Income Inequality And Secular Stagnation Revisited

Krugman yesterday:

Iíve written a lot about the evils of soaring inequality. But I have not gone that route. Iím not ruling out a connection between inequality and the mess weíre in, but for now I donít see a clear mechanism, and I often annoy liberal audiences by saying that itís probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent. More equality would be good, but not, as far as I can tell, because it would restore full employment.

I still think Krugman is utterly wrong here. Take for instance the issue of homeowner debt, which everyone seems to agree is the major drag on our economy now.. Certainly it is possible to ignore income inequality as a major reason for this problem, but it would be foolhardy in my opinion. I just don't understand Krugman on this issue. See my previous posts on this here and here.

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    Krugman says... (5.00 / 3) (#12)
    by Romberry on Thu Oct 13, 2011 at 02:09:52 PM EST
    ...that "it's probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent." My challenge to Krugman? Show me one. Anywhere in the world. Anytime in history.

    No, the richest 1 percent can not consume enough to employ the 99 percent. Krugman is doing here what economists often do, and that is thinking about the theoretical. Theoretically it may be possible. Theoretically. But as a practical matter? I think not.

    Massive inequality in and of itself isn't necessarily the issue. For example, if you had a prosperous nation where 1 percent of the populace controlled even 90 percent of the pie, it theoretically isn't a problem so long as there is enough pie (a big enough pie as it were) remaining for everyone else to get a decent slice. But that's not what we have. What we have is a pie just big enough that by the time the top 1 percent takes their piece (and pushes for even more), all that is left for many are crumbs.

    Krugman isn't often wrong, and for the times that he is, he usually figures it out and comes around. May take some time for him to figure it out, but in anything other than theory, on this one I believe Krugman is wrong.

    Never under estimate the ability of the rich to (none / 0) (#43)
    by BobTinKY on Fri Oct 14, 2011 at 08:13:52 AM EST
    demand in a society where success is measured by having more & better than your neighbor.  

    Whether that will be a just or productive society is a separate question but it could be one where there are jobs for folks.


    Same challenge (none / 0) (#54)
    by Romberry on Fri Oct 14, 2011 at 09:49:52 PM EST
    Show me such a society. Anywhere. Anytime in history. Just one.

    Krugman of Late is Missing the Point (5.00 / 1) (#13)
    by ScottW714 on Thu Oct 13, 2011 at 02:29:18 PM EST
    The wealth is sitting idle right now.  Sure it's buying large mansions and furnishing some people with really nice goods, luxury goods.  But those same dollars in the hands of us surfs, those dollars would be changing hands many, many times over.  They would be in full board circulation.

    Even dumb A GWB understood this with his $1500 rebate checks.

    We don't need a handful of very skilled craftsmen/women building yachts or designing high end watches, we millions of people doing jobs for us average people who buy average people goods.  Luxury goods benefit such a tiny slice of the population Krugman should be ashamed even trying to make that argument.

    Slice off a big chunk of that cash way up high in the sky via taxes, and get it in the hands of us average joes and jills.  Right now we are in the exact opposite mode and I think the results pretty much speak for themselves.

    On a side note, I love that the OWS has been able to frame the debate in term of the 'us and them', or rather 1%er's and 99%er's.  It a simple concept everyone can understand and it's being used in also every discussion I see, including Me Krugman's article.

    Do you really think (none / 0) (#17)
    by jimakaPPJ on Thu Oct 13, 2011 at 04:33:29 PM EST
    Slice off a big chunk of that cash way up high in the sky via taxes, and get it in the hands of us average joes and jills.

    that your average joes and jills would get any of that money??

    All that will happen is more "programs" to lend billions to people with the right connections to fund politically.......yes politically correct companies such as Sunpower and Solyndra.


