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Mother Jones featured a piece in their most recent issue titled "It's the Inequality, Stupid: Eleven charts that explain everything that's wrong with America." I thought it was interesting and did a good job of starkly illustrating the various forms of inequality in the American economy: unequal distribution of wealth, an increasingly regressive tax system, and the tacit acceptance of our entire plutocratic political establishment.

One thing it did not do, however, was "explain everything that's wrong with America," as the subtitle led me to believe. Certainly, these charts were interesting. Shocking, even. But how exactly does income inequality hurt our economy--not just the poor or the middle class, but all of us? This is something everyone who sees a problem with income inquality should know. Let's explore the economics below the fold.

We all know a thing or two about the Great Depression. The excess and expansion of the Roaring Twenties was simply unsustainable, and it all started coming apart on September 3, 1929, when the Dow hit its then-peak of 381. Though it had its ups and downs from that point, the slide didn't stop until July 8, 1932. The Dow was at 41.22. It had lost nearly ninety percent of its value in less than three years.

Our economy as a whole mirrored this slump. Industrial production slipped 46%, foreign trade 70%. GDP dropped 29 percent from 1929 to 1933, and unemployment skyrocketed to 25%. You know how the story goes.

So what happened?

The answer is twofold. First, as was written by Keynes to have caused the Depression, the slump in demand took our economy down the pipes. Second, though, and unmentioned by Keynes, was the fact that we had a monetary disaster on our hands--and the Fed only exacerbated it.

As you know, what happens when people stop buying is not pretty. Commerce is a good thing, and when consumption and investment drop--which together amount to 85% of our GDP--our GDP slumps, as you can see on the horizontal axis of the graph at the right. This is what happened in the 1930s and this is what has happened over the past couple years. But that's not all. See the vertical axis, the one labelled "P"? That would be price levels. When price levels rise, that's inflation; when they drop, that's deflation, and deflation is precisely what happens when aggregate demand drops.

Before I continue, let me interject a word about price levels and interest rates, one I'm sure many Kossacks already understand to some extent but that bears explaining anyways. Inflation isn't always bad. There are times, yes, when inflation can rise fast enough to hinder commerce; we saw that in the seventies, and many other countries see it quite often. But in the United States, inflation is historically low and steady. It's for reasons like that that we had 30-year fixed-rate mortgages, something absolutely unheard of in other countries like the UK.

As you can probably guess, then, inflation and interest rates are related. When you lock into a loan on some interest rate, that interest rate reflects not only what the bank is charging you for borrowing money, but they're also adding in what they think inflation will be. Thus, if inflation is expected to be 4% and the bank wants to get 5% interest from you, the interest rate on your loan will be around 9%.

Here's the kicker, though. When inflation is higher than expected--not unusual, seeing as people generally expect inflation to be tomorrow what it is today--working-class and middle-class borrowers, like you and me, win. That is, if inflation is 4.2% in the example from the last paragraph, the bank ends up collecting a real interest rate of 4.8%. Historically, this wasn't entirely a rarity. It wasn't a bad thing, either: banks, clearly, continue to do pretty well.

And that is where things changed during the Depression.

Price levels, which are generally rising in what we call inflation, dropped. Steeply. Like, more than 25% from 1929 to 1933. Part of this wasn't just from the drop in aggregate demand and from lines of credit collapsing across the country, but from the inexperienced Fed tightening the money supply when they should have done precisely the opposite. Either way, what ensued caused our economy to plummet even deeper into crisis.

In short, what happened was that the poorer working-class and middle-class borrowers lost--big time. Contracts and mortgages were written in the late 1920s with inflation written in, but the inflation didn't materialize. Instead, the deflation caused banks to collect even more; if, in that loan example above, inflation turned out to be -4%, that borrower would have been stuck with a 13% interest rate. Across the country, borrowers--the working and middle class, those who got the short end of the income inequality stick--were stuck with loans with skyrocketing interest rates that many couldn't pay. Some lost their homes. Others lost their livelihoods. All of them had to cut back.

And cut back they did. As more money went from the hands of the poorer borrowers--who normally spend the vast majority of their money on consumption, which is itself 70% of our economy--to the hands of wealthy lenders, who simply put the money into their vaults--a massive and even greater shock to demand than Keynes could explain took place. That is why our economy hit depths then that it didn't hit in this past recession; this time, we didn't get pulled into a spiral of deflation.

What if income inequality hadn't been so astronomically high? Well, things might not have been as bad. In the 1920s, 80% of Americans had no savings, so when they had to pay more on mortgages and contracts, that money came directly out of their consumption and into the pockets of the rich lending class, which just saved even more. If things had not been so unequal--if the working and middle class had savings they could have cut back on, and if the wealthy spent a higher fraction of their income on consumption--consumption wouldn't have taken that double hit.

What's different this time around? A few things. For one, the Fed knows better. Yes, I know this might garner some skepticism, but looking back on their policies during the Great Depression puts things in perspective; this time, they lowered short-term interest rates and put quantitative easing measures into place to prevent the collapse of credit and rampant deflation that plagued the thirties from occurring. For another, our government learned a lesson; the legacy of FDR is embodied in unemployment insurance and the FDIC to protect the poorer, borrower class, and a progressive taxation system is in place (though under attack) that is estimated to reduce our Gini coefficient (a measure of income inequality) from 0.51 to 0.43, according to the Congressional Research Service.

But our position is far from secure.

Fiscally, the GOP is all about keeping our economy unequal. Unlike during and after the Great Depression, there has been no leveling out, no high-taxes-on-the-rich and stimulative policy that brought us the best growth we had ever seen. No; on the contrary, not only did the rich get bailed out, but they got to keep their tax cuts, too. Inequality is as high as it ever was before the recession.

