firm.

According to a report released by GovernanceMetrics
in June, the good times for chief executives just keep getting
better. Many executives received stock options that were granted in
2008 and 2009, when the stock market was sinking.

Now
that the market has recovered from its lows of the financial crisis,
many executives are sitting on windfall profits, at least on paper. In
addition, cash bonuses for the highest-paid C.E.O.’s are at three
times prerecession levels, the report said.

***

The
average American worker was taking home $752 a week in late 2010, up a
mere 0.5 percent from a year earlier. After inflation, workers were
actually making less.

AP points out that the average worker is not doing so well:

--
Unemployment has never been so high -- 9.1 percent -- this long after
any recession since World War II. At the same point after the previous
three recessions, unemployment averaged just 6.8 percent.

-- The
average worker's hourly wages, after accounting for inflation, were
1.6 percent lower in May than a year earlier. Rising gasoline and food
prices have devoured any pay raises for most Americans.

-- The
jobs that are being created pay less than the ones that vanished in the
recession. Higher-paying jobs in the private sector, the ones that pay
roughly $19 to $31 an hour, made up 40 percent of the jobs lost from
January 2008 to February 2010 but only 27 percent of the jobs created
since then.

Part of the widening gap is due to the fact that most American companies' profits are driven by foreign sales and foreign workers. As AP noted last year:

Corporate profits are up. Stock prices are up. So why isn't anyone hiring?

Actually,
many American companies are — just maybe not in your town. They're
hiring overseas, where sales are surging and the pipeline of orders is
fat.

***

The trend
helps explain why unemployment remains high in the United States,
edging up to 9.8% last month, even though companies are performing
well: All but 4% of the top 500 U.S. corporations reported profits this
year, and the stock market is close to its highest point since the
2008 financial meltdown.

But the jobs are
going elsewhere. The Economic Policy Institute, a Washington think
tank, says American companies have created 1.4 million jobs overseas
this year, compared with less than 1 million in the U.S. The
additional 1.4 million jobs would have lowered the U.S. unemployment
rate to 8.9%, says Robert Scott, the institute's senior international
economist.

"There's a huge difference
between what is good for American companies versus what is good for
the American economy," says Scott.

***

Many of the products
being made overseas aren't coming back to the United States. Demand
has grown dramatically this year in emerging markets like India, China
and Brazil.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate ... that is, not only do they pay no taxes, but they actually get tax refunds.

As mentioned above, a rising stock market mainly benefits the wealthy. And yet the Federal Reserve has more or less admitted that it is putting tremendous effort and resources into boosting the stock market.

Quantitative
easing doesn't help Main Street or the average American. It only
helps big banks, giant corporations, and big investors. See this and this. And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy's paycheck, and thus makes the poor even poorer.

As I noted in March 2009:

The
bailout money is just going to line the pockets of the wealthy,
instead of helping to stabilize the economy or even the companies
receiving the bailouts:

• Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes

• A lot of the bailout money is going to the failing companies' shareholders

• Indeed, a leading progressive economist says that the
  true purpose of the bank rescue plans is "a massive redistribution
  of wealth to the bank shareholders and their top executives"

• The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws
  which rewards mergers in the banking industry (this has caused a lot
  of companies to bite off more than they can chew, destabilizing the
  acquiring companies)

The Fed has given trillions to the biggest banks, and virtually nothing to main street. This has gone to Wall Street bonuses and made the big banks' executives richer, but the rest of us poorer (and it hasn't help the economy).

As I wrote in 2008:

The
game of capitalism only continues as long as everyone has some money
to play with. If the government and corporations take everyone's
money, the game ends.

The fed and Treasury are not
giving more chips to those who need them: the American consumer.
Instead, they are giving chips to the 800-pound gorillas at the poker
table, such as Wall Street investment banks. Indeed, a good chunk of
the money used by surviving mammoth players to buy the failing behemoths
actually comes from the Fed.

