Wage Gaps, Inequality, and Government
Although the typical American consumer today has more affordable goods from which to choose than any time in this nation's history, that has not stopped some prominent voices from declaring that "unfettered" capitalism is undermining prosperity. The most prominent voice on this current "inequality crisis" has been Paul Krugman. Krugman actually seems to believe that the way to prosperity is to destroy wealth. FULL ARTICLE
Comments (38)
While I think Krugman's "solutions", are not, and Keynes treatises belong more to PoliSci than to Economics, I think your article may miss at least two key points, starting here: "For example, would one today facing major surgery really want to be transported back to the health care of 1973? Perhaps one might want to visit a typical 1973 grocery store and compare the choices people had then to what is available today. (I remember talking long distance that year to a girl I was dating who lived in another city. We talked for two hours on a Sunday evening, and the call cost me $28, or close to $100 in today's dollars. The same call today would have a marginal cost of zero, since I am on a plan for which all local and long-distance calls cost me $30 a month.)
Curiously, Krugman often condemns Wal-Mart in his columns, yet Wal-Mart has provided low-income people with consumer choices that simply would not have been possible in the former "golden ages" of income equality. After all, if the obvious end of production is consumption, then the real measure of economic progress is the number of opportunities that people have to consume and what is available to them."
Namely, first, how can one compare '73 to ~'06 without countenancing the, literal, Trillions more we are in debt today v. '73?
And, second, re: the WMT phenomenon, How does open Importation of Goods manufactured @ ~U$D .64/hr (wage&benefit rate in PROC, on average) and the, thereby, crippling of the American manufacturing sector augur for the soundness of the American economy?
Timely enough, our August Trade Deficit was announced today: ~U$D 69.9 Billion, nearly a 7/8 Trillion Annual Run Rate.
It seems, to myself, that this "golden prosperity" you seem to see in existence, today, is merely borrowed from a Future whose Bounty is yet to be measured.
Post Script: This: "After all, if the obvious end of production is consumption..." Premise is contra to ABCT, no?
Published: October 12, 2006 8:49 AM
Excellent rebuttle of old Keynesians (They're like old hippies).
ME:"Namely, first, how can one compare '73 to ~'06 without countenancing the, literal, Trillions more we are in debt today v. '73?"
The debt is disgusting, but keep it in perspective--the debt to GDP ratio is about the same. Besides, it's inflated debt, worth less than half its value in 1973.
"How does open Importation of Goods manufactured @ ~U$D .64/hr (wage&benefit rate in PROC, on average) and the, thereby, crippling of the American manufacturing sector augur for the soundness of the American economy?"
You've been listening to the MSM too much. Check out the data at the BLS and BEA. American manufacturing is at an all time high in terms of real dollar output. Our manufacturing sector by itself is almost the size of China's entire economy. We have the largest manufacturing sector in the world.
However, I do spot a fly in the ointment. I think the data show that a large amount of the inequality in incomes is the result of low levels of inflation. Low, persistant, levels of inflation are more harmful than short periods of high inflation because they don't make the news and few people plan for them. The wealthy and middle classes have many means to protect themselves from inflation, but the working poor don't. All the poor have is their jobs and without constantly battling for wage increases, their wage increases fall behind inflation every year. As a result, their real wages are falling. This is especially true where college education and health care are concerned because those two sectors have experienced price increases twice the level of CPI.
Published: October 12, 2006 9:16 AM
Economic discussions ignore the primary effect of productivity - changing the nature of poverty. In the bad old days the poor people froze to death in the winter and spent half their life's energy getting sufficient calories to stay alive. These days the poor people have access to the same sorts of consumer goods and services as the rich people but at a much lower quality.
Published: October 12, 2006 11:29 AM
billwald,
This is why societies that reward production rather than consumption have eliminated previous banes of poverty.
Published: October 12, 2006 12:02 PM
I often suspect that the whole point of the continual inflation by the Fed is so that the wage rates of unskilled workers worldwide can equalize without US workers having to take a nominal cut.
Or would that be giving the powers that be too much credit?
Published: October 12, 2006 1:20 PM
What's wrong with the class war economics? :)
There are groups of economists who think that distribution theories of standard neoclassical economics are fallacious (Neo-Ricardians are one such group). This critic is true to some extend, but not much valuable is produced if it's claimed that society is composed of only two classes of people; those who own and those who work.
These kind of theories are always appealing to those who are populists and are crusading againts "greed of corporate elite".
Published: October 12, 2006 2:50 PM
These days the poor people have access to the same sorts of consumer goods and services as the rich people but at a much lower quality.