Monetarily, inflation is currently a mere 2.7%--higher than it's been, but still low by historical standards. Last year, we saw numbers drop from above 2% around this time to 1% during the summer, but that didn't stop a group of Republican economists from signing a letter discouraging the Fed from keeping our economy scraping by.

Republicans have made maintaining the inequality and idiotic monetary policy that brought us the Great Depression their number one priority. I've had enough of the lies of Reaganomics and the "the-wealthy-are-job-creators" bullcrap. We can't just let the conservative mantra of small government and low taxes rule the day. We know where it leads us; it's time we shout it from the rooftops.

Originally posted to JackinStL on Fri Apr 22, 2011 at 07:24 PM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement, Income Inequality Kos, and Community Spotlight.

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Comment Preferences

    •  I like your diary and get the drift, (2+ / 0-)
      Recommended by:
      notrouble, phonegery

      but please, could you explain what Pe, Yf, Ye and AS stand for in the graph?

      The fundamental cause of trouble in the world today is that the stupid are cocksure while the intelligent are full of doubt. Bertrand Russell

      by dskoe on Sat Apr 23, 2011 at 12:21:02 PM PDT

      [ Parent ]

      •  Hope this helps (0+ / 0-)

        They're not that relevant to the point I was making, but the more you know:

        AS and AD are aggregate supply and aggregate demand (basically the macroeconomic equivalents to the supply and demand curves we all know a thing or two about). Pe would be equilibrium price level and Ye is the equilibrium GDP at the first level of aggregate demand; Yf would be the new GDP when it fell. I don't know why the author of this graph didn't indicate the new price level (presumably would be Pf), but I couldn't find a graph that had the right level of simplicity and accuracy and was too tired to make one.

        Like what you read? Follow me on Twitter: http://twitter.com/NewshamJ

        by JackinStL on Sat Apr 23, 2011 at 01:54:40 PM PDT

        [ Parent ]

  •  We Don't Have an Anti Reagan Political Party (28+ / 0-)

    There's the first problem.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Fri Apr 22, 2011 at 07:27:36 PM PDT

  •  Those who ignore history (8+ / 0-)

    are.............

  •  Sound and clear, but ... (4+ / 0-)

    I look at things entirely differently.
    First, as I see it, Americans still overconsume. Forgive the fogeyism and think common sense - a person takes a taxi to a check casher to cash an unemployment check,, then goes and buys bottled water, then pays his cell phone bill. Say what?
    Secondly, not only is the rate of inflation questionably calculated, but prices in all are skewed. In recent hstory housing and insurance costs (especially health insurance as we all know) are grossly overpriced.
    Incidentally, I have paid off my mortgage, I take busses, and I pay for my health care in cash. As a result I work 2 days a week and have saved more than most people with 3 times my income. Seems to me the only people I'm hurting with my underconsumption are the people who work 2 jobs just so that they can fill up the SUV to drive to the mall to buy a pair of Air Jordans.

    •  Lifestyle choices are the key - (6+ / 0-)

      I use my motorcycle more than my car (in Minnesota), live near downtown (all trips are short and against the rush hour traffic pattern), and mostly I drink water (no pop, no Starbuck's, and moderate alcohol consumption) and two cups of coffee in the morning at home. My vehicles are paid off, my co-op fee is high but cheaper than rent (and we own), and I have little materialistic motivation (make choices based on need and function rather than want and form).
      This has been very useful lately since my other half has been unemployed since June 2010 and she made more than me.

      I have some questions...

      by ocular sinister on Sat Apr 23, 2011 at 05:33:31 AM PDT

      [ Parent ]

    •  Your stereotypes are only slightly less demeaning (19+ / 0-)

      Than those of republicans that think that everybody without a job or education is lazy and that they are stealing from the rich to support their welfare lifestyle.

      I know folks who are unemployed.  They don't take taxis, they don't buy bottled water, and the cell phones are not iPhones, but prepaid minute limited ones.  As for paying for your healthcare in cash ... Let me know how that works out when you actually get I'll or injured and need ongoing and expensive care and treatment

      •  How anyone can get by without some sort of (11+ / 0-)

        phone these days, I don't know.

        Think the unemployed person is going to get a job without the phone?

        I notice that many recommends are given to the person who has a good answer, with hardly any given to the person who asks the right question. That is backwards to me; without that question, the good answer might never have come.

        by Nulwee on Sat Apr 23, 2011 at 10:34:48 AM PDT

        [ Parent ]

        •  I haven't turned mine on in about 3 weeks (2+ / 0-)
          Recommended by:
          elwior, YucatanMan

          hate phones.

          If you think education is expensive, wait until you see how much stupid costs

          by Sychotic1 on Sat Apr 23, 2011 at 11:54:16 AM PDT

          [ Parent ]

        •  Agreed... (4+ / 0-)
          Recommended by:
          Nulwee, elwior, YucatanMan, chrispadem

          ...it can be a land line or a cellphone, but one or the other is a necessity.

          That said, phone bills are a place that many people could save a lot of money on.  Specifically, if you have a land line at home and also carry a contract cell phone, one or the other is probably redundant.  If you use the cell phone as your primary phone, perhaps it is time to get rid of the land line.  Alternatively, if you primarily use the land line (as I do), the consider a cheap pre-paid minutes cellphone -- if you're only using the cell phone for short, occasional calls, the savings can be dramatic.  I'm paying about $7/month for cellphone service on my prepaid, based on how often I need to refill the minutes.

          This doesn't work for everyone, but it is certainly a good place to look.  Because if you can eliminate a land line or replace a contract phone with a prepaid, the savings can easily hit $500 in a year.

