Monetary Policy. I’m not only not feeling it, I’m dehydrating because of it.
by Daniel Becker
Continuing my prior post suggesting that what ever monetary policy has done, it has not reached that vast majority nor has it addressed what is the main issue, I viewed this chart by Mike Kimel and thought: Perfect!
Then comes Ken Houghton linking to this article with it’s chart.
What do they have in common? Income inequality. So let me repost this graph from my 12/2007 post.
I’m only posting the second half of the graph, as that is the one that matters.
So, what is the real culprit? What is it about the fuel that made us get to where we are today?
We started starving the engine of fuel. And we did it by using a supposedly better fuel distribution system. Instead of moving the money into the engine via the broadest distribution system, we followed an idea that suggested a more focused distribution system would work. It has not worked. It has quite literally starved the engine of fuel. I noted this here.
To quote that post using the time span of 1933 to 2005:
For the first 43 years, GDP doubling was always ahead of the income. For the next 32 years, GDP growth was always behind the income which was do to the top 1%’s share. Their’s is the only income that increased faster than the economy. In chart form it looks like this:
First 43 years doubling: GDP 8.6 yrs, 99%’ers 10.75 yrs, 1%’ers 14.3 yrs.
Next 32 years doubling: GDP 10.6 yrs, 99%’ers 11 yrs, 1%’ers 8 yrs.
The first 43 years the share of income to the top 1% was declining to a low in 1976. After that in was increasing.
Ok, now to Mike’s chart. He stated:
Basically, if you corner enough economists, you might get them to tell you recessions begin if there’s a big drop in private consumption, private investment, or gov’t spending.
Reading that statement while looking at his chart should be causing fire alarms and sirens to sound. This is because, if “private consumption” is an accepted cause of a recession, and the only time such appears to be associated is this current recession in 72 or so years of having recessions, then something has radically changed. If that chart showing that an accepted cause of recession only happened once in recent history, then honey, it’s the big one.
I think there is no way to deny it. Income inequality is the dinosaur in the room. It is the meteor that hit the earth. It is why all the past solutions theorized and used since the New Deal recovery are not working.
So, look at my chart again. It’s borrowed money that keep the consumption going since 1996 (yeah the supposedly great Clinton year). You do know that the share of income rose faster to the top 1% during his 2 terms than during Reagan, Bush 1 and Bush 2? It was debt combined with “new products” designed to pretend people could pay the debt which kept it going.
In terms of numbers: $1,400,000,000,000. That’s 1.4 trillion dollars every year, year in and year out that the original system had moving through it that is now somewhere in the new system doing nothing as it relates to building a larger, stronger, healthier economic engine. You can’t cut taxes enough to make up for this. You can’t distribute enough money via QE to make up for this mostly because QE does not address this at all as noted.
Still not convinced with my graph, Mike’s chart and the chart Ken referred too? Then try this on for size: Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007, by Edward N. Wolff, Levy Economics Institute of Bard College
March 2010 Page 20 to 22
As noted above, the ratio of debt-to-net-worth of the middle three wealth quintiles rose from 37 percent in 1983 to 46 percent in 2001 and then jumped to 61 percent in 2007. Correspondingly, their debt-to-income rose from 67 percent in 1983 to 100 percent in 2001 and then zoomed up to 157 percent in 2007! This new debt took two major forms. First, because housing prices went up over these years, families were able to borrow against the now-enhanced value of their homes by refinancing their mortgages and by taking out home equity loans (lines of credit secured by their home)…Where did the borrowing go? Some have asserted that it went to invest in stocks. However, if this were the case, then stocks as a share of total assets would have increased over this period, which it did not (it fell from 13 to 7 percent between 2001 and 2007). Moreover, it did not go into other assets…The question remains whether the consumption financed by the new debt was simply normal consumption or was there a consumption binge (acceleration) during the 2000s emanating from the expanded debt? That is, did the enhanced debt simply sustain usual consumption or did it lead to an expansion of consumption?
The average expenditure of the median income class was virtually unchanged from 1989 to 2001 and also from 2001 to 2007. Thus, the CEX data, like the NIPA data, show no acceleration in consumer spending during the debt splurge of the 2000s. As a result, it can be concluded that the debt build-up of the 2000s went for normal consumption, not enhanced consumption.
