Secular Stagnation And Income Inequality

By Big Tent Democrat, Section Other Politics
Posted on Wed Dec 17, 2008 at 08:15:00 AM EST
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Kevin Drum takes up an issue I discussed on Monday - "secular stagnation" (Paul Krugman's term) and income inequality. Drum, responds, as I did, to something Krugman wrote:

Bob argues that nothing will, unless the government does it. This is a modern version of the "secular stagnation" view popular in the 1940s (and visible in Keynes himself), which argued that there would be a persistent shortfall of private demand, and that we'd basically need a permanent WPA to support the economy. This view turned out to be wrong for the postwar decades . . .

As I argued in my piece, Drum points out that Krugman is ignoring the different situation we now face in terms of income inequality:

I think the big thing I'd add to that is growth in median incomes. One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more. This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves.

The flip side of this, of course, is that rich people are going to have to accept the fact that they don't get all the money anymore. Their incomes will still grow, but no faster than anyone else's.

. . . This isn't just a matter of social justice. It's a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama's biggest economic challenge. Until median wages start rising steadily and consistently, we haven't gotten ourselves back on track.

This discussion is missing in our national discourse. I especially wish Krugman would discuss it.

Speaking for me only

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Secular Stagnation And Income Inequality | 4 comments (4 topical)

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One question about definitions... (none / 0) (#1)
by EL seattle on Wed Dec 17, 2008 at 10:55:32 AM EST

I'm not an economist, so this is probably one of those obvious 101 details/definitions that I never bothered to learn. Here's my question.

When is the phrase "median incomes" used separately from "household median incomes"?

I'd assume that households in, say, 1948 usually had one main (if not only) income provider. As more women entered the workplace in recent decades, the number of households wouldn't rise, but the household median income might, because there were more members of the household working and bringing home income.

So even if wages didn't rise at all between year A and year B, if more households became 2-income households, the median household income would go up, wouldn't it?

Sometimes it seems to me that this is a statistic that needs an asterisk that would lead to a chart that could add this sort of detail for purpose of comparison, like pro sports statistics do when the increase the number of scheduled games played per season.

I feel very gloomy today (none / 0) (#2)
by Militarytracy on Wed Dec 17, 2008 at 11:37:03 AM EST

I have had to stop reading financial news this week. Hardly enough solutions out there and you are bringing up the most glaring longest term painful canker. Sometimes I think this is going to a showdown we have to face with Conservatives and the Corporations and then other days I recall the violence that organized labor once had to use, and I think I see the time of it coming to life again. There isn't going to be much of a political showdown happening if Conservative leaders and Corp CEOs and management are getting lynched in the streets.

But Krugman has responded (none / 0) (#3)
by mmeo on Wed Dec 17, 2008 at 04:57:05 PM EST

Big Tent Democrat,
Krugman has responded.

From his blog today, we have:

Kevin Drum writes that

One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more.

This is a widely held view, and I'm as much in favor of a strong middle class as anyone. Nonetheless, I'd say that in terms of strict economics it's wrong. There's no obvious reason why consumer demand can't be sustained by the spending of the upper class -- $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade -- largely supported off of super-salaried Wall Street types -- is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people.

To which, in the comments section, I responded:

Response to Krugman (none / 0) (#4)
by mmeo on Wed Dec 17, 2008 at 04:58:46 PM EST

The obvious reason, since Mr Krugman seems to have forgotten it, is revolution: the dispossessed, deprived lower classes revolt.
Examples in the previous century include the Russian Revolution and the Chinese Revolution. In both cases there were wealthy upper-class elites doing just fine out of the selective application of industrialization, with no broad middle-class or working-class participation in economic advancement.
On a broader note, it is tiresome to hear economists assert that economics is solely a matter of mathematical models, each of which is limited by simplifying assumptions to a narrow range of applicability.
Any investigator has to be aware of the limitations of his assumptions; economists famously fail to address this.

-- Michael Meo