Quality is in the eye of the beholder. What you believe to be quality goods may actually mean very durable goods - the desirability of that durable good depending on its marginal utility and value.
I would not disdain so easily this era of cheaper goods - they allow me or you to enjoy things that even my parents could not dream.
Published: October 12, 2006 2:57 PM
Very interesting article.
Keynes' idea that some savings "leaks" out of the economy is intriguing. Where does it leak to?
Sione
Published: October 12, 2006 2:57 PM
... no matter what a government does, short of killing everyone in the country, that there is going to be some inequality somewhere.
Some would still complain even in that case because some would be resting in mausoleums while others had just a small tombstone.
Published: October 12, 2006 3:01 PM
I don't think we should ignore the fact that the deliberately inflationist policies of the central banks have created a gap in wealth between those who could leverage their assets into credit (hedge fund investors with more than 1,000,000$ to invest) and those who couldn't and just ended up suffering from inflation.
Published: October 12, 2006 3:21 PM
Sione, I'm no expert on Keynes, but it seems that he believed that some savings were never loaned out to anyone. Maybe people put it under their mattresses! Otherwise, I don't know why a bank would take deposits, pay interest on them, and not loan them out to anyone. Keynes felt that investment didn't equal savings so some savings must be sitting there growing mold. But he seems to have forgotten that consumers borrow, also, for durable goods. I realize that Keynes was smarter than I give him credit for being, but he certainly reminds me of the Orwell saying, "Some ideas are so stupid only an intellectual could believe them."
Published: October 12, 2006 3:42 PM
Urbanitect,
You are exactly right when you mention that those who can leverage assets into credit can benefit greatly from inflation. However, you're a bit off when you state that only the rich can leverage their assets into credit.
People buy rental properties every day. Assuming a 5% inflation in rent prices per year, the rental value of a home doubles after 15 years, triples after 24 years, and is 4x the initial purchase price at the end of a 30-year mortgage. At the same time, the landlord's mortgage payments stay the same, with only marginal costs increasing with property taxes and maintenance costs. And BIG profits can be made:
Throwing in a tax write-off for somebody in the 25% tax bracket and 10% down (an 80/20 loan and a 10% piggyback loan), the investor recoups his initial investment, INFLATION-ADJUSTED, in the middle of the fourth year of owning the home. After that point, the investor gets AT LEAST a 40% inflation-adjusted return on his investment, with the % return ging up every year.
A middle-class person with knowledge of how the economy works could make even more money if they use leverage and a little hard work. Although it's next to impossible to do on the coasts nowadays, it's still workable in the MidWest or South where property values never really rose above the level of inflation. Take a look at Ohio, for instance, where annual property appreciation has been 3 - 3.5% over the past 5 years. Say you got an 80/20 load for 6% on a dilapidated 4-family unit for $200K. You sink $50k in upgrades into it and get the bank to re-appraise it at $400k. You get a new loan at the new price (80/20 again). You pay off the old loan and pocket the difference ($160,000). You spent $70,000 on the property ($20k down, $50k in upgrades) and made a $90,000 profit (128%). You still own the property, so you can rent it out for $2,400 - $3,000 a month ($600 - 700 per unit). You take that $160,000 you still have and do it two more times, exponentially increasing your assets. At the same time, you're still getting monthly cash flow from the property and waiting for inflation to make your profits skyrocket. If you start the process at 30, you're worth several million dollars and recieve $25,000 a month in income by the time you're in your mid-40s. You tell your kids the secret to your success and give them some of your properties.
The problem with such a system is it leaves behind those who never learned how the game is played.
Published: October 12, 2006 6:35 PM
Egads! This is nothing but another Bush sponsored ultra-right-wing hit piece on one of the great e-communists of our generation! {laughs}
Frankly, Krugman is such a doofuss and a hack I can't get three paragraphs into his yammering screed anymore. Seriously, the dude went nuts.
Published: October 12, 2006 6:45 PM
Roger M.
Keynes felt that investment didn't equal savings so some savings must be sitting there growing mold. But he seems to have forgotten that consumers borrow, also, for durable goods
When Keynes was alive, in the 1930's, there was no consumer credit in the UK - only mortgages. Very few people owned cars, and those who did paid cash. It was not until the 50's and 60's that people could by cars and furniture on installments, and even then, most people saved up and paid cash. So, I think it's a bit unfair to criticize poor old Keynes for things that did not come to pass well after his death.
You do, however, make a good point - something that Paul Krugman clearly overlooks.