    No, you completely do not... (5.00 / 1) (#19)
    by Romberry on Thu Oct 13, 2011 at 05:50:04 PM EST
    ...understand the mechanism by which higher taxes on wealth actually produces better growth and higher wages. It isn't about government loans to anyone. Read this for an explanation that is just too long to summarize here: Everything You Know is Wrong. Tax Cuts Don't Work


    If you look under the hood of the <span>industrial</span> economy, you easily see why there is this counter-intuitive relationship between tax rates and economic growth . With  high taxes, the only way to retain the bulk of the wealth created by a  business is by reinvesting it in the business -- in plants, equipment,  staff, research and development, new products and all the rest.  But if tax rates are low, then there is more incentive to pull the  wealth out, by declaring it as profits that are taxed at what turns out  to be too low a rate. In other words, low taxes create an incentive for  profit taking.

    This in turn creates an incentive for short-term horizons in business  planning. If you're going to be taking all the profits out of a  company, and take home a few million a year, why bother to reinvest  anything in the business? You're going to be rich, and never have to work again, even if the business goes bust. Or gets packed on a boat and shipped to China. Or goes "virtual" and lets all the hard work, like, you know, actually making something, be done by the lowest bidder. Employees? Don't need them.

    There's a solid argument made by the whole piece, but you'll need to approach it with a willingness to consider that argument.

    Well I did and I have (none / 0) (#31)
    by jimakaPPJ on Thu Oct 13, 2011 at 09:25:07 PM EST
    And all I know is that GHWB's tax increases hurt the economy and elected Clinton who prolonged the hurt with another increase but survived due to the Internet bubble until 3/2000 at which point the NASDAQ started a run off that took it 50% down.

    Clinton also enjoyed low oil prices.

    And the bulk of the wealth created is held in 401K's and other small investor vehicles. The dudes who started the business may or may not stay. Doesn't matter. The company stays.

    In the meantime the people who provided the start up money has made a ton of money on some and lost on others. But if they don't then there won't be any money to do the next start up.

    Like it or not, that's how it works.


    When you write "all I know"... (5.00 / 2) (#33)
    by Romberry on Thu Oct 13, 2011 at 09:43:22 PM EST
    ...it seems to me that what you mean is "all I believe", cause those things you think you know are mostly wrong. Laughably so.

    I also know (2.00 / 1) (#47)
    by jimakaPPJ on Fri Oct 14, 2011 at 11:52:54 AM EST
    that when someone goes to the personal insults they know they cannot refute the other person's points.

    To be fair, it's kinda hard ... (none / 0) (#49)
    by Yman on Fri Oct 14, 2011 at 11:55:57 AM EST
    ... to "refute" fairy tales.

    Like proving the Easter Bunny isn't real.


    Hello Shadow (2.00 / 0) (#52)
    by jimakaPPJ on Fri Oct 14, 2011 at 06:15:42 PM EST
    Showing up to get your kicks by joining in a conversation to say nothing that relates.

    Specialty of yours.

    I wonder, do you get something like a high when you do this?? Is it an addiction??


    A "high"?!? Heh, heh (none / 0) (#53)
    by Yman on Fri Oct 14, 2011 at 06:28:53 PM EST
    You overestimate yourself, Jim.  Your fairy tales are often worth a chuckle, ...

    ... but no more than that.


    An observation that is factually accurate... (none / 0) (#55)
    by Romberry on Fri Oct 14, 2011 at 09:52:38 PM EST
    ...is not a personal insult, it is merely a factually accurate observation. What you claim to "know" in your previous post is in fact objectively and factually wrong. In these matters, you have beliefs, not knowledge. They are not the same thing.

    It isn't accurate to say that wealth (none / 0) (#36)
    by Green26 on Thu Oct 13, 2011 at 10:14:30 PM EST
    is sitting idle. Wealth is invested, and investment capital and investment is critical to the economy. The wealthy don't keep their wealth under their mattresses.

    Idle May Have Been Off a Little (none / 0) (#57)
    by ScottW714 on Tue Oct 18, 2011 at 09:48:34 AM EST
    It's obvious your claim is incorrect, the wealthy have never been wealthier and the economy has come to a grinding halt.  Again, halt maybe off a little, how about a snails pace ?

    This is where theory clearly doesn't match reality.


    I think you mischaraterize a few things (none / 0) (#44)
    by BobTinKY on Fri Oct 14, 2011 at 08:18:13 AM EST
    I understand Krugman to be arguing time and again for jobs for those you call surfs but I think meant serfs.  And to do so exactly for the reasons you put forth, to prime the demand pump.

