Johnston: Income Inequality Increases as Bank Regulation, Prosecutions Decrease
Via Taxprofblog comes David Cay Johnston’s Income Inequality Increases as Bank Regulation, Prosecutions Decrease through Reuters, The Taxpayers’ Burden, by David Cay Johnston:
The accompanying graphic shows a fascinating correlation. In the years before New Deal regulation of banks and after the easing of regulations began in 1980, bank failures were quite high. So was income inequality.
But from about 1933, when the federal regulation of banks was put in place, to 1980, when Chicago School theories began to shape policy, bank failures were rare. During those years incomes were much more equal, with a prosperous middle class. …
Correlation is not causality, but the fact that income inequality rose as banking regulations were eased makes sense. Freed of restraints, banks got into all sorts of activities that generated fees and saddled clients with high-interest debt. And once banks could collect fees for mortgages without having to worry about repayment — because the mortgages were sold off by Wall Street — the crucial link between reward and responsibility was severed.
With loosened financial regulation it would seem smart to increase law enforcement. Instead, enforcement was cut, as the chart from Syracuse University’s Transactional Records Access Clearinghouse shows. Based on Justice Department internal reports, it shows criminal prosecutions involving financial firms down sharply since fiscal 1999.
These findings about bank failures, income inequality and lack of prosecutions all take us back to the coordinated attempt by the central banks of the United States, Britain, Canada, the European Union, Japan and Switzerland to delay the day of reckoning on European debt. … Given the revolving doors that allow the financial class to move smoothly between government, central banks and financial firms throughout the modern world, and how those in power in all of these places have invested their reputations in Chicago School theories, my educated guess is that taxpayers will be stuck with the costs. Let’s hope I am wrong.
There is in fact a direct causal link from debt to inequality, see ‘Why Money Trickles Up’:
http://www.econodynamics.org/sitebuildercontent/sitebuilderfiles/bullets.pdf
Err, no, not interesting.
Pre-1929 income inequality was from income from capital.
Current income inequality is inequality in labour income.
They’re simply not the same thing at all. An enriely spurious correlation.
Inequality is tied to the stock market. The incomes of the rich have been tilted toward pay tied to stock plans.
Really interesting discussion about the global economy with Chris Martenson and GoldMoney’s James Turk: http://djia.tv/james-turk/chris-martenson-and-james-turk-talk-about-europe-and-the-global-economy/
Tim
Would you care to expand on your observation concerning inequality of income (and wealth?) and its dissociated derivation from either capital or labour? I’m sure you know what you’re talking about, but in its sparse condition it reads as though you’ve reached a deductive conclusion through an inductive analysis. Help us all to understand how it is that income disparity, regardless of how said income is derived, differs based upon its derivation.
OK. I’m here to learn. Somebody explain what Worstall is getting at, preferably with facts and data.
Labor’s share has declined dramatically.
http://jazzbumpa.blogspot.com/2011/06/labors-share.html
Corporate profits as a fraction of GDP have grown dramatically since the mid 80’s.
http://research.stlouisfed.org/fred2/graph/?g=3If
Finance sector propfits as a % of total corporate profits have climbed for decades, and are
at an all time high.
http://jazzbumpa.blogspot.com/2011/06/where-has-all-money-gone-part-151-even.html
Corp dividend payout rate has been increasing since the 80’s and is now at an all time high.
http://jazzbumpa.blogspot.com/2011/06/where-has-all-money-gone-part-3.html
So corp profits have grown while labor’s share had declined; a greater amount of those profits have gone into dividends, and the finance sector has captured an increase share of total profits via unregulated rentier activities.
I guess I don’t know enough to undersand how this cannot be inequality due to capital capture of wealth. Somebody help me, please.
Cheers!
JzB
So, the researchers that give us that graph, the one everyone has seen, showing that income inequality has risen to 1920s levels, comes from Pikketty and Saetz.
And in the very paper which gives us the graph they note that the sources of income are entirely different. In the 20s it was capital income: dividends and interest. In the oughts, it’s labour income.
So, that’s my source. And yes, inequality stemming from inequality in wealth is different from inequality in the returns to labour.
As to this;
“So corp profits have grown while labor’s share had declined”
Forgive me as I don’t have the links to US numbers. But by coincidence I was looking at this in the UK numbers only yesterday.
And labour income plus capital income (let alone corporate profits) does not equal all income.
We actually have a number of other things in there as well.