Where was Paul Krugman when Boris Yeltsin's mother needed antibiotics? Clearly, there is a major disconnect between the health care system in the old Soviet Union and the optimal system that Krugman claims a state run system should provide. Evidently, Krugman fails to take into account the constraint that a private system that runs at a loss goes out of business. The state run monopoly system has no such constraint, and has no incentive to control costs. When people talk about the health care crisis in the US, many of the problems are created by Medicare and Medicaid passing on the costs to the private sector.
Published: October 12, 2006 10:18 PM
The problem for Krugman and his buds is one of consumption. That is the US because of technology is so productive that it produces vastly more than it consumes. To make matters worse, it is best at producing things that are easily duplicated, software, movies, financial services, etc.
So the US MUST go out to the world to sell this stuff or face economic stagnation, AKA the Great Depression and the Carter eras.
The problem is those annoying foreigners demand that they sell their stuff that they make less costly than we do, stuff like cars, TVs, electronics, clothes, etc.
So Krugmans's solution is to regulate the crap out of stuff in the mode of Lenin and Stalin to prevent US citizens from conducting legimitage transactions with folks outside the US.
My solution is to UN-REGULATE the crap out of stuff and let the vitality of the US workforce take over the world. It would do a much better job of it than Krugman's precious government has.
Published: October 13, 2006 8:34 AM
Walt: "It was not until the 50's and 60's that people could by cars and furniture on installments, and even then, most people saved up and paid cash."
Good point! I'd forgotten that. So where did Keynes think savings went if not loaned out for investment or mortgages? Did he think people stuck it under their mattresses?
Published: October 13, 2006 9:14 AM
RogerM,
Even if people put "savings" in their mattresses in Keynes' time or today, how does this really effect real savings? People putting money in their mattressess are still forgoing consumption even if the money has been taken out of circulation so to speak. That unconsumed product is still available for investment in capital. Or am I just missing something really obvious here?
Published: October 13, 2006 10:18 AM
Roger M,
"It was not until the 50's and 60's that people could by cars and furniture on installments, and even then, most people saved up and paid cash."
This brings up a subject I wish some economists would address: the durability of goods then and now. My hypothesis is that with a "hard" currency, producers are under more pressure to get consumers to part with their money in the present. So they provide goods of a quality and character that are advertised as "lasting a lifetime."
It's also amazing the degree to which Keynesian economics permeated the culture. Remember Scrooge McDuck with his rooms full of gold coins?
Published: October 13, 2006 10:46 AM
Yancey:"People putting money in their mattressess are still forgoing consumption even if the money has been taken out of circulation so to speak. That unconsumed product is still available for investment in capital."
Actually, if it's under their mattress, it's not available to loan out. Actually, I was making fun of Keynes's idea of money leaking out of the system. Like Sione, I wondered where it might go. I honestly don't know. From an Austrian perspective, there is no leakage.
Reactionary:"My hypothesis is that with a "hard" currency, producers are under more pressure to get consumers to part with their money in the present."
That's a good point. A hard currency does cause prices to decline and so people find it easier to wait to buy something. Still, a lot of things are better today than in the past, such as cars and computers. In the 1970's, my folks owned a used car lot and people would send cars with 100,000 miles to the salvage yard. Today, they're just broken in a 100K.
Published: October 13, 2006 11:01 AM
This issue comes up repeatedly in threads involving money and banking, namely that many commentators, and I would add many economists (Keynes included), confuse the demand for money, i.e., the propensity for individuals to hold cash balances, with the propensity to save. The demand for money and the propensity to save are not the same. Savings involves foregoing current consumption. In addition, the term “hoarded” is scientifically meaningless, since all money is always in someone's cash balance at any point in time.
Published: October 13, 2006 1:51 PM
RogerM,
I know you were making fun of Keynes, but I don't think it completely wrong to think money in the mattress (hoarding of savings) is exactly what he was talking about.
Published: October 13, 2006 3:00 PM
"I would not disdain so easily this era of cheaper goods - they allow me or you to enjoy things that even my parents could not dream."
Agree 100%. But a BMW is a higher quality car than a Ford. In the bad old days the poor people starved in the winter. Now they eat junk food year round and die of fat. These days money can buy health.
Published: October 13, 2006 7:49 PM
Lyingponds indexes writers by their partisan-ness and for a while Krugman was number one. It changes often though so he isn't at the top anymore. I've been googling to try and find the link that brought me there and described it, but nothing doing.
Whoops, found it. I'm glad I didn't hit post earlier:
http://mjperry.blogspot.com/2006/10/partisanship-rankings.html
Published: October 13, 2006 11:47 PM
Keynes may have had gold in mind when he mentioned hoarding. I can see that, because when you buy gold coins or bullion, you're taking money out of circulation because no one can borrow it.
