The Winner-Take-All Economy

Tyler Durden's picture

When the majority of Americans examine the world around them, they see a stock market at record highs and modest apparent improvement in the economy, but, as John Hussman notes, they also have the sense that something remains terribly wrong, and they can't quite put their finger on it.

Exceprted from John Hussman's Weekly Market Comment,

According to a recent survey by the Federal Reserve, 40% of American families report that they are “just getting by,” and 60% of families do not have sufficient savings to cover even 3 months of expenses. Even Fed Chair Janet Yellen seemed puzzled last week by the contrast between a gradually improving unemployment rate and persistently sluggish real wage growth.

We would suggest that much of this perplexity reflects the application of incorrect models of the world.

Before the 15th century, people gazed at the sky, and believed that other planets would move around the Earth, stop, move backwards for a bit, and then move forward again. Their model of the world – that the Earth was the center of the universe – was the source of this confusion.

Similarly, one of the reasons that the economy seems so confusing at present is that our policy makers are dogmatically following models that have very mixed evidence in reality.


Several factors contribute to the broad sense that something in the economy is not right despite exuberant financial markets and a lower rate of unemployment. In our view, the primary factor is two decades of Fed-encouraged misallocation of capital to speculative uses, coupled with the crash of two bubbles (and we suspect a third on the way). This repeated misallocation of investment resources has contributed to a thinning of our capital base that would not have occurred otherwise. The Fed has repeatedly followed a policy course that sacrifices long-term growth by encouraging speculative malinvestment out of impatience for short-term gain. Sustainable repair will only emerge from undistorted, less immediate, but more efficient capital allocation.

In recent years, the U.S. has experienced a collapse in labor participation and weak growth in labor compensation, coupled with an increasingly lopsided distribution of whatever benefits the recent economic recovery has generated. This is not well-explained by Phillips Curves or simplistic appeals to "insufficient demand," and it is unlikely to be improved by endless monetary “stimulus” (the targets that clearly occupy the Fed’s thinking). While our economic challenges can be largely traced to more than a decade of persistent Fed-enabled misallocation of capital, most of the costs of this misallocation have fallen on labor because of a) shifting composition of labor demand that has resulted from an increasing share of international trade with countries with heavy populations of relatively unskilled labor; and b) economic features that increasingly create a “winner-take-all” distribution of economic gains. 

One of the key results in international economics is that as trade opens up between nations, those nations will tend to export goods that intensely use the factor (skilled labor, unskilled labor, capital) with which they are relatively well-endowed. In a world where we have opened up trade with countries that are densely populated with unskilled workers, and where the U.S. is relatively better endowed with skilled labor and capital, the result has been something of a hollowing out of the middle class among households that aren’t themselves endowed with skilled labor or capital. Essentially, the U.S. obtains the services of low-skilled labor more cheaply from abroad than domestically. There is no great debate on this point.

Meanwhile, transfer payments like welfare and unemployment compensation allow many households to maintain consumption despite being out of those jobs, and given the ability of households to take on debt, even if they are actually living paycheck to paycheck, the produced goods get purchased, companies make a profit, government runs a deficit, the Fed keeps interest rates low which allows all the debt to be serviced, and everyone is pleasantly, if unsustainably, happy. That’s particularly true as long as nobody asks how the debt will be repaid, which is certainly what Fed policy encourages.

Now, looking at nations as a whole, academic economists proudly derive various theorems to prove that both nations actually benefit in aggregate from international trade. The problem, however, is in the distribution of those gains. This is particularly true in what might be called “winner-take-all” economies.

Why do professional athletes, movie actors, and even some 23-year-old computer programmers earn so much more than teachers, nurses, and factory-line workers? The answer is simple. They’ve found a way to spread the impact of their efforts over a very large number of individuals, while the teachers, nurses, and factory-line workers can apply their efforts to a dramatically smaller number of “units,” be they students, patients, or boxes of Corn Flakes. For massive too-big-to-fail banks, the units are dollars. The downside is that as certain winners are able to spread their efforts over an enormous number of people, the required number of winners declines – ask anyone who has ever tried to become a movie actor or a pro-basketball player. International trade and internet communications, among other developments, have significantly increased that tendency toward winner-take-all outcomes. When that effect is expanded through international trade, the result is that yes, each country benefits in aggregate, but you also observe a “hollowing out” of the middle class, particularly for families that don’t have labor or capital that shares in the distribution.