There is, for example, employer paid taxes on labour. For the US this would be things like the Medicare tax and the emplyer side of social security. That latter has definitely risen over the period under discussion. It shows up as a reduction in the labour share of income, yes. But not as an addition to profit, returns to capital or corporate profits. It’s a separate line item.
One thing I am not sure of: that labour share of income. Is it wages? Or compensation? Makes a large difference as if it’s wages then we#ll also have another line item to get to total income. That part of labour compensation which is not wages. In the US this will of course be health care insurance. A rise in hte costs here would be recorded as a fall in labour share of income but again not a rise in capital returns. But as I say, I’m not sure about that.
Yet another line item: taxes and subsidies upon production and consumption. In the UK example the largest of these is VAT. In the US, sales taxes. A rise in this will yet again be recorded as a decline in labour share.
Finally, another one. Mixed income. This is, formally, income to propreitors of unincorporated businesses. What we in the UK call self-employed. A rise in the number of people who are self-employed will mean yet again a reduction in the labour share of income. But not a rise in corporate profits share.
I don’t know what the US change in this has been although I’d be surorised to find out that there hadn’t been an increase in self-employment. I’d also wonder about what the effect of the changes between S and C corporations has had.
All of this means that we cannot look at the falling labour share and conclude that the bastard capitalists have been taking all the cash. Because the numbers we’re looking at are not a binary division into labour and capital shares.
I’m perfectly happy to agree that the corporate profit share has been rising. But that is not a mirror image of the labour share falling, there’s too much else going on to be sure of that.
All of this means that we cannot look at the falling labour share and conclude that the bastard capitalists have been taking all the cash. Because the numbers we’re looking at are not a binary division into labour and capital shares.
Fair enough. You’ve made a good case for complexity. But you haven’t made a good case for capital share not increasing. With corporate profits up and the share of those profits going to dividends also increasing, there is a strong case that capital is capturing a bigger slice of the pie. Plus, since real median income has stagnated – also since the 80’s – it’s pretty evident at whose expense these increases have come. Remember, labor’s share isn’t down by some little increment. It’s down by a lot.
Another thing to consider is labor participation rate – stagnant through the 90’s, down since.
http://research.stlouisfed.org/fred2/graph/?g=3Ir
And look at the activities of, frex, Bain Capital, who made a vast fortune, basically by eliminating jobs.
So – this is actually quite interesting after all – hence the length of your response, I guess – and the original correlation, while not a cast iron lock in terms of cause and effect, is far, far indeed from being “completely spurious.”
Cheers!
JzB
Jazz here is a piece with a chart showing capital income
http://online.wsj.com/article/SB10001424052970204630904577062661910819078.html?mod=WSJ_Opinion_LEADTop
Good lord, a WSJ opinion piece by a guy from Cato.
I hate to go all ad hominem on you, but that is just too rich.
Cheers!
JzB
Then debunk it. Prove it wrong.Is the chart on capital income incorrect? Is there no correlation between rising/falling stock values and inequality?
Or you could try Google to look for other sources. Here is the NYT with a piece:
http://economix.blogs.nytimes.com/2011/05/03/inequality-rising-across-the-developed-world/
Or this piece summarizing a CBO report:
http://botc.tcf.org/2011/10/graph-of-the-day-cbo-report-confirms-growing-inequality.html
Sorry it does not fit your world view that it cannot be anything but tax rates, or in this case bank failures, and prosecutions.
Oh, and here is a piece by Mark Thoma running through the Reynolds analysis. Note that it is posted/hosted on Cato’s website – cato Unbound.
http://www.cato-unbound.org/2007/02/11/mark-a-thoma/yes-virginia-income-inequality-is-still-rising/
Fair enough. You’ve made a good case for complexity. But you haven’t made a good case for capital share not increasing.
But I’ve actually said that I agree that the capital share has increased!
My point is that this is not the whole story…..
Nobody has time to debunk the garbage that comes out of Cato. I ‘ll just point out that he obliquley accuses the CBP report of cherry picking, then uses 2009 as his data point. that was the depth of a stock market trough. Cherry picking – big, pink juicy ones.
Sorry it does not fit your world view that it cannot be anything but tax rates, or in this case bank failures, and prosecutions.
Straw Man! I never made the claims you are accusing me of.
Cheers!
JzB
My point, too. That’s a far cry from “totally spuriuos correlation.”
Cheers!
JzB