Got that? Let’s summarize: The share of income to the 99% of people declined from 1976 onward. At the same time the means of making money changed from labor production to money manipulation (producer economy to finanicialized economy) adding to the reduction in share of income. We also changed the ideology to one from relying on the vast population (as represented by the individual and We the People) to relying on a small portion of the population to distribute what money was created. We did this for 33 years. By 1996, people were borrowing as a means to sustain their standard of living (not increase it). If the people are not spending to increase their standard of living, then is the economy really growing? By 2006 people were no longer able to make the payments and consumption was declining. Then gas hit $4/gal and winter heating was looking like another $4000 to $6000 would be needed.
To date, nothing has been done to address this. Nothing at all. And, by “this” I mean, the income inequality that has resulted in an an economy where a very small group of people (top 1%) are taking money out of the system (that is money that would fuel the engine) faster than the engine can make it which results in an ever faster declining share to the rest of the people. Instead, we have refined new fuel and dumped it right into the top 1%’s hands and wonder why the engine is still sputtering?
One other issue I have with framing and the words used today: Under water.
People are not under water. They are not drowning in debt. On the contrary, people are dehydrating. They are starving for water. Do you know what the symptoms are of dehydration? You get thirsty and then urinate less to conserve water. (debt spending) Then you stop making tears and stop sweating. (can’t borrow) Eventually your muscles cramp, the heart palpitates and you get dizzy. (close to bankruptcy, voting against your interest) Let it go long enough and you get confused, weak and your coping mechanisms fail. (Tea Party, etc) In the end, your systems fail and you die. (recession)
People are dehydrating and Washington is doing nothing about it because they believe it is drowning. They are throwing out life boats to people in a desert. That is the chart Ken linked to.
Excellent post, Dan! NancyO
They live in the manor.
Right?
earn their income by such a manor
I’ll be **** if I hadn’t been thinking something very similar as I moved away from mindlessly supporting the “Democrats” as they became Dims.
It’s borrowed money that keep the consumption going since 1996 (yeah the supposedly great Clinton year). You do know that the share of income rose faster to the top 1% during his 2 terms than during Reagan, Bush 1 and Bush 2? It was debt combined with “new products” designed to pretend people could pay the debt which kept it going.
I’m almost completely dehydrated. And it’s not a surprise.
Thanks for your analysis.
S
the income inequality that has resulted in an an economy where a very small group of people (top 1%) are taking money out of the system (that is money that would fuel the engine) faster than the engine can make it which results in an ever faster declining share to the rest of the people.
Dan,
Nice post. I disagree with your conclusion though. People are drowning in debt. (As is the Federal Government). They have way to much and have their main asset, their house, not worth the mortgage. People then make the logical choice to rein in spending and beat down the debt before they lose everything. And some don’t make it and go into BK and/or foreclosure. Your solution seems to be for the people drowning in debt should be to go out and take on more debt?????? With $4 gas and home heating oil going up – heck with current administration doing almost anything it can to increase energy prices in general – and you want people to INCREASE their debt? Especially now in the face of an uncertain job and regualatory environment?
Did I miss the part where your solution make any sense in the world?
The Tea Party is in response to the huge, overwelming Federal Government debt and the increaseing intrusion of the Feds in every facet of your life that that debt represents. Yet your response seems to be more debt, pour more water onto the drowning people.
Second – where did that 1% go hide that $1.4 Trillion (US Fed debt for 2011 ONLY BTW)? Under a matress – since its obviously no where in the economy.
And lets see what’s happened in the world. 1973 – Arab Oil embargo and OPEC. BY the end of the Carter administration Japan and Germany finally over the post war reconstruction issues and starting to compete on the open market against the US (especially against the bloated and inefficeint Detroit car makers). The the Soviets collapsed under the weight of a corrupt and unworkable philosephy. Now the US is competing globally against growing countries as India, China, and Brazil plus Japan and Europe. Yet we still seem to think we can have unskilled labor making 10 times what the same person makes in Brazil or India (forget China) while having free trade. Bulk movement of non-perishable goods is extreamly cheap. There is little if any savings, with widgets to be sold in Denver, between building them in Detroit or Mumbai. We are now competeing against the world for jobs and unskilled labor is dirt cheap. And how much change of the US raw materials used comes from overseas vs say just the US/Canada/Mexico i the last 40 years – and how much is Indai and China ( 2+ Billion people) now demanding?