And Tyler Durden notes today, summarizing many of the above-described trends:

In
today's edition of Bloomberg Brief, the firm's economist Richard
Yamarone looks at one of the more unpleasant consequences of Federal
monetary policy: the increasing schism in wealth distribution between
the wealthiest percentile and everyone else. ... "To the extent that
Federal Reserve policy is driving equity prices higher, it is also
likely widening the gap between the haves and the have-nots....The disparity between the net worth of those on the top rung of the income ladder and those on lower rungs has been growing. According to the latest data from the Federal Reserve’s Survey of Consumer Finances, the total wealth of the top 10 percent income bracket is larger in 2009 than it was in 1995. Those further down have on average barely made any gains. It
is likely that data for 2010 and 2011 will reveal an even higher
percentage going to the top earners, given recent increases in stocks."
Alas, this is nothing new, and merely confirms speculation that the
Fed is arguably the most efficient wealth redistibution, or rather
focusing, mechanism available to the status quo. This is best summarized
in the chart below comparing net worth by income distribution for
various percentiles among the population, based on the Fed's own data.
In short: the richest 20% have gotten richer in the past 14 years,
entirely at the expense of everyone else.

***

Lastly, nowhere is the schism more evident, at least in market terms, than in the performance of retail stocks:

Saks
chairman Steve Sadove recently remarked, “I’ve been saying for several
years now the single biggest determinant of our business overall, is
how’s the stock market doing.” Privately-owned Neiman- Marcus reported
“In New York City, business at Bergdorf Goodman continues to be
extremely strong.”

In contrast, retail giant Wal-Mart talks of
its “busiest hours” coming at midnight when food stamps are activated
and consumers proceed through the check-outs lines with baby formula,
diapers, and other groceries. Wal-Mart has posted a decline in
same-store sales for eight consecutive quarters.

(Indeed, as CNN Money pointed out in March, "Wal-Mart's core shoppers are running out of money much faster than a year ago ...")

Durden also notes:

Another
indication of the increasing polarity of US society is the disparity
among consumer confidence cohorts by income as shown below, and
summarized as follows: "The increase in equity prices has raised
consumer spirits, particularly among higher-income consumers. The
Conference Board’s Consumer Confidence index for all income levels
bottomed in February/March of 2009. The recovery since then has been
notable across the board, but nowhere as much as for those making
$50,000 or more."

Indeed, that could be a fifth factor
(adding to Reich's third factor and the fourth factor of political
corruption): inequality dampens the confidence of most consumers.

The bottom line is that government policy is increasing inequality by helping the big boys and hurting just about everyone else.

Comments

[ebworthen]

Oh dear, I believe I smell an elitist.

[John_Coltrane]

To summarize the article:  Rich($) >> Poor($), but we want Rich($) ~ Poor($) for some obscure reason.

To understand the plight of the poor/underemployed just watch a Jerry Springer episode.

Suggested next topic:  IQ inequality and/or running speed inequality.

[Bitch Tits]

Meh. Doesn't explain it for me. I've lived for quite a while and rarely run into the kind of total idiots that are hired to be so on a TV show. Most people are actually quite intelligent and can fully comprehend when they are getting butt-f*#$ed and why.

[Kreditanstalt]

But you STILL haven't explained why we would be better off with "government as regulator" + rigged markets & guaranteed returns...when the alternative of "totally unfettered capitalism + inequality" might actually make a stronger, more self-responsible and more skeptical investing citizenry.

[Bitch Tits]

I'm all for totally unfettered Capitalism as long as we start with a level playing field. The kind of capitalism we have now looks a lot like the playground bully is making all the rules.

[Ranger4564]

I am not for totally unfettered free market capitalism, but don'tworry... the inaction by the many may be allowing just that to come into place.  The best case scenario is that a free market system is installed, once the financiers eliminate the legislative bodies.  I don't think you will like what will arrive... but what does it matter... it may come.  Worst case or maybe not even worst, is a return of Feudalism, where everyone is saddled by a debt, and indentured servitude is restored.  You won't own anything, because the financiers will have confiscated it as part of the debt collateral, but the debt must be repaid.  One of my colleagues, always the optimist, self serving prick... he claimed not everyone during feudalism was poor or trapped to the land.  Yay, not everyone.  Perhaps he's hoping he will be one of the free wealthy fuckers.

