“So as I suggested in the speech, what I want to make sure everybody in Washington is obsessed with is how are we growing the economy, how are we increasing middle-class incomes and middle-class wages, and increasing middle-class security. And if we’re not talking about that, then we’re talking about the wrong thing. And if our debates around the budget don’t have that in mind, then we’ve got the wrong focus.” – Barack Obama
Tenebrarum’s main thesis, with which we agree, is that the president seems to be willfully in denial about how economic policy leads to income inequality. Median household income is falling (actually falling) while the GINI coefficient is rising (greater income inequaltiy). (Actually, on that note, there is some contention as to whether GINI is rising for families or individuals and which one is more important.) Such would seem to run contrary to the social/political goals of a left-wing president, and yet here we are; five years into his presidency (the first two of which where his party had unopposed control of the government) and the rich are getting richer while the poor and middle class stagnate or worse. What gives?
So what causes this income inequality? I think we can point to a number of causes throughout history. Talent disparity is a natural factor (we don’t all produce the same). So too is effort disparity. Everybody wants a new car and a day off from work, and folks have to make decisions about which is more important to them (sometimes you can’t have both). These are legitimate and fair reasons for income inequality, but there are others. Certainly there’s capital inertia, where the rich stay rich and the poor can’t break in. (I don’t oppose this, but it’s not as natural as the prior two.) Then there are government policies that help the rich at the expense of the poor.
I’m sure the list would go on, but it is this latter category that most interests me. As a proponent of “Golden Rule Democracy,” the advent of government policies by “we the people” that push down the poor to build up the rich greatly bothers me. So what government policies do such a thing? Certainly not the tax rate. A progressive tax rate intentionally punishes the extra productivity of the high wage earners (on a relative basis) and cannot possibly benefit the rich at the expense of the poor.
There are corporatist policies to consider. The government, for a long time, has piled on regulations that implicitly favor big business over small business. Further, the president’s recent “grand bargain” proposal on tax policy apparently wants a 28% top tax rate for corporations but a 40% top tax rate for small business. One could easily contend that such policies help the super-rich by limiting competition.
(While I will never give Tenebrarum economic policy pointers – he is way out of my league – I do quibble with one note he makes: “President Obama, whose credentials as a socialist are hardly doubted by anyone, ironically has presided over a huge decline in median household incomes.” I have, on several occasions, called the president’s socialist credentials into question. He’s been more of a corporatist, or perhaps even fascist, than a socialist.)
Fiscal policy is a mixed bag here, with tax-funded giveaways to both poor and rich. Monetary policy is a separate issue, it appears to be all in favor of the rich, all the time. Money printing by the Federal Reserve always benefits those with “first access” to money, at the expense of everybody else (it’s “zero sum”). This means the government, the politically connected, and the already rich benefit from Fed policies, while everybody else suffers. The rich benefit if for no other reason than printed dollars inflate asset prices, assets that are already owned by the wealthy, and deflates the value of a paycheck or a fistful of dollars, which is all the poor and middle class may have to go on.
On this note, the president actually comes of sounding reasonable. From the NYT interview when asked “what are you looking for in a Fed chairman?” (Bernanke is gone soon and a nominee is forthcoming):
And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.
And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.
For the most part this is boilerplate. But there does seem to be a bit of a subtle jab at Ben Bernanke and central banks in general with that whole “not in the abstract” bit.
The cynic (like me) views central banks as modern mechanism of wealth transfer from poor to rich. They do this by printing money and handing it out to preferred partners (devaluing the money everybody else has). When faced with “dual mandate” business, central bankers will reach far and wide for explanations as to why they most move ahead with money printing despite clear failure (historically) to achieve anything more than a boom-bust cycle of successive bubbles. The “dual mandate” business is just an abstraction, a cover story.
The president even notes the need to not create new bubbles. An excellent point. I’m not sure he has any candidates available who will avoid bubbles. But if he means this as a dig at Bernanke, then great. Or, if he means it as a tip off (read “not Yellen”) then also great.
Here’s my issue though (and Tenebrarum’s as well). If the president actually wants to knock down this income inequality problem, the only reasonable way forward is to move away from the Federal Reserve and back to a sound money policy, a “gold standard” or some other standard that prevents the Fed from changing the money supply on a whim. That will prevent the pro-rich, anti-poor abuses of fiat currencies. I won’t hold my breath.
I’m actually willing to give the president the benefit of the doubt here, I really am. I don’t think he actually wants to punish the poor and favor the rich. (Or maybe he does, and the rest is just smoke & mirrors.) But if your policies only achieve the thing you don’t want, then you really have to look at changing policies. We’ll see if the budget debates or Fed chairman nomination point toward anything different.