          Political Compass: -6.75, -3.08

          by TexasTom on Sat Apr 23, 2011 at 12:03:03 PM PDT

          [ Parent ]

      •  I think this diary, (2+ / 0-)
        Recommended by:
        marykk, phonegery

        was mostly a stab at educating.  For that reason, the only way to actually be able to talk about things historically, is to lump things and groups of people together to be able to have a basis to logically conclude things.

        You do have to stereotype generalities to have a way to make points.

        "Ignorance is bliss only for the ignorant. The rest of us must suffer the consequences." --Paradise50

        by paradise50 on Sat Apr 23, 2011 at 10:43:39 AM PDT

        [ Parent ]

        •  He was referring to the commentator... (5+ / 0-)

          who seemed to be employing common stereotypes about poor (and btw, black) people involving check cashing places, cell phones and financial responsibility.

          I notice that many recommends are given to the person who has a good answer, with hardly any given to the person who asks the right question. That is backwards to me; without that question, the good answer might never have come.

          by Nulwee on Sat Apr 23, 2011 at 11:02:45 AM PDT

          [ Parent ]

    •  Youre ideas (12+ / 0-)

      are shared by many and are based on a deep, and common misunderstanding of economics.

      Theres a law that is painful yet vital to any understanding of economics. Nothing has a "real value". That may seem esoteric but it isnt.

      Economies are organisms. They grow, change, shrink.  Inflation is actually corrolary/measurement of that change. And this is the key point the ultraconservationists/ascetics miss. Proscribing an ascetic lifestyle on humanity not only will not be accepted in the end it leads to even more harship and larger problems. The Ascetics would have us lead simple lives ,never growing , expanding, discovering, risking. Becoming merely brave new world cogs.. "Brave new world" shows us precisely the result of that philosophy...  evergrowing problems and societies who simply lock out those who must face the consequences.

      And your example? It attacks the victim. This person takes a taxi (which is a systemically/ecologically very efficient system while being an economically inefficient one) to a check casher (being poor it is hard to maintain the credit rating to hold a checking account)  to cash an unemployment check (how dare anyone be unemployed??) to buy a bottle of water (um.. it is precisely you people pushing the insanity of bottled water...) to pay his cell bill (how dare he have a means of communication that may enable him to actually end the unemployment).

      Yet... you sit here.. posting on a 600 watt pc. Or perhaps an incredibly environmentally devastating 2-300w laptop? etc etc etc?

      The key is to make hte right decisions to solve our problems as we come upon them.. not to punish the poor and working classes who have the least say in those decision for the decisions your likely class has made.

      You solve global warming not by telling dirt farmers in china that their grandchildren must live t he exact same life.. but with fewer resources. You solve it by moving the world to 100% renewable. And ending nuclear/coal/petroleum based fuel. You solve ag pollution not by telling the argentine miner that he must eat less food but by creating more environmentally sustainable farming methods. etc etc.

      Your solution is to punish the victims. Severely. Especially those below you on the ladder (that youre even posting on a website places you pretty damn high in the food chain). That isnt a solution. It is self-deluding rationalisation to protect ones place in the world while blaming the problems you cause on everyone else. All of us do that and we need to stop.

      A man is born as many men but dies as a single one.--Martin Heidegger

      by cdreid on Sat Apr 23, 2011 at 12:46:07 PM PDT

      [ Parent ]

      •  Best. Comment. Of. The. Day. (2+ / 0-)
        Recommended by:
        cdreid, VTCC73

        Yes!  What you said!  That's exactly right.

        Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

        by YucatanMan on Sat Apr 23, 2011 at 01:16:40 PM PDT

        [ Parent ]

      •  good points, but you missed mine (0+ / 0-)

        My example was intended to illustrate how people cling to modes of behavior even when that behavior is nothing but consumerist brainwashing. As someone who just posted an agreement in criticizing someone else for the use of "shylock" I will not be a hypocrit and say that my use of "unemployment check" was universally inoffensive because I did not intend to offend. Nontheless, the person in my example was living beyond his means. My examples may be incorrect (a cell phone allowing potential employer a to call you and tell you you got the job even while you're going to apply for job b is not frivilous) but my point stands. You are right in saying that as an ascetic I can have dificulty in telling whether a specific expense is rational or frivilous, But I still say that most nonessential purchases in America are bought to maintain an illusion of status and do more harm than good.

        Incidentally, minor quibbles: Let's say you take a taxi on a 6 or 7 mile trip. Until recently that taxi will burn 2 gallons of gas on that trip - taxis drive more empty than with passengers, and before mandatory hybrid laws got 8mpg. Not efficient if you ask me.
        And it's a 241 watt iMac, but on a world standard your point of my place on the scale of world consumers is right - but that reinforces my point.

  •  I could get picky about (8+ / 0-)

    25 year fixed rate mortgages in the UK .... they used to be available ... but I won't :)

    The real problems will get exponentially worse if the debt ceiling were to not be raised.

    The credit worthiness of the US would crash, inflation would soar as would interest rates, for everything.

    The US government would be pushed to more, quaintly named, Quantitative Easing, and the value of the dollar would fall.

    Quire simply, Stagflation. A recession with high inflation, the worst of both worlds .... In the Thirties it was calle the Great Depression.

    That is where the Tea Party would take us, and I don't think that they even begin to understand it.

    Tipped and Recc'd.

    I hope that the quality of debate will improve,
    but I fear we will remain Democrats.

    by twigg on Fri Apr 22, 2011 at 11:16:39 PM PDT

    •  Yes, but historically, much of the world has not (0+ / 0-)

      had mortgages at all, let alone 30 year, low down payment mortgages for 80 to 90% of home value.

      Much of the world gets by living where the family has always lived, with a few exceptions here and there mainly due to government housing programs.  Most of the exceptions are in western Europe.

