This is going well, isn’t it? And we are only a quarter the way down the page. Here are parts I and II. Let’s get a third out today.
We have a few graphs in the next stint, but I will let our narrator talk a little bit before I jump in…
This is even more striking when we look directly at incomes for different quintiles:
The Occupy Wall Street movement hasn’t taken the world by storm, but it’s given us a useful social category to think about: the 1%. These people are doing very well indeed: their share of national income was 8% in 1979, and more than doubled to 17% by 2007.
We need to be very clear on what this “income share” business means. It doesn’t just mean that they made twice as much money. Productivity is rising, so the total wealth of the country is rising; under liberalism, if productivity has gone up 50% since 1980, which is what the first graph tells us, then their incomes would go up 50% too. But they did much better than that: their incomes went up 300%.
And that’s just looking at the 1%, not the even smaller percentage that’s doing even better. In the 1960-85 period, CEOs made about 50 times the salary of the average worker. In the ’90s they made 500 times the average worker’s salary‒ that is, their relative incomes went up 1000%. (The recession clawed it down to 350 times.)
By the way, the picture looks the same even if we look at total compensation (that is, including nonwage benefits) rather than wages:
The 10% and everyone else
Here’s a closer look at the income story, from this neat interactive chart. First, under liberalism:
Note that the rich weren’t being punished, nor were they doing badly! The top 10% took in 31% of the country’s new wealth in that period, far more than their fair share by population size. The average income of the top 1% doubled. As I said, liberalism works for everyone, even the 1%.
Now, under plutocracy:
This is a very different social system! There’s still plenty of additional wealth, but the top 10% are getting almost all of it.
The 10% and the 1%
It doesn’t take a stratospheric income to make the 10%‒ as of 2010, it took about $114,000 a year. People at that level don’t think of themselves as rich; they think of themselves as middle class. (I certainly did when my income was close to that level.)
And a key fact about our system is that this tier is doing all right; in fact, since 1980 it’s pretty much received its fair share of productivity gains. The top 10% is also, of course, little affected by 8% unemployment. This is undoubtedly the key factor in our political inertia. Because they’re doing all right, the top 10%‒ which includes the leadership of both parties‒ doesn’t see any great problem.
Why do the 90% stand for this? We’ll get back to this question below, but for now I’ll note that probably most people don’t realize what’s happening. The country doesn’t look all that different; there’s still social spending and politicians gravely talk about the problems of ordinary people. That is, there’s a pretense that the liberal society is still in effect. The quiet change to plutocracy is rarely discussed, and if it is it’s presented as an intractable problem that probably requires punishing ordinary people, not as something that was solved for a fifty-year period.
Alright stop the tape, go check the charts. I have a few questions. Do you see what he is doing here with the same correlative hand-waving as before – that is, arguing that since his definition of liberalism is over with Reagan, the trends mean that liberalism was responsible for the good enjoyed before he came into office? Keep an eye out for this folly, it is common. Of course it is acceptable to have a theory, but the theory must have explanatory power over time, be exacting, and withstand simple analysis. I am not sure this one does, given the fact that Reagan was not a significant change in the way things were done by presidents in the 20th century. But let’s play along…
Yes, perhaps there is income inequality and it is increasing: why should I care if all of us are getting richer – unless it is via force for some and not others? In other words, if the market mechanisms give all of us more wealth (see chart below), the only circumstance in which the situation should be any of my moral business is if some or taking from others by force of arms or law (same thing). It is likely that this is going on given the high-stakes financial markets in bed with the government and Federal Reserve, but that is not what our dear crusader is crusading his crusade about. So let’s consider the stats concerning income mobility, since they are far more important. If a poor guy gets richer over time, what matters is not his original position, but where he ends up:
- Taxpayers whose incomes were in the bottom 20 percent in 1996 had a 91 percent increase in incomes by 2005.
- Taxpayers in the top one-hundredth of one percent had their incomes drop by 26 percent over those very same years.
- Screw it, I will just put in a chart.
Free markets work in a way that push the wealth that everyone enjoys down to the poor. This is because as producers become more efficient at making products, the cost of doing so generally goes down (though the price may stay the same or even go up, thanks to inflation of the monetary base, which is a different issue entirely). Most fruitfully, this is done via the investment of profits into capital (productive) equipment, which allow the producer to lay off a few people while producing the same amount of goods – meaning that the costs of labor decrease and the jobs that are lost as a result of the technological innovation spread wealth to a far greater amount of people (for more info about employment as a means and not an end go here or comment and ask). This means that more poor people are able to afford basic goods that all of us enjoy. It is due to this downward pressure on the cost of goods that we see, in the West and especially early America, the standards of living increase significantly. This makes sense intuitively, doesn’t it? Why else would more people be able to afford cell phones, tv sets, and other consumer goods that used to cost much more than they used to? Why else would the poor in the U.S. be relatively so much more wealthy than those in other countries?