    I do not understand Krigman to be arguing for an inequal society where the massses produce yachts for the rich, he is just noting that while that type of society has many problems unemployment is not necessarily one of them.  


    See Above Comment (none / 0) (#58)
    by ScottW714 on Tue Oct 18, 2011 at 09:51:30 AM EST
    The theory/reality one.

    I use surfs and stoopid frequently because I feel like we aren't actually serfs and the ridiculous going on is beyond stupid.


    Part of the issue remains a social (5.00 / 4) (#15)
    by jeffinalabama on Thu Oct 13, 2011 at 03:40:53 PM EST
    'safety net' that provides 10-20 percent of what one earned in a middle class job, while insurance alone eats half of that.  In other words, let's say you make 75 k per year, then become unemployed, and your unemployment insurance pays 12k per year. your insurance jumps from 24-125/month to 500/month. it's a double penalty. Mortgages don't decline, the cost of milk and bread and school clothes for children don't decline.

    Yet our system has been designed to 'punish' those out of work, or to give them 'incentives' to find work.  As if the incentive of making more than 100 percent of poverty wasn't enough.

    The system is so flawed I can't describe it in a sentence or two.

    Well, Medicare for all (5.00 / 1) (#16)
    by jimakaPPJ on Thu Oct 13, 2011 at 04:29:25 PM EST
    would solve the medical issue and then we can concentrate on other issues.

    But the problem is this.

    We don't have enough manufacturing jobs.

    How do we bring manufacturing back??


    I'd start with building road and rail (5.00 / 1) (#18)
    by jeffinalabama on Thu Oct 13, 2011 at 05:33:49 PM EST
    but that's just me.

    If we're buying the sewer caps... (5.00 / 1) (#20)
    by kdog on Thu Oct 13, 2011 at 05:54:28 PM EST
    and steel rails in Asia it's just an engineering and construction stimulus, not a rebirth of manufacturing.  Still worth it, but until we start making sh*t again soup to nuts I don't how many permamnent positions in manufacturing and near full employment comes back...not as long as some poor foreign slob is willing to wok for a dollar a day and an American wants to exploit that to make 8 figures a year.  

    Enforce our labor and wage standards on any company that wants to sell here?


    How (5.00 / 1) (#21)
    by Ga6thDem on Thu Oct 13, 2011 at 06:00:18 PM EST
    we get it back is we don't let third world countries set the terms of the economic debate. The way to get out of this to quit relying on the cheap labor economic model and start competing on quality of life issues like schools, amenities etc. The places that can compete with us on that level is just a few countries.

    That is difficult if not impossible (none / 0) (#22)
    by BTAL on Thu Oct 13, 2011 at 06:15:39 PM EST
    with the consumer based economy we have here.  The expectation and demand (read as: want) for low cost consumer goods forces manufacturing capital to flow to the lowest cost locations.  

    The US consumer will not buy $5,000 Ipads.

    There is a light at the end of the tunnel though it will be a decade away.  As China and India's populations evolve into larger middle class consumers their demands will drive higher wages and costs for their products.   That doesn't help now and the risk that we will not be positioned to step back into the fray due to manufacturing capacity, skilled labor or both.

    Compounding this for both us short term and them longer term is that technology is rapidly replacing many of the entry and mid-level manufacturing jobs.  Robotics in auto manufacturing for example replace how many previous line workers?


    I think you overestimate... (none / 0) (#23)
    by Romberry on Thu Oct 13, 2011 at 06:36:30 PM EST
    ...the impact of labor costs by an order or two of magnitude if you imagine that domestic production would result in 5000 dollar iPads. Doesn't matter. When things do finally turn around, the demand for oil will once again be bumping up against supply, the price will rise and the economy of cheap labor will be at least partially offset by the expenses of shipping. That's where things were headed when oil was pushing 120+ dollars/bbl, and that's where things will head again. Peak oil is a fact. (And not just oil.)