Published: October 14, 2006 8:54 AM
RogerM,
With these two points:
One, "The debt is disgusting, but keep it in perspective--the debt to GDP ratio is about the same. Besides, it's inflated debt, worth less than half its value in 1973."
And, two: "You've been listening to the MSM too much. Check out the data at the BLS and BEA. American manufacturing is at an all time high in terms of real dollar output."
I haven't found anything that supports either view. Maybe you could provide some background data so that these "conclusions" can be independently divined?
Published: October 14, 2006 12:39 PM
It's not clear if we're talking about total debt or just US government debt. If it's US government debt, it was 35.7% of GDP in 1973 and 64.3% in 2005. Source: http://www.gpoaccess.gov/usbudget/fy07/pdf/hist.pdf
The more interesting number is the net present value of the US government, which is in the hole to the tune of about 4x GDP. In other words the collapse of the welfare state is inevitable.
Published: October 14, 2006 5:40 PM
I can see that, because when you buy gold coins or bullion, you're taking money out of circulation because no one can borrow it.
What you're failing to realize is that "any amount of gold is sufficient". If you take a pile of gold out of circulation, hiding it in your mattress or whatever, you're not spending it - not taking other (real) goods out of circulation, thereby making them available to others, much the same as if they had borrowed the gold directly.
Published: October 14, 2006 11:08 PM
Mark Hoffer,
RogerM is correct about the United States manufacturing output. It is at all time highs and, by itself, is about the same size as the entire Chinese economic output. Employment in manufacturing is falling, but this is simply a reflection of the effects of the extension of capital and the ensuing increased productivity.
Below, I have linked to some BLS, BEA, and Wikipedia tables to demonstrate this.
Link1
Link2
Link3
Link4
Published: October 17, 2006 10:54 AM
Yancey,
I appreciate the effort, though, in links 3 & 4, what use is info that is, respectively, 8 and 10 years old?
Past that, it was ol' RogerM's assertion, that he has chosen to leave unsupported. Curiously enough.
Published: October 17, 2006 2:03 PM
The data on manufacturing output is from the BEA. All you have to do is download the data and plot it on a graph. You'll see that in deflated dollars, our manufacturing sector has hit record levels almost every year for decades.
Here's my source for the comparison of US and China: Albert A. Frink, Testimony before the Subcommittee on Technology, Innovation and Competitiveness, June 8, 2008, http://www.manufacturing.gov/pdf/frink_060805_written_testimony.pdf
Published: October 17, 2006 2:31 PM
Mark,
I included the last two to show the long term increases in manufacturing output in the United States since the second link shows only the rate of increase since 2001.
Published: October 17, 2006 3:10 PM
Yancey, RogerM,
Don't you think that the size of the growth of the Manufacturing sector v. the rest of the economy is the important Q?
Published: October 17, 2006 3:32 PM
Mark,
It need not be important. A lot of manufacturing does not require highly educated labor, and as a result, countries like China will have a comparative advantage as long as labor is still a an important component. I don't see a solution this problem if, indeed, it is a problem at all, other than tariffs and other trade restrictions.
What interests me is the progress towards nearly laborless manufacturing. I can easily imagine that sometime in the future that manufacturing will involve so little labor that it will not matter one whit where the plants are located. What happens then?
Published: October 17, 2006 3:40 PM
"Don't you think that the size of the growth of the Manufacturing sector v. the rest of the economy is the important Q?"
Not necessarily. Manufacturing has followed the path of farming in that while total output grows, the share of the economy shrinks. That's because as we become wealthier we don't buy more food or manufactured products, we tend to buy more services. The more advanced an economy becomes, the higher the share services take as a percentage of the economy.
That doesn't mean there aren't problems in the manufacturing sector. Protectionism, regulation, high taxes and, as Dr. Reisman points out, inflation keep manufacturing from being what it could be. The real threat to manufacturing is the Federal Gov, not China.
Published: October 17, 2006 3:43 PM
Yancey,
For the time being, ask yourself why the proposed "Trade Sanctions" are thought to be a useful and effective tool in dealing with North Korea(?)
Published: October 17, 2006 3:52 PM
Mark,
I would not consider them useful. Do you?
Published: October 17, 2006 4:11 PM
Yancey,
Why are they Thought to be useful?
Published: October 17, 2006 5:57 PM
Mark,
You should ask those who think they are.
Published: October 18, 2006 10:55 AM