Stagnation is Still All Income Inequality

Larry SummersPaul Krugman has written quite a laudatory article about a recent talk given by Larry Summers. I think part of this is just an attempt for Krugman to make nice after being fairly critical of Summers as a possible Federal Reserve chair. But there is no denying that what Summers has to say is interesting. You can read Krugman’s description of it, Secular Stagnation, Coalmines, Bubbles, and Larry Summers. But the basic idea is pretty simple. And troubling.

What Summers noted was that since Reagan, the only time that our economy has been at full employment has been when some kind of bubble is going on. Part of this goes along with our huge increase in private debt over that time. But it is has not caused inflation. Summers suggests that we have a new normal where the economy is depressed. The takeaway from all of this is what we already know: individual saving during bad economic times is bad for the economy generally. Given that individuals won’t spend, the government ought to be spending more. This is all very basic Keynesian theory.

But having read the article, one thought immediately occurred to me. The real problem here is not how the economy is working on average. The problem is how the economy is being divided up. You may remember a TED Talk by Nick Hanauer that I wrote about last year. In his lecture he talks about how if workers had the same share of the economy as they had in 1970, they would make almost twice as much as they do today. Just imagine what that kind of extra buying power would do for our economy! Instead, we have rich individuals and corporations sitting on huge piles of money—money that could be spent on salaries for the unemployed.

I didn’t come up with this idea all by myself. It came from reading Dean Baker for years. So I was interested to see what he had to say about Summers’ talk. He made four points, Bubbles Are Not Funny. First, when bubbles burst, they tend to cause wealth to trickle upwards—they make income inequality worse. Second, he talks about income inequality. Third, he mentions how our trade deficit harms us (and how it is partly the fault of Summers’ strong dollar policy). And finally, he talks about a very big issue for him: work sharing. The truth is that part of our problem is that Americans work too many hours and don’t take vacations. If they worked less, more people could have jobs.

To me, the biggest issue by far is what I originally spoke about: productivity gains over the last 35 years have not been equitably shared (in fact, to a large extent, they haven’t been shared at all). As Baker noted, “The upward redistribution in the last three decades, from middle and lower end wage earners to the high end wage earners in the 80s and 90s, and to corporate profits in the last decade, likely had an effect in depressing consumption.” Simply by increasing the total taxes paid by the rich, and providing better services at the bottom would greatly help the poor and middle classes. This actually gets to a point that Matt Yglesias makes a lot: if companies can’t think of anything creative to do with their piles of cash, then maybe they should just lower their prices. Well, if the rich can’t think of anything creative to do with their cash, I can think of a lot of creative things the government can do with it.

As Krugman hammers on all the time: economics is not a morality tale. All the Ayn Rand sycophants can talk all they want about “makers and takers.” But the fact is that the bad economy hurts the rich as well as the poor. The rich are not concerned, as Rand always claimed they needed to be, with their enlightened self-interest. The rich are as short sighted as anyone. We need to do what is best for the economy as a whole. And that works out well, because it also means that the economy works well for everyone inside it.

Update (17 November 2013 9:57 pm)

Krugman wrote a column based on the same stuff, A Permanent Slump?

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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