      The diary author is generally correct that 30 year mortgages and the type of financial stability implied by their existence has not been the case for much of the world.

      Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

      by YucatanMan on Sat Apr 23, 2011 at 01:20:16 PM PDT

      [ Parent ]

  •  On consumption: (15+ / 0-)

    Very nice diary. Some comments question the implicit assumption that high consumption is good. I think that a stability analysis is more relevant. Consumption by the poor is rather inelastic- you need to eat, to avoid freezing, etc. Most consumption by the rich is highly elastic- if a glitch in the economy has you spooked, you just don't get the new gold back-scratcher. So the greater the inequality the higher the positive feedback term, and the greater the instability. It's that instability, not generally low consumption/savings ratios, that leads to unemployment, people starving, etc. (See Germany for a relatively stable, high-savings example.)

    So the problem with inequality leading to economic instability is closely linked to the even simpler problem- the declining marginal utility of spending. The gold backscratcher has no measurable effect on happiness (see Kahneman) and hence spending on it is highly elastic. This is a rare case where the basic immediate moral case (the poor need resources more than the rich) and the fancy dynamical-systems analysis (high Gini-> instability) lead to the same general conclusion. It's probably also the most central and persistent issue on which the left and right consistently disagree. The right is completely wrong.

    Michael Weissman UID 197542

    by docmidwest on Sat Apr 23, 2011 at 09:23:59 AM PDT

    •  Consumption isn't just goods (12+ / 0-)

      It's also services. A concert is an example of an exchange of capital in return for an experience. What patrons bring home with them are their memories of the event and whatever they captured on their phones - plus a T-shirt, perhaps.

      As we depart the last economic model (the Information Economy), we are entering a new one we can call the Experiential Economy.

      The landscape of most cities is dotted with U-Store-It warehouses where people, for whatever reason, rent space to store their surplus belongings. People hold garage sales to lighten their material excess. When we reach satiation of goods, what is left are services that we can create and sell to one another.

      Because experience - whether education, sight seeing, touring, sport or recreation - is largely a kind of education, you see that it's also more able to deliver the kind of self-actualization that mere possessions like cars and carpets cannot. And if you pay attention, you'll see that this is indeed a trend.

      Income inequality, then, presents us with concomitant experiential inequality. Those who have to labor overmuch for basic survival concerns have less time to form meaningful lives outside of their working environments, and less capital with which to purchase high-quality experiences.

      As a single example of the above, it was possible for me to dash to the airport on a Saturday a months few months ago, fly to upstate New York to see a concert, stay overnight, and fly back Sunday, purely for recreation and a cultural experience.

      Contrast with the magnate Richard Branson, who jumps from his private blimp to ski down a virgin mountainside, and sail off in his private yacht waiting below off on another adventure to rescue penguins while sitting in a hot tub filled with Champagne and Hollywood starlets.

      Fabulous wealth allows for extreme enjoyment of life and the free time necessary to appreciate it. I think it may be this kind of inequality that will eventually rub American noses in the fact that we have allowed an aristocracy to form in our society, and that class warfare is both overdue and necessary in the form of progressive taxation and inheritance taxes that get the job done. (Hi Paris Hilton.)

      The top 1 percent can happily own 20 percent of the nation's capital. That's not a problem. But when they own 40, 50, 60 percent, then there isn't enough left in the system because even the ultrawealthy can only buy so much experience in any given waking period.

      Every day's another chance to stick it to the man. - dls

      by The Raven on Sat Apr 23, 2011 at 10:15:42 AM PDT

      [ Parent ]

      •  The simplest truth of all... (7+ / 0-)

        ...is capitalism is honestly an unsustainable system.  It is a "positive feedback loop," which are always ultimately destructive and they keep moving things in one direction only until the system collapses entirely.

        Capitalism is predicated on things ALWAYS expanding and growing.  This type of system works as long as there is a relatively small population on the earth (from 10,000 BC there were 1 million people on the whole planet...it took until about 1800 to get to 1 billion people.  Now we are adding 1 billion each decade).

        And capitalism works as long as there are plenty of resources pretty readily available without being close to consuming them to the point of trouble.

        So, with these variables, capitalism is great!  As long as populations continue to grow at a reasonable rate...and as long as the financial industries grow at a reasonable rate...and as long as production and consumption grow at a reasonable rate...alls good!

        What we saw recently is this positive feedback loop on steroids.  The ENORMOUS amount of "debt" the banks created is ONLY payable by future growth.  But the Goldman Sachs of the world created a giant debt never seen before in from only 2003 until 2008, when it came crashing down.

        There is no way we can grow enough to ever pay that back.  And the resources are really being consumed to the point of "gone for good," while the world's population grows like never before.

        Do you see why the Republicans want to do away with anything that stops totally unbridled capitalism?  No EPA, no TAXES for corporations, no SOCIAL SECURITY, no MEDICARE, no UNEMPLOYMENT COMPENSATION, no SAFETY NETS.

        Even if they get there way completely, it won't be enough.

        Capitalism as a system of economy and a system of government (as the USA is) is ultimately unsustainable.  It is a system that can only work really well IF AND ONLY all the right parameters are in place.  We've gone way, way past that tipping point.

        Just saying.

        "Ignorance is bliss only for the ignorant. The rest of us must suffer the consequences." --Paradise50

        by paradise50 on Sat Apr 23, 2011 at 10:56:14 AM PDT

        [ Parent ]

        •  Old economy (6+ / 0-)

          In the experience economy, you don't need exploitation of resources.

          You go to New Orleans and a man is telling a story in Jackson Square and you listen and you enjoy it and so you give him a dollar.

          Doesn't rape the planet to do that.

