Welcome to Income Inequality Kos.
Join us Thursdays, at 9:00 p.m. eastern. We discuss income inequality, concentration of wealth, and related issues.
Previous diaries in the series can be found by the tag Income Inequality Kos, or by a series history.
Volunteering for Diaries
- Diaries come from the community. Please volunteer!
- A signup sheet for upcoming diaries is available in an editable google doc. You can volunteer for future diaries by just adding yourself to the list.
Writing Diaries
- Use "Income Inequality Kos" in your diary title, and add the same tag, that people can find it.
- Copy for this introduction is available in a google doc. Copy and paste it as your diary Intro.
How do I hate thee, Income Inequality ?
Let me count the ways. For me, the sheer, in-your-face injustice of it is enough. This series has been filled with charts and figures showing that income inequality in the US has reached grotesque levels in the 30 years since the government adopted supply-side economics as policy. Where's the outrage ? Why isn't everyone fuming over this ?
In my last couple of posts in this series I have tried to give other reasons to hate inequality. In The Spirit Level I shared the research of Wilkinson and Pickett which demonstrates that Income Inequality is associated with other social ills. You can see this chart, and many more, at equalitytrust.org.uk, Wilkinson & Pickett's website.
In Inequality ? So what ? I tried to bring attention to the fact that our economy is a zero-sum game and that income gains at the top means income losses for the rest. This idea is hard for some to accept and the mainstream media has spent much effort trying to obfuscate it. But take a look at this chart, from the work of Picketty and Saiz :
The graph tracks the share of total income going to the top 10%, not absolute income. As that share gets larger, the share going to the bottom 90% must grow smaller; zero-sum.
In addition there are zero-sum transfer schemes operating where private sector entities use the government to funnel public tax dollars into private bank accounts. Much, if not all, of the estimated $4.6 trillion dollars in federal bailouts due to the financial crisis will end up in someone's pocket: straight up transfers, zero-sum. Nearly half, current estimates are 45%, of all money paid out for healthcare in this country come from governments, Federal and State. To put this another way, half of the profits taken by for-profit "providers" come from taxpayers. Half of the return on investment and 8-figure CEO salaries garnered by large hospital corporations are the results of transfers from taxpayers.
Then there's this, the richest counties, by income, are Loudoun and Fairfax Counties in Virginia. These are suburbs of Washington DC. Why are the two richest counties located near the capitol ? Perhaps it's those highly paid government employees that John Boehner rails against, those GS-13 & 15 workers whose salaries the president froze. Not likely. The high incomes in those areas are accounted for by contractors, those for-profit, private companies that are so indispensable to the Global War on Terror. Again, public funds to private pockets, zero-sum. It's the same with all privatization schemes, by the way. Privatization is never cheaper.
These are the reasons to hate Income Inequality that I've covered so far. But there's still another that I'd like to talk about tonight. It is this: to what extent can we say that Income Inequality causes financial crises ?
It's an interesting question. This article appeared in the New York Times back on August 21, outlining the work of David A. Moss at Harvard Business School.
Now, as he studies the financial crisis of 2008, Mr. Moss says that even Wall Street may have something serious to fear from inequality — namely, another crisis.
The possible connection between economic inequality and financial crises came to Mr. Moss about a year ago, when he was at his research center in Cambridge, Mass. A colleague suggested that he overlay two different graphs — one plotting financial regulation and bank failures, and the other charting trends in income inequality.
Mr. Moss says he was surprised by what he saw. The timelines danced in sync with each other. Income disparities between rich and poor widened as government regulations eased and bank failures rose.
Here are the two graphs overlayed:
Of course, we were all taught that correlation is not causation and we wouldn't want to commit the fallacy of the common cause. Might it not be that the free-money and deregulatory policies of former Fed chairman, and "Biggest Asshole in the Universe", Alan Greenspan caused the financialization of the economy which in turn caused both the Income Inequality and the Wall St. meltdown ? It's a subtle thing. Income Inequality means that the very wealthy have more than they can spend, so they invest. The pools of capital get bigger and bigger, the investing becomes gambling and voila, bank failures and bailouts. Obviously the country, and the world, would be better off without these huge chunks of capital zipping around the world seeking the greatest returns, but, again is it causation ?
Senior economics Kossack bobswern quoted Washington' Blog in a diary he posted yesterday entitled Unrecovered. Here we see Krugman :
Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.
The problem, he says, is finding a mechanism. Krugman brings up underconsumption (wherein the working class borrows a lot of money because all the money is going to the rich) and overconsumption (in which the rich spend and that makes the next-most rich spend and so on, until everyone is spending too much to keep up with rich people whose incomes are growing much faster than everyone else's).
and Reich addressing this issue:
Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:
First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.
Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:
Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were "no more poker chips to be loaned on credit," in [former Fed chairman Mariner] Eccles' words. And "when their credit ran out, the game stopped."
And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:
In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.
Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.
In the end, I don't think it really matters whether Income Inequality causes financial meltdowns, or partially causes them or doesn't cause them at all. Outrageous Income Inequality and spectacular financial crises are both caused by the same economic policies. Stop the class war and you stop the gambling. It's just a question of getting enough people angry enough that our politicians must listen. If we raise enough Hell, maybe they'll see this as a winning issue and begin to fight.