Real Time discusses income inequality and the Great Depression

OrbitalPower

On Bill Maher's latest "Real Time" show, with one of the best panels he's had in months, he quotes BYU graduate, economist, and former fed chairman Marriner S. Eccles, who noted that when there is a large inequality in a society and the rich hold all the cards, it screws up the system:

"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." --Marriner S. Eccles, FDR's fed Chairman. (1951)

Certainly it makes sense to me: people will do what they can to survive, and this of course will be exacerbated due to deregulation.

And if those statistics are correct that Maher cites, that income inequality is the greatest it has been since the great depression, we could be in real trouble.

In social science don't they consider a system that allows few hands to control all the resources to be tyranny? Such as an oligarchy, probably what most capitalist systems would devolve into if left unregulated, or a polyarchy, what political scientist Robert Dahl dubbed the American system?

ultimablah

Who gave the rich all their money?

russ_watters

China, with its vastly increasing income inequality must be in real trouble, then -- despite that they also have consistent 10% gdp growth....

I'm not a big believer in coincidences. Economic growth and income inequality go hand in hand. Income inequality helps drive economic growth. If the opposite were true (that income inequality was harmful to prosperity), we would not have seen the spectacular increases in the Western standard of living over the past 50 years.

The US economy is vastly different today from pre-WWII. There was an awful lot of "old money" out there - people who never worked a day in their lives and lived only on their investments. These people didn't take much from the economy but they also didn't add much - in essence, they weren't really part of the economy. There isn't nearly as much of that today. Today, we have a class of "working rich" - entrpreneurs who have earned their money in ways that stimulated the economy (ie, by starting businesses).

At the same time, there is a theory that in a healthy capitalistic society, the historical income inequality will be inverted U-shaped, decreasing as more of the lower end get pulled up. We may yet see that happen.

An article on the subject: http://elsa.berkeley.edu/~saez/pikettyqje.pdf

LightbulbSun

Interesting. So would Obama's economic policies actually stagnate economic growth?

jal

Get real!!! ... look north to Canada .... they have a better banking system and and plenty of growth

russ_watters

Could you be more specific about what policies you mean?

wildman

I think there are a couple of issues at work in China.

First, although the inequality is increasing in absolute quantities, I think one could argue that in a percentage, inequality has actually gone down. Under Mao, a few leaders controlled almost all the resources, now the control and wealth is spread very widely.

Second, a lot of the economic growth one sees in China is due to American outsourcing. So in a sense, the Chinese growth can be explained simply as displaced American industry. It is not "real" in the sense of wealth creation, it is more like wealth displacement.

I think the real model of a economy with concentrated wealth is the stagnated Third World economies. After all, if there is a single person who makes $100 million a year, that person may purchase a dozen cars and maybe 6 or 7 houses. But if you have 1000 people making $100,000 a year each one is going to buy a couple cars and a house. They will be a engine in the economy that very rich never will be.

russ_watters

My point is that you can't have those 1000 people making $100,000 a year unless there is someone to employ them and pay them. And that's the guy making $100 million. They can't exist without him.

mheslep

Thanks for the QJE piece RussW. Here's an old joke I heard once while visiting US old money, blue-blood country; it underscores the point above by it's out datedness. Paraphrasing:

A charming young woman of the mansion, servants, and capital set suffered a reversal of fortune when her husband passed away and left the family in financial dire straits, threatening to end their way of life. After a time, the young woman continued to entertain society with little apparent reduction in circumstance. One one such occasion, two matrons engaged the young woman and inquired about the paradox. She deflected the inquiry for a time, but they persisted. Finally, mortally ashamed, she admitted she had turned to occasional prostitution, to which the matrons replied, "Oh thank heavens dear, we thought you were dipping into capital!"

LightbulbSun

Correct me if I'm wrong on this, but it seems like Obama's economic policies are centered around increasing taxes on the rich (the ones who makes $250,000 or more a year) and evenly distributing the wealth. Is this just a quixotic idea or will this actually improve economic growth?

mheslep

Canadian unemployment over the last 10 years averaged over 7% compared to 5% in the US. US GDP growth averaged over 3% in the last five years, Canada under 3%. To its credit, recent Canadian governments have been running a budget surplus. To emulate all this the US should first ... become the 2nd largest holder of oil reserves in the world (counting tar sands). Oil/gas/mineral exports, mainly to the US, count for a large part of the Canadian industries sector and resulting government revenue, as the recent collapse of oil prices and US slowdown is about to highlight.

http://www.canadianeconomy.gc.ca/eng...employment.cfm
http://www.indexmundi.com/canada/gdp...owth_rate.html

russ_watters

That idea is the very essence of socialism and will undoubtably stifle growth. If by quixotic, you mean dreaming of the ideas of Marxist redistribution of wealth and a resulting paradise - a long dead dream of a flawed ideology - then yes.

Nevertheless, it is clear that socialistic policy is on the rise in both the US and in the West in general. Due to the nature (free money = buying votes) it is difficult to stop, but the fact that the US's economic growth has long eclipsed her more socialistic western counterparts is evidence of the flaw inherrent in those policies. My biggest economic worry for the future is about this very issue.

Here's an article on the subject - I haven't fully read it, but it looks pretty good. I was mainly looking for a citation for the two claims in that last sentence (the growth fact and the reason for it). http://faculty-web.at.northwestern.e...gordon/355.pdf

The author goes on to discuss reasons for the shorter hours and more vacation. I'm not in 100% agreement with that point, but the gist of it is the same.

mheslep

I agree that a) the trend at the moment is for more socialism in the US, and b) that other Western countries have chosen much greater levels of socialism relative to the US in past decades. However, I argue that at the moment other Western countries are probably moving away from socialism; the record is at least mixed.

Observe:

• Canada. Government has grown more frugal under Harper and his predecessor; its former government-only health care system now tolerates a large growth in private health clinics.
• Netherlands: reformed a previously government run health system to now use mostly private suppliers w/ a universal mandate.
• Ireland: very low business taxes, 1/3 of the US rates.
• Central Europe. Poland just overhauled its formerly state run health system to provide the option of buying private. I believe similar efforts are under consideration elsewhere in CE.
• France: ? The French President is less socialist than his predecessor, at least by sound bite, and has attempted to open up the employment laws.

I assume these trends are the result of growing recognition of the consequences outlined, for instance, in the article posted by RussW. Hopefully these trends in other OECD countries will be noticed in the US.

Crosson

Have you looked at the stock market lately? Clearly the very essence of capitalism has stifled its long-term growth...

drankin

I disagree. Our current situation is due to banks loaning money to people who could not pay it back. Basically, gambling by both the lender and borrower. The markets will readjust.

Socialism does not allow people to build wealth. It does not reward individuals who work hard and take the risks to pursue success. It's an ideal (similar to a religion) that, in my opinion, does not inspire innovation let alone support "long-term growth".

russ_watters

I'm not plugged into foreign politics enough to know much about that - but I hope you are right that the pendulum is swinging back toward freedom/democracy.

russ_watters

"lately.....long term".

No.