    The $5k number was arbitrary for (none / 0) (#24)
    by BTAL on Thu Oct 13, 2011 at 06:46:09 PM EST
    illustration purposes, but I know you know that.

    We will have to disagree on peak oil and the cost of shipping goods in the future.  It potentially could come into play, but until China and India internal demand for middle class products hits full swing, the us cannot compete.  

    When that does happen some significant changes will occur.  Now whether (by your scenario) they won't be able to ship goods here competitively due to transportation costs AND our workforce will be willing and able to fill the void is the $64,000 question.


    If we have to disagree on peak oil... (none / 0) (#26)
    by Romberry on Thu Oct 13, 2011 at 07:30:18 PM EST
    ...then do we also disagree that the earth is more or less round and that it orbits the sun? Peak oil is not a theory. Peak oil is a fact. If you deny it, I have a hard time taking you seriously.

    What ever (none / 0) (#28)
    by BTAL on Thu Oct 13, 2011 at 08:38:49 PM EST
    Was attempting to have an honest conversation with you but if you want to take that tack, so be it.

    Say what? (none / 0) (#29)
    by Romberry on Thu Oct 13, 2011 at 08:50:46 PM EST
    If by "honest conversation" you mean resorting to hyperbole of things like 5,000 dollar iPads and denying the fact of peak oil, then yeah...I guess you might call that honest. I'd call it something else.

    If you have a point to make, you should make it. Spouting utter nonsense over labor costs and denying basic facts is probably not the best way to go about it though.


    PUI is not a wise thing to do (none / 0) (#30)
    by BTAL on Thu Oct 13, 2011 at 09:10:02 PM EST
    Again, (based on reading the content of your posts here) you knew that the $5k number was illustrative, but if not, stop reading now.

    Peak oil has as much scientific evidence as MMGW both for and against.  Only a pure partisan wants to completely ignore the other side of the equation.  If that is the case, again stop reading now.

    I clearly made my case regarding the economics of US manufacturing in relation to the developing markets and suppliers of China & India, however you appear to want to ignore those aspects.  


    LOL! (5.00 / 1) (#34)
    by Romberry on Thu Oct 13, 2011 at 09:45:09 PM EST
    Peak oil only has as much evidence for it as MMGW? Really? You think that the evidence for MMGW is lacking?

    Your 5,000 dollar iPad copout is just that. You don't know what you're talking about. At all.


    Ok you win - it is really only a $1,000 Ipad (none / 0) (#35)
    by BTAL on Thu Oct 13, 2011 at 10:00:21 PM EST
    Feel better?  Geez.

    How can you claim Peak Oil when there are so many areas of the globe that have not been explored, either by govt restrictions or yet to be developed technologies?   Look at the Siberian reserves that were never considered/discovered until extreme cold drilling technologies evolved.  

    Your political bias is clouding your "scientific" expertise.


    Peak oil isn't a matter of politics... (5.00 / 2) (#37)
    by Romberry on Thu Oct 13, 2011 at 11:38:38 PM EST
    ...anymore than gravity, evolution or MMGW. The only people that deny the science and try to make it political are...well...people like you.

    Do you not follow links at all?

    Oh yeah...saying "$1000 dollar iPad" shows that you still have no idea what you're talking about. The difference in labor costs is not near that great. Manufacturing the iPad in the US or some other first world nation would add roughly 40 to 50 dollars to the labor costs (if that.) How long do you think it takes to put one of those things together anyway?


    Well (none / 0) (#39)
    by Ga6thDem on Fri Oct 14, 2011 at 06:17:51 AM EST
    if it's impossible to do that then you're also saying that our system is ideal for slavery.

    So you are no longer (none / 0) (#32)
    by jimakaPPJ on Thu Oct 13, 2011 at 09:30:14 PM EST
    supporting illegal immigrants who work cheap and keep veggies and fruit produce low priced?

    Well, that's some progress.


    Oh (5.00 / 1) (#40)
    by Ga6thDem on Fri Oct 14, 2011 at 06:20:28 AM EST
    good grief. Reading comprehension was never your strongest point was it?