Enter the French Revolution II, but more so on a broader multinational scale.  It is inevitable if the financiers take us into feudal territory or worse... slavery / mass execution / mass imprisonment.  Do you see what is allowed to happen, and even incited in Afica? 

If some of you would consider the options available at the tipping point we're all looking at, maybe you'd join me and others in taking actions to prevent a catastrophic turn of events. Or you can sit around and gloat that the miserable wretches and their fucking entitlements are getting just what they deserve.  Do you not see how misanthropic that POV is?  It's just fucking stuff, and you don't even own it really... you happen to have your hands around it or sitting on it for now, but in the end, you will have to move on, and someone else will move in. Why not make life enjoyable for everyone who is here, for just a short time?  Why make it a fucking living hell?  Grow up already.

[ebworthen]

If you have the money you can buy the politicians and the lawyers.

...Until the mob arrives...

[Audacity17]

You mean the rich are investing in tax free munis and stocks of multinationals that employ people in freer markets instead of creating jobs here where they can be harassed daily by our government??  Im shocked, shocked, I say.

[Bitch Tits]

Oh please, the rich are the government. How can they harass themselves?

[three chord sloth]

Sigh. So many words from so many people, yet so little insight.

The primary driving force behind the ever-growing wage inequality wasn't even mentioned; in fact, many of the experts cited above are themselves part of the problem.

The root of the problem is this: the post-WWII rise and post-1960 explosion of "rule by technocratic elites". That is the force behind the de-industrialization of America. That is the force behind the financialization of America. That is force behind the over-regulation, over-legalization, over-centralization, and over-credentialization of America.

The technocratic elite were imagined, created, and nurtured to manage post-WWII America as a smoothly running, expertly tuned machine. They were to impartially balance competing interests, assure fair distribution of the fruits of the nation's labor, and guide the development of the citizenry... mind, body, & soul.

Instead, they reshaped the nation in their own image, to meet their own needs. They exported inconvenient industries, imported foreign-born serfs, crippled competing power bases, and gutted the non-technocrat middle class. They elevated the university and the text-book as the sole pathway to education and knowledge (a narrow, incomplete, and utterly self-serving viewpoint)... all the while devaluing every other form of learning. They exalt concepts and symbols, and denigrate the concrete. They abandoned truth for glib relativity, the eternal for the faddish, the universal for the tribal... and set themselves up as arbiters of it all.

In short, they rigged the whole system to funnel as much power, money, and opportunity to themselves as possible... leaving the rest of us to scramble for crumbs and fight over the leftovers.

[DOT]

Well Said, tcs, the statists have indeed rigged the game.

The Bureaucrat is now the Dictator.

Legislation is now rule making.

Denial of Liberty is Patriotic.

The Plantation has no borders.

[onthesquare]

Excellant summary.

What are your thoughts on their demonization of communism?

[anony]

++++

[AnAnonymous]

The demiurge fantasy is quite high among US citizens.

There is no shadow elite consiparation in the dark to break the US path to glory.

There is only elite that has been accompanied the initial US impulsion and course or an elite that has failed in curbing the US natural trend set at its inception.

The US course has not changed one bit since its start.

They abandoned truth for glib relativity, the eternal for the faddish, the universal for the tribal... and set themselves up as arbiters of it all.

What the use of so cheap propaganda? I could understand from professional propagandists, they will try to make money, uninspiredly though but still...

The US is as tribal as it was at start. Universal? It is common knowledge that the US proclaimed universal right to liberty and started as a slaver nation. What is the use of so cheap propaganda? Tribalism has been the nature of the US since 1776, 4th of July. The English King was more universalist than the US citizens. No change.

No export of industrial activity other than under the Smithian economics driving forces.

In Smithian economics, an area naturally disqualified itself through success to host a certain kind of low valued activity. That is the way it is. And the US has been successful, therefore disqualified itself to host certain activities.

And the US has supported Smithian economics?

No shadow elite working against the interests of US citizens.

Only US citizens disgruntled by what they sow and reap.

[4horse]

[three chord sloth]

No dark conspiracy is necessary in my explanation, just a well-established, widespread human foible -- self interest; combined with an ever-narrowing of the life experience of the movers-and-shakers -- the unitary perspective of the mass-produced, cookie-cutter college sieving & shaping process.