And the advent of the information age in the 90s has just accelerated this to a lightning pace. I have more connectivity and information at my fingertips than FDR did as President.
Yet their seems to be some idea that we won’t be effected by all this? It harkons back to Mike’s claim that the Fed Fund rate was the cause of US economic growth in the early 20s – we are not an island.
BUt yes, just keep putting it all on the credit card. This time is different.
Islam will change
Ah, you got me Suzan. It’s my manner. : )
I am hesitant to put this in writing, because some Ron Paul acolyte is sure to misinterpret, but I am starting to suspect the early 1970s is important for another reason that does tie in with what DolB is saying. What changed in the early 70s was the abandonment of the gold standard. At first the Fed handled it poorly – Burns was clearly out of his element, and we ended up with the remaining of the decade mired in stagflation. Volcker figured out what to do, but in 1987 got forced out by Reagan’s minions. Greenspan was so-so for a while, but he mishandled the post 2001 recession…
Exactly where that puts on the dehydration v. drowning analogy I couldn’t tell you, but the lesson may be that we need people who know what they’re doing at the Fed.
Hi Buff, thank you.
My solution is not one of taking on more debt. Far from it. I do not understand how you came to such a conclusion. People do not have too much debt as noted in the spending type. Just like people are not over taxed.
There is only one problem: to little money. Not to little money in the country or economy, but to little money in the hands of the many.
Thus, dehydration, not drowning. To continue to use the drowning analogy is to continue to ignor the income inequality. Calling it drowning means the continued solutions will be life boats in the desert.
I suppose the implication of the title is that loose monetary policy is somehow responsible for inequality. Except the evidence is completlely the other way. It was tight money in the 1920s and the contractionary part of the Great Depression that was correlated with extremely high inequality.
In 1933 FDR devalued the dollar by 41% and set of the greatest peacetime boom ever (real GDP growth averaged 9.5% during 1934-37). During this period income inequality declined substantially. And all through the period of loose money and steadily acccelerating inflation rates in the postwar period through 1978 inequality steadily declined.
It was only when we adopted tight monetary policy to squeeze the inflation out of the economy that inequality started to increase. And based on core inflation rates, and the jobless rate monetary policy hasn’t been this tight since the contractionary part of the Great Depression (when nominal interest rates were also 0%).
If you want to reduce inequality you need loose monetary policy like FDR.
P.S. Nominal interest rates tell you absolutely nothing about monetary stance.
This post confirms our suspicions. Look forward to interacting with you as we roll out our activist site where we will be taking collective action to fix these shortcomings.
Thanks
B
Mark Sadowski: I suppose the implication of the title is that loose monetary policy is somehow responsible for inequality.
Not at all. Not even suggesting that in this post or the past. Very simple message. Regardless of what you do with or think about monetary policy, it will not and can not be the solution to what is an income inequality problem.
Now, it may be part of the problem and solution, but as noted in prior posts, the share of income to the top 1% being at 16% appears to be the point at which the other 99% have income above or below personal consumption.
Even the recession of the mid/late 30’s you see that income share had risen above 16% and hit about 19%. It was on the decline prior to that. Then Roosevelt was led astray. In 1945 that share went below 16 and never looked back until 1976. In 1996 when the 99%’s income fell below personal consumption, the share of income to the top 1% crossed above 16% and has not stopped nor has the separation of income to the 99% and personal consumption.
Tight money of the late 70’s is not the only cause nor would I argue the major cause of income inequality. To many other policy change specifically targeting labor in the negative is the main cause. Besides, Mike has shown that the Fed is loose with it’s play based on the presidents party. And everytime labor looked like it was going to get a piece of the 90’s action, Greenspan tightened up. Over heating economy and all was the reason (excuse). That’s not monetary policy for the masses to improve income inequality thus economic reasoning. That is social structuring policy.
To me the only issue with tight money of Volcker was that people with money could earn 19% simply leaving it with the bank. That meant business had to earn more. The capital class I think thought earning 19% doing nothing was the norm instead of the exception and suddenly there is a new bench mark for what was considered value. Heck, I had an IRA at 22 that at 7.5% and $2K per year would have me at $1 million dollars by retirement. How’s that 7.5% now?
Volcker may have stopped the inflation, but knowingly or not he created the mark for the financialization of our economy. This did not happen in a vacuum. We were getting Milton/Rand ideology at the same time. Danger Will Robbinson!