    Shorter ppj: if you don't support stupid legislation like they passed in GA that's been a miserable failure then you have to "be supporting illegal aliens". Hold onto your knee Jim 'cause it's jerking so fast you might need an knee replacement soon.


    Good grief yourself (none / 0) (#48)
    by jimakaPPJ on Fri Oct 14, 2011 at 11:55:45 AM EST
    And the comment goes back to your position on all the illegal immigrants leaving AL and the tomato crops not being harvested.

    You can't have it both ways.


    You are confusing (5.00 / 0) (#50)
    by Ga6thDem on Fri Oct 14, 2011 at 05:36:27 PM EST
    me with somebody else. I made no comment about people leaving Alabama. I said if the farmers in Alabama have bought the governorship like they did here in GA it won't matter because the state will send prisoners or probationers to harvest their crops for free. So you're now supporting indentured servitude?

    Confusing you (none / 0) (#51)
    by Zorba on Fri Oct 14, 2011 at 05:39:11 PM EST
    with someone else is a specialty of jim's.  Everyone who doesn't agree with him obviously must be the same person, Ga6thDem.  ;-)

    You have 2 choices to bring it back (5.00 / 1) (#41)
    by BobTinKY on Fri Oct 14, 2011 at 08:04:23 AM EST
    First, ignore/repeal WTO etc & enact tariffs that would raise the costs of foreign products mported into the US to correct for the environmental (freedom to pollute) and labor (serf-like wage structures, slave labor in the extreme cases) subsidies many foreign manufacturers receive courtesy of their host goverments/societies.  And they are subsidies despite not meeting the official WTO definition.

    Second, weaken our own environmental laws and labor laws (wage structure, benefits, pension etc) to the point where US labor can compete with workforces in those countries that provide the heaviest enviromental and labor subsides described above.

    I believe US policy favors the second route.  In fact, I believe the second option has been the entire point of WTO & our various free trade agreements.


    Income Inequality (none / 0) (#1)
    by bocajeff on Thu Oct 13, 2011 at 11:27:04 AM EST
    Income Inequality has no direct correlation on homeowner debt. I've seen many people with huge incomes have enormous mortgages, and I've seen lower income people with homes with hundreds of thousands of dollars in equity.

    Well your anecdotal evidence convinces me (none / 0) (#2)
    by Big Tent Democrat on Thu Oct 13, 2011 at 11:37:57 AM EST

    Indeed, your comment does not even make sense. Enormous mortgages are not the cause of the crisis, rather people's inability to pay their mortgages are the problem.

    "People with enormous incomes" are not having trouble making the mortgage payment.


    the rich have stopped paying the mortgage (5.00 / 1) (#5)
    by sarcastic unnamed one on Thu Oct 13, 2011 at 12:09:30 PM EST
    the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
    Admittedly the article is over a year old, did not find any more recent articles...

    Anecdotally I have heard of well paid professional (5.00 / 1) (#42)
    by BobTinKY on Fri Oct 14, 2011 at 08:10:14 AM EST
    types, doctors etc. who have taken a job elsewhere, obtained the mortgage on their new home then walked away from their houses back in whatever depressed area they moved away from.  I am sure they bout their new cars and everything else they need so they won;t have to be borrowing any money anytime soon.

    Economically speaking, no one is more well positioned or more well accustomed to walking away from underwater deals than the well off.  They do it all the itme.  I have little doubt many of the foreclosures in AZ, FLA, Las Vegas etc are second of third homes of some realtively well to do folks. Yes, they can service the mortage but they know at some point is becomes a losing proposition to do so so they quite rightly, without any of the guilt our media tries to impose on the mass public, walk away.


    You and I aren't that far apart, but (none / 0) (#8)
    by bocajeff on Thu Oct 13, 2011 at 12:38:11 PM EST
    You did mention people's inability to pay which I also believe is a huge problem (with the exception of strategic defaults).

    BTD, my job is to work with low income families and housing issues in greater West Palm Beach. I see this hundreds of times a day. This is an incredibly complex issue that can't be easily fixed.

    Income inequality isn't the major issue here - it's simply jobs and any income. If most people had their same jobs and same pay when they purchased the homes it would be a different story...that's where you and I disagree.