We've been stamping out our intellectual biodiversity, in the name of "professionalization"... and like a county planted with a single crop, we've traded resilience for brittleness.

The US is as tribal as it was at start. Universal? It is common knowledge that the US proclaimed universal right to liberty and started as a slaver nation. What is the use of so cheap propaganda? Tribalism has been the nature of the US since 1776, 4th of July. The English King was more universalist than the US citizens. No change.

Heh. Cheap propaganda indeed. Factually incorrect... and precociously faddish. But you'd get an "A" in most social "science" classes today.

[AnAnonymous]

Factually incorrect? How?

US proclaimed universal right to liberty? Checked.

US started as a slaver nation? Checked.

Tribalism being in the US since start? Checked (as shown by above)

Englisk King beating US on more universalism? Checked.

Doubts it would get me an A in any classroom in the US. Largely preferred: patriotic gibberish.

[That Peak Oil Guy]

All societies are somewhat constrained by the norms of the times.  Slavery was already well-established when the US was formed, and American pragmatism decided slavery was a topic best approached later in favor of unification of the States.  This topic was indeed revisited almost exactly one human lifetime later, after the old guard had died off and a new constellation of generations had opportunity to look at the hipocracy of their situation.  The result was one of the bloodiest times in history.  So we as Americans did not shirk from our duties of self-examination and penitence for our crimes.  We did delay it.  At the time of the Declaration of Independence the most important issue was defeating the British and creating a new, unified country.  By the time this was done the country had little will left to confront the incredibly divisive issue of slavery.  But we did come back to it and confront ourselves, almost at the expense of the unification we had acheived earlier.  As you can see, both issues could not have been solved at once.

Now we approach another great challenge to our nation.  But in what form will the crisis ultimately play?  Will we turn outward and risk another global war?  Or will we turn inward and once again test the unification of our nation?

Tribal Americans?  Absolutely, and proud of it.  The problem we have today is specifically that our current leaders are not tribal enough.  The collective gains its power from the individual, not the other way around.

TPOG

[AnAnonymous]

By the time this was done the country had little will left to confront the incredibly divisive issue of slavery.  But we did come back to it and confront ourselves, almost at the expense of the unification we had acheived earlier.  As you can see, both issues could not have been solved at once.

Maybe time to admit (big effort I know) that some stuff can not be covered up.

How can slavery be divisive if the nation was started for freedom?

The civil war was about slavery, big, big issue, the benefits that each side drew or did not draw from it, but it was not about emancipation.

Emancipation in the US came as a by product, a hap unwished by US citizens. That is the way it is. Bear with it.

[MisterMousePotato]

By Jove, I think you've got it. Most of it, anyway. Well put.

[dalkrin]

Outstanding effort went into producing this thorough article, it is obvious from the outset.  Thank you for relating this troubling trend. 

I used to be against these types of studies, as they tend to describe income as being something "distributed" or "received" rather than simply earned, be it by labor or returns on invested capital.

Now I find myself more uneasy as the game is clearly rigged, and not in the common citizen's favor.  Even if everyone were to see some nominal gains, the fact that inequality amongst Americans is charging ahead can only bode ill for social cohesion. 

Politics seems to be a lost cause for any hope of a course correction.  Best advice, for both the top 1% and the rest of us, might be to support the economy through purchasing the heaviest firepower the 2nd amendment allows.

[DaveyJones]

or shutting down the system by not playing

[ZenStick]

Good article but Jesus, coulda said it in 25 words or less.

In fact you did: The bottom line is that government policy is increasing inequality by helping the big boys and hurting just about everyone else.

[George Washington]

Sorry it's such a beast, but I had to "show my work".

[Ranger4564]

Your articles are always interesting to me, and I appreciate the effort and the point of view.  Don't let all the negativists dissuade you.  THis article was exceptionally thorough, which is what these negativists demand, but then they protest the thoroughness.  Oh well. 

I actually don't believe there is this much incompetence in such a large group of the best educated and most well paid persons within the GLOBE.  I am positive there is a conspiracy to dehumanize the world... and the longer people live in denial, the easier it all becomes for the oppressive douche bags.  It's obvious there is a war being waged by finance to eliminate governments, so they can have direct control of people without intermediaries / regulations / demands.  Hello Feudalism, again. 

