Elephant in the Room: Upward Redistribution, Concentrated Income and Wealth, and Secular Stagnation
Update: Brad DeLong has replied, and I have replied to him.
Dean Baker quite rightly takes Robert Samuelson to task for his op-ed on the causes of secular stagnation.
Samuelson:
The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states.
Dean’s right that this doesn’t even touch on perhaps the most likely explanations. But Dean’s explanation also misses the the 800-pound gorilla:
Actually the most obvious cause for most of the shortfall in demand is the trade deficit.
Brad Delong, likewise, reels off four possible explanations today while ignoring what seems to me to be the most obvious one.
How about a three-decade upward redistribution of income, and massive increases in wealth and income concentration?
Add declining marginal propensity to spend out of wealth/income, and you get a so-called “savings glut” (aka “not spending”) and secular stagnation.
The arithmetic of this is straightforward and inexorable. Extreme inequality and upward redistribution kills growth.
Of course this effect doesn’t exist in a vacuum. (Only a Republican would point to this and say, “Look! It’s obvious.”) But theoretically and arithmetically, it’s huge.
Why is it not even part of the conversation?
Cross-posted at Asymptosis.
Most people don’t quite get the problem of “upward distribution,” but if I describe it in farming terms it is easier to grasp.
Suppose a farmer harvested his crops every year, but never fertilized his fields? Who would expect that to work? Even worse, suppose he harvested his crops but sold all the seed and never replanted? The only way that system could work would be through spillage, I.e. Inefficiencies in the harvesting.
Another metaphor is medical: there is a condition called ascites, where liquids in the body cease to circulate properly but accumulate in the belly instead. The result is a combination of over- and under-hydration, and merely adding more fluids to the system doesn’t cure the problem. The belly just gets bigger while the rest of the body falters.
Severe ascites often accompanies life threatening illnesses. Just saying.
Noni
On the most “esoteric”level — though I’m afraid I’m not going to explain it very well here — we have to start explaining (thinking about) the labor market mess as an inability of labor to test the market to see what it will bear — it’s all free market; which we don’t have to fear if it is balanced right.
For instance, the minimum wage can be better presented as, not a humanitarian or welfare mechanism — if a $15 an hour minimum wage been needed to live humanely in 1956 it would still not have been FEASIBLE ($8.50) because the needed GDP wasn’t there yet; someday the Republicans’ bane of $100 an hour will be feasible, when we have 5+X the per capita GDP — but presented as an easily FEASIBLE minimum wage, shifting only 4% of overall income from the 55% who now get 90%. The 45% are hardly going to be out of work (except those who can afford to quit one job :-]).
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I’m reading a lot of campaign books about Obama. He seems (so far) extremely “situational.” For instance, one of his first pre-2012 election meetings with his staff finds him (crazily?!) stating green energy as the most important issue (to him — and Al Gore). What of all the tangle of suffering caused across the board by “inequality” (I call it the “Great Wage Depression”).
Occupy starts making noise in the book (Double Down) and Obama suddenly seems genuinely sold that “inequality” has become America’s biggest problem. I wonder how to hook up guys like Obama or the Clintons (or JFK) directly to real life.
One big thing we have going for us here: there is no downside politically to the Obamians embracing a $15 an hour minimum wage or re-unionization via legally mandated, centralized bargaining (or some serious steps in the re-unionization direction — if people need more time to learn about how ideally sector-wide labor agreements should work (a recent guest of my mother had heard of sector-wide; her husband is an economist).
Unlike JFK who feared losing crucial Southern Democrat support for all his other legislation if he supported civil rights (he did his best to avoid the issue and even discourage civil rights activity), the Obamians would build great political capital pushing the reforming of the labor market from the ground up (and thereby reforming society).
Question is how to get Obamians (included Clintons) to even know we exist.
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Least “esoteric”: While waiting for my battery to come back to life I told my (black) AAA technician about the minimum wage being $11 an hour back in 1968. He was astounded as most people I inform about it are (especially if they are black and therefore already thoroughly informed about the paucity of pay in our labor market).
He professed no idea at all about per capita output doubling every two generations.
First task may be to simply inform the public (maybe especially the African American public) about these two simple facts — could be the cornerstone of all salesmanship for reform.
Face it Steve, they are not going to acknowledge it because to do so would mean that the efficiency of money is not primary in an economy. Everyone of the “causes” sited by the people you mentioned are all an off shoot of “modern” economic study: the efficiency of the dollar.
They ignore the labor aspect of an economy as being part of the micro when it truth it is the macro and all the finance stuff is the micro.
It’s flow right along with the reversal of banking and producing. Banking has become prominent over a production/labor economy and this change fits with the current economic theories and study. They would not accept that an economy can live and thrive with out a bank (may not be as fast an economy but it can) but an economy can not exist without the production of something other than money/value from money.
Now, I don’t know which came first. It may be a chicken/egg issue but I am certain that the intellectual shift in the upper levels of policy making/academia has moved from focusing on substance/people to abstract/theory. This is seen everywhere from our in ability to elect people in enough numbers such that policy truly improves the individuals life via reduction of risk of living instead of greater efficiency of capital movement around the globe.
Economic theory fits right in with the political/policy/outcome results. It’s all abstract efficiency and not people real efficiency believing the abstract is all that is needed to promote people efficiency that is real.
35 years later we’re in a depression so unique in that the top is spared this time and they are still trying to prove they are correct in their focus of study. Maybe they are, they spared the top this time around…and is that not what conservatism wants?
http://equitablegrowth.org/2013/12/02/1012/is-much-of-our-current-low-natural-rate-of-interest-is-due-to-the-rise-in-income-and-wealth-inequality
Brad Delong says:
“Well, let me say that it ought to be part of the conversation, but that the pattern of asset prices is not what I would expect to see if it were a high propensity to save on the part of the rich coupled with high inequality that were driving our current (and likely future) destructive encounter with the zero nominal lower bound on short-term safe interest rates. I would expect greater inequality coupled with a higher propensity to save on the part of the rich to drive all asset yields down. Yet what we have seen has been a steep, prolonged fall in Treasury bond yields while stock-market equity yields have plateaued at about 5%/year:
…(chart)
That is what makes me (tentatively) side with Ricardo Caballero, and say that the asset market derangement is better conceptualized as inadequate risk tolerance and safe asset supply, rather than either a global savings glut or a global investment shortfall…
But I would be willing to be persuaded…”
http://www.bruegel.org/nc/blog/detail/article/1205-blogs-review-the-natural-interest-rate-framework/