    Doubtless the three new (5.00 / 1) (#9)
    by oculus on Thu Oct 13, 2011 at 12:40:45 PM EST
    trade pacts passed by Congress will help remedy this situation.  

    FWIW, "inability to pay" isn't (5.00 / 1) (#38)
    by gyrfalcon on Fri Oct 14, 2011 at 01:26:41 AM EST
    a bright line.  I say this as someone with close friends who are seriously considering a strategic default because the strains of the second jobs and other measures they have to take to make the payments are close to tearing them apart.  Yes, they're "able to make the payments," but they pay an extraordinary price on a day to day basis, and with no hope it's going to get any better in the foreseeable future.

    Translation (none / 0) (#46)
    by jimakaPPJ on Fri Oct 14, 2011 at 11:49:45 AM EST
    strategic default

    Not doing what I said I would do.

    AKA Lying


    Do you have a problem... (none / 0) (#56)
    by Romberry on Fri Oct 14, 2011 at 09:56:37 PM EST
    ...when corporations "strategically default"? Or is your moral scolding only for actual people?

    I hope (none / 0) (#3)
    by kmblue on Thu Oct 13, 2011 at 11:46:35 AM EST
    you wrote Krugman about this.

    Krugman is letting his (none / 0) (#4)
    by BTAL on Thu Oct 13, 2011 at 11:55:09 AM EST
    limousine liberal petty coat show.  As one of the elites, he doesn't want to give up his "stuff" in the pursuit of equality.

    You are welcome (none / 0) (#10)
    by BTAL on Thu Oct 13, 2011 at 01:03:19 PM EST
    and if you read Krugman's comments, it is readily clear the comment is the truth.

    When his NYT page masthead/tagline is "The Conscience of a Liberal", it further adds to his hipocrisy.  Sorry of that insults you but I didn't focus my comment at you so your indignation comes across shallow, at best.  


    I don't (none / 0) (#11)
    by Ga6thDem on Thu Oct 13, 2011 at 01:27:49 PM EST
    know. Conservatives should love this kind of stuff. It goes right along with their desire for a plantation banana republic type economy.

    Donald just defends Krugman (none / 0) (#14)
    by Towanda on Thu Oct 13, 2011 at 03:09:53 PM EST
    and attacks all (except BTD) who question even parts of Krugman's columns, even if agreeing in general.  It's not you.

    I know, right (none / 0) (#27)
    by lilburro on Thu Oct 13, 2011 at 08:22:14 PM EST
    why won't he just put on his Mao suit like all the other liberals???

    What a dumb comment.


    The inequality, it seems to me, (none / 0) (#7)
    by Anne on Thu Oct 13, 2011 at 12:14:09 PM EST
    is largely because those at the top do not depend on wages for the bulk of their income, and pretty much everyone else does.  So...if you increase the number of people who are earning wages, and increase the wages that those with jobs are earning, it seems to me you reduce the gap between the haves and the have-nots.  And I don't see where those at the top would be raking in any less just because there are more people earning a paycheck.

    Full employment - and the demand that is commensurate with it - means less inequality, regardless of whether we are all busily producing luxury goods, or more of the stuff of everyday living.

    I'm not sure I understand why Krugman doesn't see that.

    All the recent tax schemes and plans and proposals, the intent to "reform" the safety-net programs - these are all things that take exponentially more from people whose major source of income is wages, while making sure those with non-wage income can keep more of it - which just makes sure the gap continues to expand.

    Also, too, wage earners pay progressively more (5.00 / 2) (#45)
    by BobTinKY on Fri Oct 14, 2011 at 08:20:08 AM EST
    income tax whereas the idle rich have a flat 15% tax for their capital gains.

    why only manufacturing? (none / 0) (#25)
    by diogenes on Thu Oct 13, 2011 at 07:18:38 PM EST
    If the top one percent stopped buying luxury goods (many imported) and went back to actually hiring large numbers of gardeners, servants, cooks, tutors for the kids, home health aides for the elderly rich, etc, etc, then there would be a lot more low-paid jobs to pad the employment numbers.