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John Kenneth Galbraith and Marriner Eccles Explained 50 Years Ago that Inequality Causes Crashes
Preface: If you think that only liberals are concerned about inequality, guess again.
In his definitive study of the Great Depression, The Great Crash, 1929, John Kenneth Galbraith wrote:
There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:
(1) The bad distribution of income. In 1929 the rich were indubitable rich. The figures are not entirely satisfactory, but it seems certain that the five per cent of the population with the highest incomes in that year received approximately one-third of all income. The proportion of personal income received in the form of interest, dividends, and rent – the income, broadly speaking, of the well-to-do – was about twice as great as in the years following the Second World War.
This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitably, to more erratic influences and to wider fluctuations than the bread and rent outlays of the $25-week workman. This high bracket spending and investment was especially susceptible, one may assume, to the crushing news from the stock market in October 1929.
Galbraith wrote that in 1954.
Marriner S. Eccles - Federal Reserve chairman from 1934 to 1948 - made a similar point in his 1951 book Beckoning Frontiers:
As mass production has to be accompanied by mass consumption, mass
consumption, in turn, implies a distribution of wealth -- not of
existing wealth, but of wealth as it is currently produced -- to provide
men with buying power equal to the amount of goods and services offered
by the nation's economic machinery. Instead of achieving that kind of
distribution, a giant suction pump had by 1929-30 drawn into a few hands
an increasing portion of currently produced wealth. This served them as
capital accumulations. But by taking purchasing power out of the hands
of mass consumers, the savers denied to themselves the kind of effective
demand for their products that would justify a reinvestment of their
capital accumulations in new plants. In consequence, as in a poker game
where the chips were concentrated in fewer and fewer hands, the other
fellows could stay in the game only by borrowing. When their credit ran
out, the game stopped.
Numerous prominent economists in government and academia have since agreed that large inequalities can cause - or at least contribute to - financial crises, including:
Paul Krugman and Simon Johnson are also open to the possibility.
In addition, a large and healthy middle class has long been understood to lead to political stability. But America's middle class is being decimated.
Given that revolts are partly being waged in a number of Arabic countries because of inequality, and that inequality in America is worse than in Tunisia, Egypt or Yemen, this is a cause for concern.
As Robert Shiller said recently:
I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ [a reference to the "let them eat cake" statement of the soon-to-be-deposed French aristocracy] not through wishful thinking. We have to understand how we get inequality and what we can do about it.
Shiller said in 2009:
To me, I would hope that this would spur public discussion about the structural problem that inequality, economic inequality, has been worsening in the United States and in other countries for 30 years. And it's gotten really -- especially at the high end -- it's gotten really off.
And it's not like we want to level income. I'm not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.
This, I think, is potentially the big problem which is bigger than this whole financial crisis.
***
If these trends that we've seen for 30 years now in inequality continue for another 30 years, we're going to look like -- it's going to create resentment and hostility. It's not a country that -- we could turn into a country that even the rich would rather not be in.
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USA killed the other 10 % period. Now the new Indians are the US middle class. The new US cavalry and the new pioneer : the man from the third world. Brave new world as the wheel spins again. And its the US capitalist who started the wheel spinning so fast by outsourcing his art so as to be part of the 1% international filthy rich. Can't stop that wheel turning now. Benbernankification in hot progress!!
Same problem as usual: since fabled equality or fair play ground or whatever, was firstly achieved in the US by robbing blind the Indians and distributing their assets through government pipes to the US citizenship, the question is as always the same:
Where are the Indians?
They mostly died I think. Euroasian diseases killed like 90% of them, leaving a huge vacuum for America to fill.
It seems more likely that the inequality isn't a cause but a symptom of the problem which is a system that has become such that a portion of the people are able to utterly exploit it to gain riches greater than Croesus while adding little worthwhile to the economy.
Nearly half of corporate earnings of US corporations come from offshore. Why or how are Americans not attached to those corporations going to share in that income and profit stream?
This rough idea make analysis based upon the past obsolete. Obsolete in terms of the structure of the political economy. Better wages or more income for Americans so they can consume more of the output of American corporations simply does not apply. Highly skewed income distribution will no longer explain things.
Remember this too, American corporations are not American, they just live here. The great CEO's and executive class is the same. They are residents of the world.
GW, I look forward to all your articles, and am overwhelmingly in agreement with almost everything contained within them, but I would not use such dubious "economists" as the rabidly statist JKG, Eccles, and Robert Reich to bolster your premises. "With friends like those ..." (you know the rest).