It does no one any good to hope and intellectually require that the oppressors are absolutely not oppressing; it's just part of the world economy, nothing unusual.  Is anyone looking at the real world?

By the way, go to Youtube and watch this, from 13:00 on I guess, when Dr. Michael Hudson says basically what I keep saying.

watch?v=sU4Nvv5yqVg

Thanks again for your hard work on behalf of humanity.

[Ghordius]

Sorry for the double post, I can't resist:

When the former Sovjet Republics came back to the light, they faced an important decision. Should they mimic the West and set up a huge burocracy for taxes of should they do something "that works, cheaply"?

Their decision was a flat tax rate. Most of them have now a rate of 20%-22%, for everybody. Very effective. It works.

The "real" rate is of course only for those who have no transfer from the state, if you make only 10'000 a year and you get support for 5'000, the rate for you is negative.

The second worst tax collection scheme in the world is the German one. Only a very rich country can afford this kind of immense tax code, with literally thousands of loopholes, laws, a huge army of tax collectors, tax lawyers, policemen, etc.

Which inevitably leads to "the richer, the easier (the more tax lawyers work for you), the less you pay".

[Ghordius]

GW, did you ever stumble on Pareto's work on wealth distribution? The 80/20 Rule?

There is some fascinating power law rule behind this distribution effect I suspect you won't be ever able to change as a government or society, even in a communist regime.

Top post, by the way. I'm a bit skeptic about the 90% vs. 1% show, the missing 9% are crucial.

The biggest statistical issue with this matter is that wealth and income gets constantly confused.

---------------
Some ramblings about Pareto Distribution of wealth:

- When Athens decided to build a fleet the like the world had never seen before, the top 300 citizen had to sponsor one ship each. The next tiers had each a minimum contribution (with a horse & armor, with heavy armor, with light armor, etc.) set for wars and fiscal contribution. Fits in the Pareto pattern.
- Roman Republican fiscal policy was centered on the top 300's contribution (the senators), all the others did not have the wealth to contribute anything worthwhile, except for the above Athenian requirements. The Empire started in earnest when the Government focussed it's attention to the potential fiscal contribution of the (new) class of "second tier" wealthy, the "equites" (translated nowadays as "knights"). They were the logical/numerical expansion of the "top 1%". Fits the Pareto pattern.

My take on this: when the general population loses wealth, the lower tiers do it first and it takes decades to reset to the original Pareto pattern. The falling tide lowers all boats, just not at the same time, there is a time differential because of the different asset class distribution in the tiers of the population. On the other side, when the tide lifts all boat, the pattern is reversed IF rampant corruption does not favor the top 1%.

[RockyRacoon]

Yeah, and if you'd said less you'd be getting criticism for lack of depth.

You did a great job.   Lots of critics will pick out their least favorite economist to denigrate your article, yet skip the fact that it is now those very economists who are rethinking their premises.  

Thanks for your labors.

[disabledvet]

Save for Eccles where were all these folks when the collapse occurred?  the fire blocks were put in place by an entirely different set of folks.  i'm not sure where the difference between "rich and poor" factors in but i will say the government to the extent is "allowing" such gross inequalities is doing so out of necessity and not out of some "conspiratorial need."  since the demands on Federal authorities to manage our withdrawal from the Middle East while at the same time trying to push this economy on some type of growth path... the ability to "put the cherry on top" is severely constrained.  it's nothing short of a miracle that they have made it this far.  when the time comes to "exert the will of the State" on the requisite "pains in the ass" i have no doubt Federal Authorities will not hesitate to "clean out the scum who caused all this."  If market performance is any guide the folks who thought they were getting away with the collapse sure don't appear to be getting away with it right now.  And I must say i really am moving over to the Cramer view of The Bernank as "the guy who gets it."  Basically i just don't see the malice in the guy--of course having my eyes opened to those who oppose him has..."helped me along" as well.  How the nation can contenance what The Goldman not only did but admitted to doing is simply beyond me...come what may with me but there is no doubt in my mind that institution will pay the ultimate price.  Simply put finance itself cannot recover so long as that name exists.  It would be nice if none other than Hank Paulson would come forth and admit as such as well.  His is the only book--and it will go down in History as THE primary source.  How else to explain his expertise in dealing with the panic other than the fact that "he was running the company that was on the evil side" and therefore knew the threat and the need for the greatest possible response against their "Clear and Present Danger."  Besides "it's only terrorists that take responsibility" for their evil acts ex post facto, right?  "And there they were, right on cue..and in the people's House no less...