          Another example: Near where I live is a business called "Amelia Island Outfitters." You can rent kayaks and canoes. For a small fee, you check out a watercraft, and paddle along the marshes, enjoying nature and animal life. Pull up on a bank and have lunch.

          They have a couple dozen of these small boats for rent, and thereby hundreds of people can enjoy the naturescape and have a good time. That's very different from the proposition that hundreds of people have to own their own kayaks and paddles and such, and tow them on trailers to waterways.

          One way makes sense and is a sustainable form of capitalism, in keeping with an experiential economy. The other way reflects the past economy where you have to own everything you need to have the experiences you want.

          Capitalism itself isn't a bad thing, provided that there are checks and balances to prevent monopolies on the acquisition of capital. Right now, there are severe imbalances in our system, yet past history shows that these can be corrected without dismantling the entire system and replacing it with a Marxist structure or something like that.

          Every day's another chance to stick it to the man. - dls

          by The Raven on Sat Apr 23, 2011 at 11:11:24 AM PDT

          [ Parent ]

          •  Capitalism doesn't promise happiness, and it (2+ / 0-)
            Recommended by:
            Sparhawk, paradise50

            does provide for a remedy for these imbalances (recession, depression, and so forth).  There is no economic system that can produce ever ending increases in the standard of living without periodic painful adjustments.  I would argue that the problem isn't "capitalism", the problem is that we're practicing "crony capitalism", which seems to be part of the human condition.

            Personally, I prefer the "poker game" analogy to explain the economy.  It's 2:00 in the morning, one guy has all of the money, and he's not lending.  The game is effectively over.  Now if you consider that in real world terms where business enterprises have value based on the stream of cash flows they generate, the wealthy would be foolish to harm the value of that enterprise (worth multiples of it's cash flows) just to shave 2-3% off their tax bill.  In short, the best thing you can do for the wealthy is give their customers (consumers) a helping hand.  Whatever they pay in taxes, they get back in multiples in the valuations of their business enterprises.

            "Because I am a river to my people."

            by lordcopper on Sat Apr 23, 2011 at 12:00:32 PM PDT

            [ Parent ]

            •  Let's say we have a dollar (1+ / 0-)
              Recommended by:
              paradise50

              Well, I have it. You don't. And those other 3 people don't.

              So you mow my lawn and I give it to you. One of the 3 sells you a beer because you're thirsty and you give the dollar to him. Etc. Eventually I can get the dollar back.

              There's no reason to assume that the total amount of goods, services, or money in the system has to continue expanding. You're begging that question.

              Every day's another chance to stick it to the man. - dls

              by The Raven on Sat Apr 23, 2011 at 12:34:38 PM PDT

              [ Parent ]

              •  Maybe the problem is that you're thinking of (2+ / 0-)
                Recommended by:
                YucatanMan, paradise50

                the dollar as the measure of wealth in the economy, when in reality it's just a means of trading goods and services efficiently.  The value of any currency, is determined by market forces, and usually represents the confidence in that economy and the differential in interest rates (relative high rates attract investment, but only so long as there is the belief that the investment is safe and inflation won't erode real returns).

                "Because I am a river to my people."

                by lordcopper on Sat Apr 23, 2011 at 12:49:27 PM PDT

                [ Parent ]

              •  Until that one dollar creates $4 more dollars, (5+ / 0-)

                you've got food and 4 other people do not.  Whoever holds the dollar eats, the other 4 seek ways to gain the dollar so they can eat. But there's only one dollar.

                Under capitalism, the economy must expand to create more dollars. (or whatever $)   If not, people go without food. Because, under capitalism, the goal is acquiring money: the creation of wealth.

                Capitalism doesn't give a damn about society, government or humanity. Capitalism only cares about money. It doesn't care about natural resources, public spaces, the community garden or whatever. It only cares about money. Capitalism will continue to lay waste to vast swaths of the countryside without appropriate controls to assert the rights of everyone to clean air, clean water, a functioning ecosystem.

                Without government ( = public = society ) control, capitalism will lead to its own collapse over and over again. And it takes a lot of humanity with it each time. That's the crime.

                Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

                by YucatanMan on Sat Apr 23, 2011 at 01:29:22 PM PDT

                [ Parent ]

            •  If you (1+ / 0-)
              Recommended by:
              paradise50

              are sitting at the poker table wondering who the mark is, its you.

              "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

              by johnmorris on Sat Apr 23, 2011 at 01:35:48 PM PDT

              [ Parent ]

    •  I would really, really like you (4+ / 0-)

      to explain this in more detail, for someone who has not internalized the meaning of economic terms such as "declining marginal utility of spending."  I don't quite understand what you're expressing when you write

      This is a rare case where the basic immediate moral case (the poor need resources more than the rich) and the fancy dynamical-systems analysis (high Gini-> instability) lead to the same general conclusion. It's probably also the most central and persistent issue on which the left and right consistently disagree. The right is completely wrong.
      , but I have a very strong suspicion that you are making an extremely important and very interesting point that non-economists interested in political economy need to understand.

      Please write a comment, a diary, or at least point to a link or two. Thanks!

      A conservative is a scab for the oligarchy.

      by NBBooks on Sat Apr 23, 2011 at 11:05:01 AM PDT

      [ Parent ]

      •  It is (3+ / 0-)
        Recommended by:
        YucatanMan, NBBooks, opinionated

        Insanely hard to explain real economics to people. They have their very self worth wrapped up in something they dont even understand.

        The word capitalism. What does that mean to you?? Our media has convinced americans including the vast majority here that it means "free enterprise, free  markets, democracy". Yet capitalism is at its very foundations hostile to all three. The best definition of capitalism is simply a form of usery. It is the loaning and borrowing of money. ANY other definition includes systems like communism as capitalist or literally fly in the face of  easily demonstrable reality.