Let me mention a bit of math, as well, to explain why a gap widening is not extremely important (again, there are exceptions to this, as when it is immorally done through coercive means). Historical examination of the data shows that in the presence of free markets, the wealth of people across the board begins to rise. Generally under market conditions, the poor gain wealth faster than the rich. But let’s do that math. Suppose that market pressures double the wealth for all. This means that poor guy Adam moves from making $100/month to $200/month. Rich guy Bert goes from $1000/month to $2000/month. The difference in the pay of the two is $900 initially per month. After free markets have had their effects, the difference is $1,800! The outrage! The market has increased the wealth of both in our extremely simple example, but the income gap has also doubled! Ah, but the purchasing power of both has now doubled. This is the effect of the market that the left complains about and demands be rectified – even while the poor in free market countries enjoy a very high standard of living compared to those in others. But wait! That’s not all! It turns out, the poor in free markets gain wealth at a much higher percentage than the rich. So perhaps Bert’s wealth goes up by 50%. Meanwhile, Adam’s wealth increases by 500%! What are our absolute terms? Adam goes from $100/month to $500/month. Bert goes from $1000 to $1500 per month. The gap has again increased, this time from an absolute $900 difference to an absolute $1000 difference! But think about how Adam’s life has been changed – what would you do with 5X as much money today than you made before? He will now be able to afford much more of the goods that allow him to live in more leisure and luxury than before. Adam is much better off than he used to be, even though the income gap increased. This effect is often missed because it happens over time and as market innovation increases – but it does exist where capital spending occurs without state interventions in the market.
As the author does mention, there is greater growth in wealth to the rich today than to the poor. This is not historically how it has worked on the market, as I mentioned above. A bit of proof. There is a better theory than the one of our neoliberal friend. Regulatory capture (lobbying ensures that regulations create barriers to entry into certain industries), taxation, and the expansion of fiat currency paired with the Cantillion effect (new currency enters the system at specific points that give generally “the rich” access to it first, before the money has had inflationary effects on the supply of currency economy-wide, making their purchasing power greater than those – the poor – who see the currency later) are hints of why a decline is in the works, but lets let our new homie finish before I start to put out a positive theory. Here are them there charts I promised ya’.
The change over time in this arena to the poor quintiles is astounding – and government spending cannot be responsible for the wealth creation.
It’s not just that liberalism distributed the wealth better [better than what again?]. It actually turned the US into a middle-class country. As in most of history, the biggest class used to be the poor‒ about 40% of the country in 1900. In the liberal period, poverty declined from 30% of the population to under 10%. Thus the idea that the US was a middle class country, one where the average person was doing well. This was almost unprecedented in history! The middle class had always been a minority. Under plutocracy, efforts to reduce poverty ended. And now poverty is rising again; it’s up to 15%.
Again, we have a reference to this ghostly “liberalism” that did all of these things, without clear definition except the political persuasion of the author. I will actually agree here, but not on the definition of liberalism that this gentleman has given. Classical liberalism, as understood to be free markets and the independent function of business from state intervention. This theory, with the historical perspective of this country’s development consisting of never-before-seen low regulation, a free economy, and limited taxes is the only theory that has explanatory power. Other countries have tried the left-“liberal” statist experiment that I believe this author is referring to in their countries (again, it is hard to be precise here, because what does he mean? Democracy? State intervention? Parliamentary or congressional lawmaking? Representative republicanism?), and it has never led to the increase in wealth that we have seen in America. We have had, in contrast to nearly any other country in history, low taxes, free exchange, and minimal regulation. It was not for government interventions in the economy that we had the most literate society ever to exist by the end of the 19th century, nor did we have a huge military apparatus to protect our interests and ensure that our commodity costs have always been historically low. The dawn of big-governmentalism came after great increases in wealth, and continued during slowed increases in wealth – yet the thesis today is that government allowed for those increases? Is it possible here that we have an ad hoc ergo propter hoc fallacy? Methinks that’s an easy one to see. Child labor is a great example. Child labor did not stop because of laws. Laws were enacted at the hind end of working conditions improving drastically. In fact, do-gooders banning child labor before the markets could support it in places like Bangladesh led to children prostituting themselves out on the street to continue working and add to the family income such that none would starve. The ignorance of history here is apparent, but it is unclear that any coherent theory at all has been made, since there is no definition included…
Here comes some history!:
The depression and the stimulus that ended it
It’s been suggested that when a great disaster is experienced, people learn something‒ but that it’s forgotten as soon as the generation that remembers the disaster dies off. Then we repeat the disaster. That’s pretty much what’s happened with laissez-faire or libertarian capitalism. Laissez-faire can produce big booms, and it did so in the ’20s. Then it blew up, spectacularly. The stock market crashed, then the economy. And then, for four years, pretty much nothing happened: the Very Serious People of the time thought that the economy needed to be “liquidated”, so they just let it spiral into misery. Unemployment reached 25%; the banking system entirely disintegrated.