I’m not addressing the right or wrong of monetary policy and it’s success. I’m addressing the lack of addressing what effects 99% of the population. Ken and Mike are more capable of arguing monetary policy.
Thanks for the thoughtful reply.
I find it interesting that you think that 16% is the threshold beyond which the top 1%’s share of income is destabilizing.
Again, I’m only going by the two points at which the 99% fall below personal consumption or above it. 16% was the point.
With that, I also believe that when we get much below 10% to the top 1% there is a problem with the 99% thinking they are rich and thus voting as they did for Reagan’s/Stockman et al’s trickle down.
Nixon was the guy who could open up China, he was also open to radical economic ideas, almost like Obama (not a good thing today). In the early 70’s Nixon allowed/tried price controls etc to get around a touch of Vietnam war demand pull inflation (or was it resource shortage cost push?). I was doing a mid level econ courcse undergrad at the time.
Then Nixon tried something like proce controls like the rationing idea.
Then Nixon went off gold, and went to see Mao.
The oil embargo was a crisis I had a big 8 cylinder monster, could go fast straight between hihg test pumps.
Were Reagan and Nixon from the same part of Ca?
Today, Obama thinks he can get reelected like Nixon, staying in a cruel and unwinnable war and acting with the economy in very odd manners.
Sad!
Jerry Ford tried slogans.
Dan,
Ok I misunderstood, I came to that conclusion since you said they too little money, and the only place they are going to get more is by debt. Plus this,”People do not have too much debt…”
But the bottom line is that their is a large number of people who are in debt over their heads. On top of that their largest asset isn’t worth what’s owed on it, and probably will not be for quite awhile. The smart thing to do in this situation is either dig in, live frugally and get control of your debt OR go BK and get out from under it.
How does income inequality figure into this issue?
I’m watching a member of my extended family go the first choice. I expect it will take her 4-5 years, assuming she holds her present job, to get back in the black. She got into the hole in the first place by over-spending way beyond her means. Now its time to pay the piper and its going to be tough – but she wanted to avoid BK and hold onto her house. She is drowning in debt and every free penny she has is going to pay it off.
Again how does income inequality play into the fact she lived a cavier lifestyle on a ham-salad income?
And there are millions in her position especially with respect to her house (underwater). People are drowning in debt and are living frugally to get out from under it.
Yet you stated they are not over taxed? So increase taxes and take more money from the drowning? (If you mean you want to tax high-income folks and give it to the drowning say that). And exactly what do you propose to get the money out of the wealthy? How do you propose to get a cut of Teresa Heinz-Kerry’s billion in tax free muni’s?
You say too little money, but where is it? Gates and Buffet are worth billions, is it all hiding under a mattress somewhere? Obama is going to run a deficit this year of $1.4 Trillion. Roughly 40% of the Feds expenditures will be borrowed. Is this the money be sucked out of the economy?
Is your solution is to just print it up and send everyone in the US a $5,000 check (cost roughly $1.5 Trillion). I’d take it for my family and pay off some of my mortgage debt. And should I expect another $5K next year from the Fed printing press?
We, both as individuals, a lot of state governments (California!), and the Feds, are drowning in debt. We spend more than we have. Its really that simple.
The rumor is we are about to bailout the Greeks who lived well beyond their means. Who’s going to bailout the US?
Islam will change
Bseeker,
Exactly what “collective action” have you in mind to collect from Teresa Hienz-Kerry’s tax free muni billion? Or go after Oprah and her billions?
I’ll be waiting to see if the idea is to lock in the wealthy elite and kill the chance of anyone actually joining them like non-college grad people like Gates.
Islam will change
Mike,
Good point. Getting off the gold standard was the right choice and Burns probably muffed it. But the world was changing a lot in the ’70s. The days of cheap oil were ending. The US had just got its butt handed to it in Vietnam and was suffering a big collective ‘who are we?” moment. The Carter gets us further humiliated in Iran and it looked like were cooked. You had Japan and others finally coming on line as competitors. Lots of stuff going on then and since then that severely degraded our ability to compete globally (both inside and outside the US). The biggest was the ability to tap into unskilled labor world-wide. This eliminated the ability to graduate HS, go to work for the UAW and join the middle class. The unions didn’t help themsleves here either, but they couldn’t really slow it down.