        Thus the problem with writing economics diaries etc. You cannot get emotion-based thinkers to comprehend how these incredibly complex organic systems actually work.

        A man is born as many men but dies as a single one.--Martin Heidegger

        by cdreid on Sat Apr 23, 2011 at 12:53:16 PM PDT

        [ Parent ]

      •  Declining marginal utility of spending: (6+ / 0-)

        An analogy: Say you don’t have indoor plumbing. You spend X (in dollars plus time) to get running water into your kitchen. HUGE improvement! After finding a source & laying pipe to get the water to your house, Life is Grand.

        Then you spend Y more to get a bathroom constructed. Y is the marginal extra cost of getting a bathroom. Not quite as big an improvement as that last investment, but still pretty great.

        Then you go nuts, and spend Z & M & Q on light fixtures, ceramic tile & gold-plated fixtures. All nice things, but that extra spending (marginal costs) doesn’t really get you as large an improvement as that first original investment (X).

        So the author’s point in that paragraph is that the initial cost of turning a person into a somewhat richer person is a fine thing, at least for that person, and maybe even a social good (indoor plumbing!), but you get a much bigger “bang for the buck” using your extra (marginal) spending on making a lot of other people somewhat richer (indoor plumbing for all!) than you do by using it to make the already-rich person even more rich (gold-plated faucets!).

        Reality has a well-known liberal bias -- Stephen Colbert

        by ItsaMathJoke on Sat Apr 23, 2011 at 01:10:27 PM PDT

        [ Parent ]

        •  Great job explaining "marginal cost"! n/t (0+ / 0-)

          Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

          by YucatanMan on Sat Apr 23, 2011 at 01:31:23 PM PDT

          [ Parent ]

        •  Thanks ! And that is an extemely important idea: (3+ / 0-)
          Recommended by:
          ItsaMathJoke, phonegery, opinionated
          the initial cost of turning a person into a somewhat richer person is a fine thing, at least for that person, and maybe even a social good (indoor plumbing!), but you get a much bigger “bang for the buck” using your extra (marginal) spending on making a lot of other people somewhat richer (indoor plumbing for all!) than you do by using it to make the already-rich person even more rich (gold-plated faucets!).

          This is what Dems should be injecting into the national debate over and over and over and over again. Then some more. About that time, people will start asking questions. That's when you really get the chance to shift some gray matter by explaining it yet a few times more.

          A conservative is a scab for the oligarchy.

          by NBBooks on Sat Apr 23, 2011 at 02:13:16 PM PDT

          [ Parent ]

        •  exactly nt (0+ / 0-)

          Michael Weissman UID 197542

          by docmidwest on Sat Apr 23, 2011 at 07:20:09 PM PDT

          [ Parent ]

      •  I will try to write that up (0+ / 0-)

        but I'm not an economist at all, so it will be an amateur job. Probably can't get to it for about two weeks.

        Michael Weissman UID 197542

        by docmidwest on Sat Apr 23, 2011 at 07:19:08 PM PDT

        [ Parent ]

  •  I think 1930-40s Fed chairman Eccles (7+ / 0-)

    better explained the problem of income inequality destroying aggregate demand generation:

    As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. (emphasis in original) Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently  produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

    That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

    The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

    Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

    This then, was my reading of what brought on the depression.

    END of quote from Eccles, pages 76 to 78

    I first posted this extract from Eccles' memoirs on December 2, 2007 in Not Good – We’ve Been Here Before , which I'm proud to boast rather accurately forecast the economic and financial collapses of 2008.

    About the same time, I also posted the Eccles quote on the Wikipedia page on "The Great Depression." Robert Recih picked it up and used it in a column about a month or two later. Since then, the quote has been entirely removed from Wikipedia, and a bunch of neo-liberal / conservative bullshit inserted on the page.

    Liberals and progressives may be repelled by the idea of "not enough consumption" but they are thinking in terms of consumer spending only. The distortions in the monetary and financial system caused by Wall Street's over-weening political power has resulted in severe mis-allocations of money, , credit, and capital. Speculation, arbitrage, and rent seeking have been hugely favored over actual investment in the real economy. The decline in the percent of GDP invested in public infrastructure is one marker of this.

    So basically, all we need is to shift about one and a half percent of GDP back into infrastructure investment. And we actually need to do much more if we were to get serious about transforming our and the world's economies off of burning fossil fuels. It's a small shift statistically, but wit will have a huge positive impact on our future.

    A conservative is a scab for the oligarchy.

    by NBBooks on Sat Apr 23, 2011 at 11:27:17 AM PDT

  •  Get ready things are just getting started... (1+ / 0-)
    Recommended by:
    rgleason

  •  Warning: (0+ / 0-)

    Serious diary pimpage ahead:

    http://www.dailykos.com/...

    (Oddly enough, it's on a related topic: Congressional sub-committee hearings about he oppression business face with government regulation (despite that many, if not most, businesses and corporations seem to have made record profits even during the most recent recession and despite that these "stifling" regulations allegedly....prevent them from making those record profits)...

  •  Really good analysis, one addition (3+ / 0-)
    Recommended by:
    cdreid, YucatanMan, opinionated

    You hinted at it with

    ..poorer borrowers--who normally spend the vast majority of their money on consumption, which is itself 70% of our economy--to the hands of wealthy lenders, who simply put the money into their vaults..