The Great Depression is commonly understood to have occurred as a market failure, but that is not what it was. Fractional reserve banking had been around since the mid-1700s or earlier. Under fractional reserve banking, banks only hold a percentage of the amount of money that they have in deposit. The remaining money is lent out or invested elsewhere, generally somewhere with a higher return. This is why there is an interest rate on your savings accounts. Back in the day, you would pay to keep your money somewhere, until banks realized they could lend out money without people noticing (it is not often that someone will come to the bank and demand their entire deposit, so generally a reserve of only about 8-15% of holdings is necessary to ensure that the bank doesn’t become insolvent from too many people taking money out). Additionally, the Federal Reserve system (our central bank / bank of issue) was created in 1913. Due to the massively productive period from the 1890s to the 1930s, great pressure was put on banks to extend more and more credit to productive businesses. This credit expansion took the form of lower reserves in banks, down from around 23% to 10%. This is why so many banks failed during the 20s and 30s. The credit expansion continued into the 20s, and people ended up using leverage (debt) to buy into the stock market. Add to this a massive expansion of the currency base (currency in circulation in the economy; in other words to pay the government debt incurred with the production of guns and war vehicles, the government just printed the money as opposed to paying with gold, driving the value of the currency down) to finance WWI, and you have a sort of perfect storm where everyone is highly leveraged, from the government to the banks to the people. Generally, such a vast credit expansion was not possible without a Federal Reserve. The Fed could ensure that banks did not go insolvent (it failed in this respect over 1700 times, as it often does), and banks began to expand credit more and more boldly with the government guarantee in mind. Several notable economists saw this process occurring, labeled it correctly as a government-induced credit expansionary boom, and were able to predict the collapse, some even to the year… If you are interested, read about the “depression” of 1920 that did not occur despite the exact same symptoms of the Great Depression, for the mere reason that the government did nothing in 1920.
FDR started pumping money into the economy, and things got better. In 1937 he made the mistake of listening to the Very Serious People and cut back spending; the economy went into a recession and much of the progress made was lost. (This wasn’t mature liberalism‒ FDR was improvising much of the time, and not everything he did actually helped.)
As previously mentioned, Hoover was the designer of the New Deal, and he initiated its first stages before his term ended. Remember also that printing money tickets does not increase the amount of stuff in the economy. FDR’s measures, like Hoover before him, were a disaster. The greatest tax hikes in history were the first step, especially on income (the income tax, initiated in 1913, was a “temporary” measure that started at a mere 2% on the higher end of incomes. At the end of Hoover’s tinkering, it was 63% on the highest bracket, and by the end of FDR, rates leveled out over 90% on the top bracket). Despite the measures (or is it because of them?), government revenues dropped significantly. Hoover also instituted massive public works programs, many of which eventually becoming insolvent. Then Mr. Roosevelt enters the picture. Bad times. FDR actually ran on the promise to cut government spending by over 25%. The first stage of the New Deal was to cartel-ize several industries in an attempt to raise wages by restricting output and raising prices. It of course does not work as intended, because prices go up for everyone (which in a depression is very dangerous) and labor is restricted, leading to higher unemployment. FDR’s administration also then began price and wage controls, which increased shortages even more, to the tune of 1.2 million additional workers being out of work and unemployment shooting up to 28.3% in 1933. By 1938, unemployment was still at over 18% in the U.S. (it was less than 10% in Britain). Needless to say, printing more money than had ever seen the light of day was not an adequate solution to the New Deal.
As everyone knows, World War II came along and the economy soared.
But economically, what was WWII? An enormous government spending program. It got us out of the depression and far beyond, when FDR’s earlier stimulus programs only partially did so, because it was eight times larger. In the context of a depression, you have to think big. A WWII-sized stimulus was what was needed, and fortunately it was what we got.
Some folks seem to think that WWII doesn’t count, somehow, because it was a war. It sure was, but spending is spending. Of course, it gave great political cover; it was the perfect excuse to increase government spending 800%. Plus, as a bonus, we defeated the Nazis! On the other hand, we might have needed far less spending if we weren’t essentially throwing most of that money away. Buying useful things, like roads and universities and health care and solar energy and spaceships, should be better stimulus than fighting wars.