As for the U.S. economy, QE-induced speculation misallocates resources that might otherwise contribute to long-run growth, and while conditions could certainly be worse, the benefits of this economic recovery have been highly uneven. Again, 40% of families report that they are “just getting by,” with the majority essentially living paycheck to paycheck without enough savings to cover even a few months of expenses. We could be, and should be doing better, except that this complex adaptive system of ours responds to good incentives as well as bad ones, and has been repeatedly crippled by policies that have produced waves of malinvestment, bubble, and collapse. The economy is starting to take on features of a winner-take-all monoculture that encourages and subsidizes too-big-to-fail banks and large-scale financial speculation at the expense of productive real investment and small-to-medium size enterprises. These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions. The Federal Reserve is right to wind down quantitative easing, and would best terminate reinvestment of maturing holdings, ideally beginning in October or quickly thereafter. The issue is not whether the U.S. economy does or does not need “life support.” The issue is that QE is not life support in the first place.

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FilthyHabits's picture




ahh dichotomy...


Elliptico's picture

Oh, I think we get it. It's only a question of how far the slaves can be pushed before they revolt.

cougar_w's picture

That might be the question, but I'm not sure. I can see a number of other "interesting" outcomes besides that one.

Alhazred's picture

anyone notice how a cougar is never the wrong answer?

willwork4food's picture

What rhymes with orange?

OK, now what's my prize?

ugmug's picture

Turn off the cable and computer game server connection and you'll see the biggest protest ever amassed in civilized history as they all search for more pot to smoke their way back to utopia. People are dumb and lazy....nothing more.

NOTaREALmerican's picture

They are also not unhappy.   

The smart-n-savvy have done an amazing job at providing the bullshit and bling required to keep the Trash Class just happy enough not to be revolving. 

August's picture

Now there you go again... bitchin' about Jeb and Hillary.

Look... a Muslim!

Bastiat's picture

Funny, back in the early 70s I used to say there would never be a revolution as long as there were TVs.  On the other hand, the TV images of the Vietnam war  (back before the temporary aberration of a somewhat free press was corrected) fueled the popular protest and end of it.  

Stuck on Zero's picture

The SSS (draft) fueled the Vietnam protests more than television.

Alhazred's picture

the slaves dont revolt.

governments have gotten far too good in being little preasure cookers.  Never quite enough preasure to explode, they always let the overly excited types out a little at a time, and never need to bring down or stop the heat of taxation or regulation.


why do you think we keep taking refuges from mexico?  its because if we didnt, they and the rest of south america would be in civil war mode in less than 5 years.

NOTaREALmerican's picture

Who cares about the Trash Class.  

Survival of the fittest, BITCHEZZZZ!!!  

Sure, it's tough when your above-average kids turn out to be food for the REAL above-average kids; but REAL Mericans suck-it-up, and move on, knowing that by not bitching about the greatest country in the entire world they won't be accused of being like "those people".  

dbTX's picture

The winners always take it all.

cougar_w's picture

The framing of the article as poor. Has less to do with winners when this is not an actual contest. More like piracy and theft. When you frame it that way the whole point of who gets and who keeps becomes silly.

They are taking what is not theirs, we should not be debating about how much gets spread around later.

cougar_w's picture


Welcome to the lottery economy.

all-priced-in's picture

I could barely read the whole thing - bla bla bla -  boring as hell -

I see things a little differently - I am more concerned about our government changing things over to a loser gets an equal share.

Winner takes all at least someone wins - in a loser get an equal share everyone becomes a loser.



ugmug's picture

Put the word 'economics' in any title or headline and nobody will read it...

duo's picture

The medical-industrial complex mis-allocates $2T of capital a year.

NOTaREALmerican's picture

Well,  depends if you're one of the OldFarts getting unlimited new hips, or the doctors doing the work, or the hospital administrators collecting some skim.  

Mis-allocation of capital is a Libertarian morality that doesn't apply in the REAL world of entitled adults (aka, those who live by duplicity).

Alhazred's picture

i dont think you understand "Mis-allocation" as applied to capital in the framework of catalytics.


It does not have any connotation of "good" or "bad" or anything so related to frame of reference, it only refers to capital invested in a manor less than optimal due to influences of outside forces modifying the praxiological environment.

the term has nothing to do with positional referece, so your 'Well,  depends if you're one of the OldFarts getting unlimited new hips, or the doctors doing the work, or the hospital administrators collecting some skim.' is a non sequitor.

It is true that many of us find Mis-allocation of resources bad, but this value judgement is not a part of the term it self.


NOTaREALmerican's picture

Re:  It does not have any connotation of "good" or "bad" or anything so related to frame of reference

This sounds like Krugman's defense that "macro economics isn't a morality play" and macro-economics doesn't pick the winners and losers it's just a model that says perpetual spending leads to perpetual growth and - therefore - the model MUST be followed because economics isn't (after-all) a "morality play". So, Krugman can shrug his shoulders and say "his economics" isn't what allowed the "bad people" to win; how could it be because there's NO morality in economic models (and then he sites himself as an expert reference to prove his point). 