I second the motion re: suspicion of JKG. More specifically I am suspicious of modern day economists who, for political reasons, purposely distort the work by JKG (or Keynes for that matter).
Inequality is this context invariably means the solution proposed by those concerned will result in state defined equality. Kind of like what we have already except worse.
akak,
Go to Robert Reich's site and read his blog on Hoover. It is timeless.
Oh, you mean the "hands-off" Hoover, whose "laissez faire" economic policies were responsible for the Great Depression?
(Just kidding!)
I will check it out, and thanks for the reference --- although I remain HIGHLY skeptical of anything said or written by that little man with the big mouth (and the even bigger love of Big Government).
I'd suggest you read chapter 7 of Murray Rothbard's book America's Great Depression. It describes all the myriad ways that Hoover was anything but a laissez faire guy.
Oh, he occasionally talked a game in that direction but read especially the stuff about his bizarre browbeating of industrial groups to keep wages as high as possible no matter what.
These sorts of posts are getting a little old. Inequality is the root of the problem? How about a symptom. Regulatory capture and corruption lead to these sorts of massive imbalances. When the regular guy doesn't get a fair shake any more, that's when middle classes are decimated. We have a middle class that is saddled with an insurmountable amount of debt.... debt foisted upon them by banks and politicians who said that it was the path to the american dream. Now we have a middle class which has no mobility because they can't sell their house and newly-minted college grads who have non-dischargable student loan debt that they can't possibly service... since there are no jobs.
We don't need distribution of wealth. We need government to shrink about 90% and let people thrive once again. Instead we've become a nation of dependents.
Debt is money and money is debt! Debt is the american dream!!
A lot of the debt problem started when banks were allowed to peddle debt across state lines. In the '80s sometime. Before that states had a handle on the predatory debt thing.
Now the insurance companies say that if they are allowed to peddle insurance across state lines we will be better off.
The problem has been a lack of regulation. Not too much regulation.
There is that buzzword again. "Regulation".
We the people need to harness capitalism, not the other way around.
gh
The thing is, to the average small business guy there's plenty of regulation. More than enough. And he's barely able to keep up with it. But we're still waiting for the first fraud prosecution of anyone at any of the too big to fail banks. That's not a lack of regulation. It's a lack of enforcement.
Well, we sure do not want the government to be in the middle of spreading it around...there will be nothing to be 'spread' once they get a hold of it.
I have one fairly modest proposal and that would be to eliminate any gains taxes on money invested in start up companies. We need to do something to re-direct capital into the creation of new companies which is where most all new jobs are actually created.
The big corporations are not job creators domestically...they are job killers. Bernanke's money pump for Wall Street is great for PD's and for insiders dumping cheaply acquired stock, as we all know. But this money does not create new companies nor new jobs. As far as I can tell no one has seriously attempted to modify the tax code to incentivize new business formation.
I have a fairly outragous proposal myself - everyone learns about fractional reserve banking and its implications. Disregard any financial commentator who refuses to discuss it as they are only providing surface level commentary.
It was a GW article that first opened my eyes to the way private banks create money out of nothing.
Bravo!
Yes and sneezing causes colds.
True dat. Inequality is a symptom the same way the crashes themselves are a symptom.
Jeez, I thought that is what I said in another post about an hour ago.
You guys are giving me the heebie-jeebies!
On another note:
I've been doing a privately funded study into the possible causes of headaches. My research involves limes and I believe I have found a link between limes and headaches.
I have been consuming limes in some quantity. Not large quantitys. Maybe a couple small limes at a time. Limes are pretty tart, so to make the experiment more "palatable" I have been clearing my palate with Corona. I believe I may be on to something. Every time I conduct these extensive tests, I end up with a headache.
I'll keep up the research.
Sincerely,
gh
yea, tell me about it. in 2005 (when i was stupid) i purchased a condo in MICHIGAN. now, 5 years later i want to move out of this freezing cold, desolate & abandoned state & this condo ain't worth shit ! the guy across the street from me listed his condo for $265,000 a few years ago, it didn't sell. last year he finally sold it for $135,000 . so, that crap about always "buying the nicest house you can afford" was jus a big scam perpetrated by the real estate business & our government. it's still downhill from here / no one cares anymore / no one even wants to borrow money to sink into housing ............ RENT !!! ..........