    One of the huge problems with income inequality is that the middle class spends their income driving the economy, the wealthy class looks to invest their wealth. In the housing boom they bought mortgage backed securities and other securities. These are essentially debt based investments, someone has to pay it back with interest. That money went into mortgages and credit cards that resulted in spending from the middle class. That is, it was a temporary redistribution of income, resulting in economic stimulus and massive debt. In order to continue this, we would have to continue growing broad based debt year after year. It would have been better to transfer that income from the wealthy to the middle class in an ongoing method, such as a more progressive income tax structure. As it is, we are going to have to deal with this stress of debt and decreased spending power for a very long time. The advantage of the Great Depression is that it eventually eliminated this stress in a very complete way and fueled the great post WWII boom. The bottom line is that if the Republicans have their way we will never get out of this Great Recession. We will have endless austerity for the middle class.

    •  Very good comment (4+ / 0-)

      i would suggest that in your unconcious desire to continue our current 3 state class warfare system youre still avoiding reality though.

      The single most efficient means of growing the economy is transferring the riches of the top 5% to the poor, not the middle class.

      Give a middle class worker $1000 and he may buy a big screen. Or put it in his ira.

      Give it to someone starving on the streets they immediately spend all $1000 on baseline items. Food. A cheap cell. clothes. a bicycle. etc...  And his/her spending improves the odds they can become an economic plus to the economy (though our current capitalist system actually relies on their poverty .. and should they move out will institute measures to send others into poverty.. literally).

      A man is born as many men but dies as a single one.--Martin Heidegger

      by cdreid on Sat Apr 23, 2011 at 12:57:43 PM PDT

      [ Parent ]

  •  It's not the spread between the top and the (1+ / 0-)
    Recommended by:
    Ginger1

    bottom that is unfair.   It's where the bottom is.  

    I firmly believe that raising the standard of living for the blue collar working man is more important than "spreading it around".  You do that by providing equal education opportunities for all who wish to take advantage of an education.  That's also how you encourage democracy in the Third World.   Education is the key.  

    If you lose your disc or fail to follow commands, you will be subject to immediate de-resolution. That will be all.

    by SpamNunn on Sat Apr 23, 2011 at 12:26:04 PM PDT

    •  Education is a bullshit buzzword (4+ / 0-)
      Recommended by:
      YucatanMan, johnmorris, sberel, phonegery

      And its spread by mostly very comfortable uppermiddle class people who tend to reside in a very very very protected niche within our society. There are millions of people with degrees and certifications who cannot buy a job or are massively underemployed. I work with a woman with a BA who is basically a secretary who does some accounting stuff. I have a pretty extensive resume in a fairly exotic field as well as the CSCI field in general and couldnt buy a job in it. Thise "education will set you free!" meme is bullshit in the modern economy. Those days are over. As a benchmark: India and China are pumping out more college grads with actual Worthwhile degrees (science engineering etc) than we concievably could. And their engineers and scientists are BETTER than ours due to the darwinistic effects of such harsh societies. And they live in massive poverty.

      A man is born as many men but dies as a single one.--Martin Heidegger

      by cdreid on Sat Apr 23, 2011 at 01:01:51 PM PDT

      [ Parent ]

      •  Supply and demand dictates that you (0+ / 0-)

        try a less exotic and more salable field.

        I have a pretty extensive resume in a fairly exotic field as well as the CSCI field in general and couldnt buy a job in it.

        If you lose your disc or fail to follow commands, you will be subject to immediate de-resolution. That will be all.

        by SpamNunn on Sat Apr 23, 2011 at 02:29:33 PM PDT

        [ Parent ]

        •  Less exotic than (1+ / 0-)
          Recommended by:
          phonegery

          Computer programming (10+ languages) web design and SEO? (How many people you know who have ever held #1 on google for the #1 searched term?)

          Rationalise all we want if the jobs arent out there having a ba/masters/phd etc doesnt really do much but make it harder to lower your standards to dishwasher/fast food clerk.

          A man is born as many men but dies as a single one.--Martin Heidegger

          by cdreid on Sat Apr 23, 2011 at 04:06:08 PM PDT

          [ Parent ]

          •  ps i held that spot for (0+ / 0-)

            exactly a week before spammers cloned my methodology and transplanted it across thousands of sites. Going rate when i got out for a TEAM of indian programmers was about 300 a week....

            A man is born as many men but dies as a single one.--Martin Heidegger

            by cdreid on Sat Apr 23, 2011 at 04:08:20 PM PDT

            [ Parent ]

    •  Standard of living for minorities must be raised.. (2+ / 0-)
      Recommended by:
      YucatanMan, sberel

      currently the unemployment rate for minorities is double the rate of the rest of the population...but by 2050 the minorities will be the majority. With no employment or under employment, where will the tax base come from to support social safety net programs? Also, the number of citizens over the age of 65 will double from what it is today. We desperately need a jobs program, and I don't mean a mcjobs program. And raise the damn taxes on the wealthy...

    •  empirical evidence? (0+ / 0-)

      The claim that the absolute level of goods to the poorest is what counts may sound reasonable and may well be true when that absolute level is very low. Do you have any empirical evidence that the spread between the rich and poor is irrelevant to human welfare in more prosperous economies? All the correlational studies (admittedly not proving causation) say exactly the opposite of what you claim. Relative wealth matters a great deal, and inequality hurts.