In actual fact,  all economics is a morality play, and there are winners and losers resulting how well one is "positioned" to get the loot.

Re:  It is true that many of us find Mis-allocation of resources bad, but this value judgement is not a part of the term it self.

I was using the reality based view of the word "Mis-allocation".   Kinda like "Freedom Fighter".  

He's not a terrorist, he's a freedom-fighter.
That's not a mis-allocation of loot, I'm entitled to that new hip.
Infinite debt doesn't cause corruption, people do. 

Alhazred's picture

In a way your right but i feel you miss the point.

Krugman's keynsian economics is a morality play because it violates the property rights of others.  Even if it did produce growth(which it doesnt), it would still be immoral to do. 

You seem confused about the difference between the impartial study of praxiology and catalytics as done by Ludwig von Mises, and the sophestry of bubbling idiots like krugman.  Economics is rightly the study of cause and effect in the complex network of human interactions, it is conserned with finding what ends are achived with what actions.  it can be put to bad uses or to good uses, it is a neutral area of study.

as to the joking and humor in your post it did not register with me because i am a bland idiotic robotic dicionary.


Beep beep boop

hedgiex's picture

Economics are belief systems. The models from them are chosen to embelish the thuggeries.

August's picture

America produces the finest statins and SSRIs in the world!

Caviar Emptor's picture

Darwinian Capitalism was supposed to be winner take all. And when it wasn't, the winners turned to fascism aka crony capitalism so that they can have it all with the help of a police state

NoDebt's picture

I think you're closer to the truth than the article.

It's one thing to get it on your own.  It's another to write your own ticket and set up your own interconnected system of control that says you will always get it, no matter what.

bid the soldiers shoot's picture

I thought Darwinian Capitalism was "survival of the thievingest"

Fuku Ben's picture

Winner Take All

Sounds like low budget 80's porn movie

Alhazred's picture

no, the porn name of this article is


"Thinner takes all"


bid the soldiers shoot's picture

Orwell might have said: WINNERS SPLIT ALL!

Oceania, Eastasia, Eurasia

novictim's picture

You just figure this out, Tyler?

ramacers's picture

that's ok. we can claw back most from the 1-3% after "the fall". the money or your heads.

Cthonic's picture

That's the tragedy; trillions of real wealth mis-allocated and gone (pissed away on rat holes such as Detroit, ghost cities in Guangdong, firebases in Helmand, uber-embassy and green zone in Baghdad, and the like) ~ on net there is nothing to 'claw back' except promises made by the US Treasury and all the central banks.

unplugged's picture

Why don't you save me alot of time and just say "FASCISM"

NoWayJose's picture

It's election season again - where democrats are campaigning on tax breaks in order to attract more middle class manufacturing jobs. Companies like Burger King are taking their tax cut advice and moving out if the country. And of course, the reason they need to offer tax breaks is that they have raised taxes on all businesses too much! So should the US offer Burger King tax breaks to 'stay' in the US?

Alhazred's picture

They should give EVERYONE TAX BREAKS (as in no taxes at all)


Then i might find a burger king chain that will take my 90% junk at x15 face.  ( i want to buy a burger for a dime like me parents did)

(now i want 10 burgers per face values)

Seasmoke's picture

Picking the Winner. Take-ALL-Economoy. 


Fixed it. 

Cheduba's picture

"These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions."

The people writing these articles never get it.  The Federal Reserve's policies are designed to f*ck over everyone else in the world.

It is NOT accidental or didn't just "happen" to be this way.

BiPolarFrenchman's picture

The only vote you have that counts is the one you make with your wallet. Buy local, starve the beasts.

limacon's picture

Winner-takes-all is the end phase of the Tragedy of the Commons.

A few players end up with everone's marbles .

There is an out , for which Ostrum got the Nobel for Economics .


JayKitsap's picture

Although I am rather conservative, I think the Grand Stimulus and similar programs would have have strong positive effects if constructed right.  Our Gov't and the Fed are pushing money into the system with transfer payments and funding banks, but the bank funding basically says they can only buy Gov't paper, not make loans.

So we have thrown away Trillions, when we could have spent the same Trillions on real things - pipelines, new power grids, updated highways, etc. but please no Taj Mahal's.  That would have given jobs to those that need jobs and support main street not Wall Street.

Cthonic's picture

And so, my fellow Americans: ask not what Goldman Sachs can do for you — ask what you and your progeny did for Goldman Sachs.

17 Nov 2008 - 53.31

25 Aug 2014 - 177.87

"In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities. It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies."


Muppet's picture

Not this excerpt, but Hussman's latest weekly commentary is outstanding and highly recommeded reading.   One of his best .

lindaamick's picture

I call it the Monopoly Game economics.