We are seeing a global wage arbitrage and leveling. The US is on top with only one way to go. And as we face the crises we have…Obama…
Islam will change
Also,
What political party do you plan to accomplish this with? The Dems and Obama gave us the Obama tax cuts during the lame duck session. Or do you thik the Rs are going to raise taxes? And that just takes more moeny out of theeconomy.
How do you plan to get this money?
Islam will change
The key to solving the inequality puzzle is in realizing that it isn’t tight monetary policy or loose monetary policy that causes the problem. It is the volatility of monetary policy. As Mark S. points out, it was tight policy in the 20s that caused a deflationary boom and the rich got richer. As you point out Dan, it was also tight money in the late 70s and 90s that gave us the same thing (I know that isn’t the way most people look at the 90s but I judge monetary policy by the value of the dollar and from 1995 to 2002 the dollar went straight up; that’s tight policy). We ran a loose policy through the ’00s (dollar falling) and while there was a period where everybody seemed to be getting rich on houses, the aftermath has seen the rich get richer again. So it doesn’t seem to matter, loose policy, tight policy, the rich get richer. You can’t just look at the middle part of the ’00s when policy was loose and think that loose policy is the answer. Obviously, it wasn’t sustainable. I’m sure Mark S. would respond that if the Fed hadn’t been too tight in late ’08, we would have been okay but I don’t think so. Remember that summer when oil was hitting $140? That’s something the poor can’t deal with. Inflation ultimately hurts the poor a lot more than the rich. The fact is that the wealthy have numerous ways to deal with the volatility of the dollar while the middle class and the poor do not.
There are a lot of pieces to the inequality puzzle but monetary policy is a big one that gets ignored by most. Mark Thoma had a post a while back called Is Income Redistribution the Key to Economic Growth? (I’d put in a link but it seems to be broken). Like you, he mentioned the big change in the early 70s and completely ignored the end of Bretton Woods. BW wasn’t a true gold standard but it did for a while provide a stable value for the dollar. That was key in my opinion to providing a level playing field and keeping inequality in check. I’m not endorsing a gold standard but however it is defined, a stable dollar has to be a goal if we are to address inequality. I wrote a long post in response to Thoma’s aricle that he was kind enough to link: http://alhambrainvestments.com/blog/2011/01/09/is-income-redistribution-the-key-to-economic-growth/
I think this is the most important issue facing our country but we won’t solve it unless we consider all the factors involved. Sound and stable money is surely part of the answer.
This is a very interesting analysis of data. I agree with the overall conclusion that a major source of our economic problems is the lack of money (share of the pie) going to the lower 99 percent over the past 30-plus years. The evidence seems to be building that we’ve been hurting ourselves badly. The retort from the top 1 percent appears in part to be that the lower 99 percent should instead reduce its standard of living. For example, reduce government delivery of public goods and income transfers, and avoid policies that might reduce unemployment or increase wages. This is a road consistent with declinists’ views of America’s future but it would appear that we have some powerful people who really don’t give a damn about our country’s future as long as they get theirs.
Income “inequality” is not causing problems, but is a natural result of our economic and technological growth.
Take a look at “Income Inequality Increasing Dramatically…… in the NFL”: http://www.minyanville.com/dailyfeed/income-inequality-increasing-dramatically-in/
50 years ago there wasn’t that much money in the NFL – revenues were primarily just ticket sales, but with the growth in population, affluence, and importantly technology (TV, Cable, Satellite, advertising, etc. etc.) the money has become HUGE. So the difference makers ie. Tom Brady, have much more leverage/potential productivity. The backup linebacker, not so much.
It’s the same thing with the economy in general. What was considered a large company even 20 years ago wouldn’t even register today. So the potential leverage is that much greater.
Also take a look at a side conclusion of the NFL income disparity story:
One, says Perry, is that rising income inequality in the NFL has not come at the expense of either the lowest-paid or the median-paid players. The minimum NFL salary increased by almost 29 percent between 2000 and 2009 in real dollars, and the median inflation-adjusted NFL salary increased by 41 percent during that period.
“Therefore, despite rising income inequality in the NFL, all players (the lowest-paid players, players earning the median salary, and those earning the highest salaries) were better off in 2009 than in any previous year,” he says. “In the NFL, the highest-paid “rich” players get richer, and the lowest-paid “poor” players also get richer.”