Paul Krugman continues his illumination into the significance of a falling labor share, as he reads Thomas Piketty’s Capital in the 21st Century. Mr. Krugman rarely writes about labor share but that looks to be changing.
Piketty describes the growing power of capital income as “patrimonial capitalism”, where an elite gain control through inheritance and gained favor. Beatriz Webb explained this process over a century ago, so it is not a completely new insight. Capital income has been a monster of sorts growing in its power and dominance of the global economy.
Mr. Krugman points to the GOP as the culprit who set policies towards patrimonial capitalism…
“In short, the GOP is more and more a party that consistently, indeed reflexively, supports the interests of capital over those of labor. But why?”
Mr. Krugman is realizing the danger of a falling labor share of national income…
“So what we’re seeing is that half the political spectrum now instinctively accords much more respect to capital than to labor, at a time when capital income is growing ever more concentrated in a few hands — and is surely on its way to being concentrated largely in the hands of people who inherited their wealth.
“Curious, isn’t it?”
What is really curious is why Mr. Krugman and many other progressive economists support a monetary policy that is feeding the patrimonial capital monster. They think that accommodative monetary policy is the proper medicine for the economy, and they even ask for more of it… even to push beyond full employment with it. What they must eventually realize is that accommodative monetary policy is not a medicine but a substantial part of the overall poison that is slowly killing the wonderful economy that once was… when labor was able to influence politics and economic growth.
The fall in labor share must be reversed in order to have an effective Fed policy, a healthy inflation, healthy employment, a healthy population, a healthy society… a healthy world.
I have been writing about the fall in labor share through the lens of Effective Demand for a year. I have equations, models and predictions all laid out. I see the fall in labor share as the true poison in the economy and the reason why monetary policy is ineffective.
Now Mark Thoma is mentioning weak effective demand as a cause for low inflation and ineffective monetary policy. (video of lecture… 53:00 to 55:30) At the 55:15 point of the video, he mentions effective demand. But from what I see, I am the only economist calculating an effective demand limit upon the economy. What equation would Mark Thoma use to calculate effective demand? How does he evaluate it? I periodically send an email to Mark about my work. I was a constant commentator on his blog for a couple years. I highly respect his contributions to the econoblogosphere. Maybe he is seeing something in what I say.
Some say that raising the Fed rate would kill the economy and cause a recession. Well, Volcker raised the Fed rate to kill the inflation monster which resulted in a recession… and most praise his courage now. Raising the Fed rate now would cause a contraction, but it would go a long way to debilitating the patrimonial capital monster growing in power as it preys upon “our” economy. As Mr. Piketty focuses upon r-g, raising the Fed rate would lower r. Think about it Mr. Krugman. … a step toward putting economic power back into the hands of labor.
As Volcker saw inflation as a greater monster than a temporary recession, so we now can see patrimonial capitalism as a greater monster than a temporary recession. The capital monster must be attacked and wounded. If it isn’t, it will grow stronger and stronger, until we have a neo-feudalistic economy fulfilling M. Friedman’s dream of a government ruled by a benevolent dictator solely focusing on the order of law and military protection, while the free market becomes a glorious …. “thing”… where maximizing shareholder profits is the guiding rule.
Just look at the graph at Mr. Krugman’s post to see how maximizing shareholder profits is stacking up… The economy is terribly sick and the medicine is feeding the sickness.
To wrap up… Yes, accommodative monetary policy should have created more inflation and more investment, but due to the political-economic environment which leads to patrimonial capitalism and low effective demand, it is actually a poison making the economy worse as time goes on.
I continue to observe Mr. Krugman’s illumination into labor share.