      Michael Weissman UID 197542

      by docmidwest on Sat Apr 23, 2011 at 07:28:34 PM PDT

      [ Parent ]

  •  Reagenomics and the fiscal ideology of the GOP (2+ / 0-)
    Recommended by:
    cdreid, YucatanMan

    are just bald faced lies and bullshit.  When the GOP requested that Obama not end the Bush tax cuts he should have laughed in their face and literally told them they were a bunch of cretins who don't represent the welfare of the American people, which is supposed to be their job.  When Obama
    negotiated with the GOP on that occasion to allow the Bush tax cuts continue for two more years it was the last straw for me.  I don't approve of Obama's brand of transactional politics
    because to me it is very unprincipled.  Maybe I should call it expediency politics.  Whatever, there are some things that are wrong and you just don't do them.  If a President agrees to do things wrong under pressure or in some Faustian bargain with the GOP, when else will he do things that he knows are wrong ???  Oh, I forgot, Obama is a lawyer.  That explains it all, lol

  •  There is an (2+ / 0-)
    Recommended by:
    ItsaMathJoke, opinionated

    actual mechanism at work in income inequality and it can be teased out by understanding a couple of the words in common use. First, there are two kinds of "investments"; one of them involves using capital to purchase or build productive plant and equipment. The other uses capital to extract a profit from an abstract exchange of paper. "Hedge funds" are the second kind. Their reason for existing at all is to protect money from the risk of real investment. So wealthy people sequester money. They take it out of the economy, thereby recessing it. That's what Mariner Eccles is so clearly explaining. Their money does the exact opposite of stimulus. If you want it to stimulate the economy, the only route to that end is to tax it away from them and spend it on public good. And god knows, after 30 years of this bullshit, we've got plenty of things to spend it on.

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Sat Apr 23, 2011 at 01:53:42 PM PDT

  •  The Chicago School economists would (3+ / 0-)

    ..scream blasphemy and get their free market undies all in a wad..

    But we could have a booming economy in short order just tackling crumbling infrastructure, and developing green energy solutions - here at home.

    Apparently that's not what "The Market" wants. A majority of Congress would rather we do that austerity thing instead.

    They've either forgotten who and what it is that they've sworn to serve or were lying when they took the oath.

    An imbalance between rich and poor is the oldest and most fatal ailment of all republics - Plutarch

    by Anthony Page aka SecondComing on Sat Apr 23, 2011 at 02:24:06 PM PDT

    •  Not *entirely* true (1+ / 0-)

      I support what you've got to say about stimulus. But debt-deflation theory, the details of which I've tried to translate to lay, does get credit from Chicago Schoolers for its acknowledgement of monetarist causes to the Depression. It's likely they would fault the Fed more than income inequality in their explanations, though.

      Like what you read? Follow me on Twitter: http://twitter.com/NewshamJ

      by JackinStL on Sat Apr 23, 2011 at 03:19:12 PM PDT

      [ Parent ]

  •  What were capital gains rates before and after the (1+ / 0-)
    Recommended by:
    opinionated

    Depression?

    I hope its not a dumb question.

    When those with money dont even have to create jobs or do anything (any actual work) to obtain more money then surely all the rules change.

    Why would anyone whose goal it is to have more money sidetrack themselves with the  slower rate of return that would come from trying to open a new business front and employing some people?

    The rich dont need the poor in a land where money is more important than mankind.

    you cannot worship both God and money.

    If money is all thats needed to make money then where does it end?

    •  Not at all (2+ / 0-)
      Recommended by:
      vets74, echo still

      It's a good question with a complicated answer, an answer I don't entirely understand:
      http://en.wikipedia.org/....
      It appears the rate was 12.5% before the 1929 Crash and, at some point thereafter which I can't tell, 70% with some sort of exemption that encouraged long-term investment. It's 15% now, I believe.

      I don't feel it's fair to say that investors don't create jobs or do work. They get money to people who are going to do something with it. There are flaws in execution, certainly. But should we trash the investment class as a whole? No. Even if they don't invest in small businesses--for whom, to the best of my limited knowledge, there are borrowing and investment opportunities, though the may not make headlines--they're still performing a demanded service.

      Like what you read? Follow me on Twitter: http://twitter.com/NewshamJ

      by JackinStL on Sat Apr 23, 2011 at 03:15:12 PM PDT

      [ Parent ]

      •  not all investors (3+ / 0-)
        Recommended by:
        vets74, opinionated, echo still

        create jobs or do works. Many investment dollars have been used to run up and enable the mortgage-backed-securities game, for example, betting on either side of it.

      •  Problem, now, is that capital gains tax (0+ / 0-)

        is not connected to direct investments.

        Not the most of it.

        This is the main fraud in today's tax code, after the steady bribery-driven-loop-hole decline in business tax payments.

        MJ has the chart for that, too.

        Financial criminals + Angry White Males + Personality Disorder dreamers + KKKwannabes + George Will =EQ= The GOPer Base (-4.38,-3.74)

        by vets74 on Sat Apr 23, 2011 at 05:43:51 PM PDT

        [ Parent ]

      •  Well...if republicans drop capital gains rates to (0+ / 0-)

        zero then I think that would suck a lot of money in that direction and away from actual business investment.

        Ive heard arguments against tax cuts that fall along these lines.  We need to push money through more productive channels with the tax code IMO.

        Ive heard some say that tax policy has little relevance to income inequality and I could not disagree more.

        Im sure its beneficial (or could be) if someone invests in Home Depot but isnt a lot of money just invested in 'money markets'?  Does it really do any good there?

        all of the hedging and side bets that go on...thats only good for rich people.  and Im convinced they actually crash the economy on purpose.

  •  Two minor points: (2+ / 0-)
    Recommended by:
    vets74, opinionated

    1) When an economy deflates, it is rational for people to put their money in mattresses.  (Because money they don't spend today is worth more tomorrow.) When deflation hits, those who don't have to spend don't.  With money in mattresses, there's no investment and minimal spending.

    2) Perhaps the best intro to macroeconomics, occasionally mentioned by Paul Krugman can be found here:

    Baby-Sitting the Economy

    Be sure to read the side-bar/link near the end.

  •  Thank you. This is a great diary!!! (1+ / 0-)
    Recommended by:
    vets74

    "Comfort the afflicted and afflict the comfortable" - Dorothy Day

    by joedemocrat on Sat Apr 23, 2011 at 04:59:35 PM PDT

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