Does that mean that government spending is always good? Of course not. It’s good in a depression, and that includes the crisis the Bush administration gave us in 2008. Keynes told us to cut back spending in good times, and ramp it up in bad times. But that gets us into the next subject: debt.
Perhaps everyone with passerby fool’s knowledge of economics believes that WWII was good for the economy – but those who were there and know their history do not think that the economy was roaring along. The reason that this notion is no longer held as true by many economists today is a man named Robert Higgs. Dr. Higgs is a historian whose greatest contributions to the dismal science are the ratchet effect (once the government claims some area of the economy or social scene, it not only never lets go, its presence increases in the area on almost all occasions), regime uncertainty (the tendency of those who run businesses to hold capital funds and hesitate on any investments when an administration shows signs of disregarding economic law), and the in-depth analysis of why WWII was bad for the economy and freedom. The latter was by far the most influential theory the man has in his arsenal, and he has nearly single-handedly changed the way economists view the WWII and post-WWII era.
The lesson to be taken from Higgs’ work is that World War II vastly altered the structure of production to make GDP, spending, and employment numbers look as if our economy was flourishing. In reality, there were serious price controls, periods of terrible inflation at some times and rapid deflation in others, and many other dangerous economic factors that cannot be simply overlooked for the fact that we survived them. Specifically, let me list a few things.
- Nearly 40 percent of the workforce was forced into the government sector at the time. This included teens and pre-teens, as well as the elderly. This is of course the reason that unemployment was “so low” during WWII. A third or so of the able-bodied men were in Europe or the Pacific, and 20% of the populous worked for the state manufacturing tires, gasoline, airplanes, etc. (And where does the government get the money to pay these people? Taxes and debt.)
- Again, we have the false signals proffered by GDP numbers. Higgs gets at the fact that if you are spending all of your money on guns, chances are you will not be doing as well in other areas:
Yes, national output as conventionally measured did grow hugely during the war. . . . [G]ross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944. What the orthodox account neglects, however, is that this “miracle of production” consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military personnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity.
I would like to make a simple note about financing spending through debt, whether it is the government or an individual. Say that you want a car. You can either save your money and buy it, or you can finance it, and have someone else pay for it and pay them back with interest. Either way, it takes someone’s savings to allow you to purchase the car. If you can print money on the other hand (I need not even mention the side-effect of inflation, right?), you can disregard the fact that savings need to be used, and you can push consumption far higher in the present than it normally would be. This means that it is the savings of the future that will have to pay the money back, as you are consuming resources that would normally be consumed in the future. In effect, you are impoverishing future generations by consuming today.
Two other factors aided us in paying off the debts we incurred during the war. We happened to be the greatest victor of WWII. As a result, much of our debt was forgiven outright. Second, as the guy with all the chips in the game, we were able to push the Bretton-Woods system on the rest of the world, ensuring that demand for dollars would continue for the foreseeable future (I will talk about this elsewhere).
Think about it this way (money isn’t wealth!): If wartime spending is a policy that creates wealth, why don’t we have everyone in the U.S. hired by the government building modern warships? We are talking about the best warships ever – the greatest technology, the most expensive metals, the largest, etc. Then, we sail them into the middle of the Pacific Ocean, and sink them! Would we be wealthier? Absolutely not. We would have just destroyed a huge amount of wealth. Wartime spending is a direct example of the broken window fallacy. I will let someone else elaborate:
The illusion of wartime prosperity is rooted partly in how national income was calculated and partly in how the statistics were compiled. Gross Domestic Product, one measure of a country’s output, is defined as the sum of consumption expenditure, investment expenditure, government expenditure, and net exports. A serious problem arises with government spending: How do we assess something not traded in markets? We can assess my computer, my shirt, and my pen because I voluntarily exchanged money for them. How do we assess government purchases? In the national-income accounting they are valued at cost, but at best this only tells us what those resources could have earned in alternative lines of production. The costs don’t indicate the value of what the government has produced.
But what happened after WWII to get us out of the Depression? We went back to freedom! Millions of men on the government payroll killing and manufacturing were unleashed, which meant that the money that was being taken from the markets and via debt (I repeat myself) could be left in the hands of those who produced it. All of the materials which were expropriated by the state for war manufacturing was put back on the shelves for consumers and capital investors to purchase. The largest deregulation period in the history of the world took effect. People used their savings that they had been building during the war to buy goods. The markets came back.
Does anyone else see a danger here in the idea that wartime spending is a good way of growing? That the method and means of killing is touted as a net economic gain?
Until next time…