http://www.youtube.com/watch?feature=player_detailpage&v=9TjTb5bPZc0

[Herbert_guthrie]

Considering who the government is working for (fyi - the "American People" is just a political buzzword) this should not be a suprise.

CHANGE YOU CAN BELIEVE IN!

[zorba THE GREEK]

 The rich get richer and the poor get poorer.

 What's new?

[Hacked Economy]

There may be inequality, sure, but you can live within your means and stay out of debt to limit your exposure to their game.  Not sayin' the gross inequality is "fair", but a lot of people willingly make their personal financial situation worse than it needs to be, and fork over some of those big gains to the fat cats, while also complaining about it.  Makes no sense.

[AnAnonymous]

There may be inequality, sure, but you can live within your means and stay out of debt to limit your exposure to their game. 

Former coach who had plenty of little catch sentences sweating US citizenism.

One was "you dont win a match by staying on the bench"

In a consumption game, debt is good. The idea is not about getting out of debt, the way to lose, but how to get deeper into debt.

The US is not the solution, the US is the problem.

[Hacked Economy]

Wow.  I thought maybe you were just pulling my leg, but when I take this and combine it with your other comments over the past week...

...you really are clueless.  Any future input from you will therefore be treated as entertainment.

[AnAnonymous]

you really are clueless.

From a US citizen, it means a lot.

[G. Marx]

Your fascination and reliance on the Keynesian/Monetarist economists is a howler. Ezra Klein? He's a joke. What happened to Naomi? You seem to have a fascination with socialist named Klein as well. How telling.

[Raging Debate]

G. Marks, why are you giving Washington shit for providing multiple perspectives? That is called journalism. I loved it. As much as I admire the downtrodden 'little guys unite' spirit of attempting to evolve, one-hand clapping from one faction or another really gets hold and solves nothing. Not all global citizens are left-right radicals.  

[eureka]

the Keynesian/Monetarist economists...

upon whom the rich bail-out-entitlement-receiving-rich depend...

[JennifersBody]

I may agree on some of the negative effects of inequality, but inequality doesn't cause poor economic growth. It's poor economic growth that leads to inequality.

[ebworthen]

It's not the holes in Swiss cheese that make it taste the way it does, it's what makes it look like the moon.

[pitz]

The H1-B visa has ruined the US tech industry and the US economy, by deflating the wages of the most valuable workers in engineering, technology, and accounting, while inflating the pay of a select group of elites in government and in CxO positions.

Deporting all H1-B and Green Card holders would be an excellent first step towards restoring some of the equality.  Most Americans want a hand up, in being able to work, not a hand out.  H1-B is a massive hand out to a bunch of rich people who don't really need any more money.

[DOT]

Do you have any idea how expensive it is to hire through a H1-B ?

Is all you have left envy ?

[pitz]

With a word processing software package, its just a matter of filling in forms.  So simple even a HR clerk can do it. 

Expensive, hardly.  Firms often save 50% or more going through H1-B, and just the presence of a few H1-B's basically chills salary expectations amongst the non-H1-B's.

[donmindme]

What he said. Besides, H1-Bs ARE dead. OP, wake the fuck up. You don't want H1-B? Fine. They've already outsourced EVERYTHING. You happy now? At least with H1-B, they earn and spend money here.  

[pitz]

At least without the H1-B's, we'd still have the domestic capacity and the domestic people to rebuild the country once it collapses.  You think the H1-B's are going to stay in the USA when the currency collapses?  You're dreaming...

[Stuck on Zero]

Not just H1-Bs but the entire "globalism" doctrine.  It was pushed down our throats so that the wealthy could enslave the middle class with labor arbitrage.  This was alos fine for Wall Street because it has grown rich by absorbing the capital plowed back into the country by mercantilists.  Effectively, our rich are nothing more than traitors and cut-throats.   If you don't believe any of this then answer the question: "What is the value added by the banksters to gain their trillions?"

[Dburn]

+1

I read a story recently where many small and some large Chinese factories are without orders that had been full a year ago before wage increases for production workers increased to a range of $190 to $290 a month. Apparently that was just too much for American and European Companies so they are transferring work down to Vietnam where they can still find labor at $30/month. The generally accepted ratio is 10 Jobs to 1. Once the Chinese got to $300 /month on a rising tide of inflation and human expectations, they become a target as they are now at the magic threshold.

When I read things like that a real feeling of hopelessness occurs. I have traveled that area extensively. Switching countries for cheaper labor or goods is a non-trivial expense both in sheer dollars and man-power from the USA who have to consrtantly fly and live in the new country to bring them up to standards that are no more than marginally acceptable. It's common that as soon as the round eyes leave the material substitution starts, especially in a product that is built out of compounds. Also see counterfeit Chinese Chips at Zero Hedge with built in back doors to shut missles down.

The idea they are willing to go to that much trouble as labor becomes a smaller and smaller percentage of cost of goods sold tells me forces than just a better price is at work since shipping and cash cycles are enormously expensive. Trying to predict demand six months in advance can kill a company faster than anything. So why do it? Wall Street.

If you aren't outsourcing you are paying too much. The stock gets down-rated and executive bonuses retreat. There are a million ways for accountants to make imbalanced inventories look pretty on the balance sheet but it is hard to hide US based factories or even US based employment of tech workers, the upper tier of the middle class.

So it all comes back again to the banks and C-Suite Greed. Does anyone need to make 60 Million a year? Add up the corporate suite salaries at companies and compare them as a percent of or greater than the work force salaries and see the starkness of the inequality.

On the good side , even for small business who manufacturers here, if a big influential customer calls in and needs 1000 widgets with certain features, it's a matter of  days to  transition and days later the company is shipping out the first part of the order. You just can't do that with overseas manufacturing.

So is a VP worth 50-100 years of pay much less a CEO, of that of a top scientist that makes discoveries that can be commercialized adding billions over the life of the product? You have to wonder when you see a firm paying 3.4 Billion for what amounted to a patent protected versian of Niacin, a basic Vitamin that costs very little OTC and is a effective remedy with few side effects in keeping Cholesterol low.

Business is slow here for us small business people. I was called by a recruiter for knowledge in a programming language. Everything was just jiffy for 80-90K a year except  one major disqualification. My age. Whenever things got slow in the past I could easily find side gigs to fill in the holes, sometimes for years at a time. Then I just got too old at +50.

My advice to those who are frittering around in their 20s, 30s and even 40s? Get a goddamn job and work your fucking ass off and be grateful. Live like a pauper and save like a king. You're gonna need it. There is no protection for you if you haven't had significant and very public accomplishments by the time you reach you late 40s.

The risk vs reward for starting a small business is so far out of whack it only pays if one truly has some products or services that are proprietary with a significant barrier to entry. Research your ideas and then make goddamn sure you have an experienced devils advocate that has a macro and micro viewpoint . If you can't answer more than a few questions, you aren't ready.

I don't think it's particularly helpful to argue the way things should be. Far better to address the way things are, head-on, and deal with it.

[AnAnonymous]

 but the entire "globalism" doctrine. 

The New World (and that includes the US) is the result of the Globalism doctrine.

It was pushed down our throats

It was pushed down the throats of other people way before some US citizens were lightly hit back and those people had benefited from it much less than US citizens.

US citizens, always playing victims when they are the victimizers. Bully style...

[Bitch Tits]

Dude, there are 300+ million Americans who are white, black, irish, muslim, indian, christian, yellow, red, iranian, swedish, german, italian, and albino.

Then there are the 535 rich fuckers who make the rules.

If you think there is any difference at all between you and the average American, you are sorely mistaken.

[eureka]

535 rich fuckers...

so we need 535 ninjas to strike one crystal night...