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FDR's Fed Chairman: Income Inequality Caused the Depression [UPDATE]

by NBBooks Tue Dec 4th, 2007 at 06:27:53 AM EST

Last week, Senator Chris Dodd’s campaign put up a web page highlighting Senator Dodd’s proposed policy responses to the subprime mortgage crisis, and the general sense of economic unease felt by most Americans. Unfortunately, Dodd’s proposed policies serve has a case study of what’s wrong with economic thinking in this country, including even the Democratic Party.

According to the Dodd campaign’s web page, "The current foreclosure crisis is rooted in shameful predatory lending practices on the part of unscrupulous lenders."


more below the fold

Update [2007-12-4 2:30:51 by afew]: This is NBBooks' full diary copied from DKos with the author's permission. It updates the abridged version NBBooks posted here yesterday - afew

Promoted by afew

The current foreclosure crises is rooted in the stagnation of wages and earnings the past 30 years. If, since Reagan took office, average weekly earnings had continued to grow at the same rate they had grown from 1964 to 1980, the typical household in the U.S. would have had around $30,000 more in income than it does now. That's right, nearly twice the income. There would not have been a "market" for sub-prime mortgages in those circumstances, and the opportunities for predatory lending would have been almost non-existent.

To blame predatory lending is merely focusing on the symptom. The rescue plan announced by Treasury Secretary Paulson last week only delays the inevitable, because the illness that needs to be treated is the decline of wages and earnings. To get a cure, we need to address the problem of the stagnation of earnings for the middle two fifths of the population, and real declines in earnings for the bottom two fifths.

(The above graph comes from Wikipedia, which notes the data source is DeNavas-Walt, Carmen; Bernadette D. Proctor, Robert J. Mills (08 2004). Table A-3: Selected Measures of Household Income Dispersion: 1967 to 2003).

On February 1, 2007, The Center on Budget and Policy Priorities reported that the most recent study by the Congressional Budget Office showed that

income inequality continued to widen in 2004. The average after-tax income of the richest one percent of households rose from $722,000 in 2003 to $868,000 in 2004, after adjusting for inflation, a one-year increase of nearly $146,000, or 20 percent. This increase was the largest increase in 15 years, measured both in percentage terms and in real dollars. . . .

I recall very clearly that when I bought a house in 1999, I was urged to get an low initial rate with a series of resets down the road, rather than a fixed rate, with the argument that when time came for the interest rates to increase, I would be earning more money and thus have higher capacity to pay. Well, it didn’t work out that way for me, and it hasn’t worked out that way for around 240 million of my fellow citizens.

So, where did the missing wages go?

Management guru Tom Peters picked up on a New York Times story in by Bob Herbert on January 8, 2007:

There are 93 million production and nonsupervisory workers (exclusive of farmworkers) in the U.S. Their combined real annual earnings from 2000 to 2006 rose by $15.4 billion, which is less than half of the combined bonuses awarded by the five Wall Street firms for just one year.

"Just these bonuses — for one year — overwhelmingly exceed all the pay increases received by these workers over the entire six-year period," said Mr. Sum.

Last week on DailyKos, Geekesque called for a boycott of Burger King

Telling Burger King to pay an extra penny for tomatoes and provide a decent wage to migrant workers would hardly bankrupt the company. Indeed, it would cost Burger King only $250,000 a year. At Goldman Sachs, that sort of money shouldn’t be too hard to find. In 2006, the bonuses of the top 12 Goldman Sachs executives exceeded $200 million — more than twice as much money as all of the roughly 10,000 tomato pickers in southern Florida earned that year. Now Mr. Blankfein should find a way to share some of his company’s good fortune with the workers at the bottom of the food chain.

Of course, under the Bush / Cheney regime, certain other sectors are doing quite well, also.

The Sub-Prime Crisis spreads

Last week, The Florida State Board of Administration was forced to freeze withdrawals from the state’s government investment fund after local municipalities and school districts, worried about the fund’s exposure to mortgage-backed financial derivatives, pulled over $10 billion out of the $27.3 billion fund in two weeks.

How important does the financial oligarchy consider this development? The London Financial Times carried the story on the front page on November 30, carried a second story exploring the details of exactly how it occurred, including interviews with the county clerk and the budget director of Leon County on page 8, and further discussed the story in its "Lex Column" on page 14, fretting that it "is a reminder of the potential for contagion" and worrying that "it shows how problems are still spreading slowly through the financial system."

(Contrary to premature reports of the death of the British empire, London remains the largest financial center in the world. According to MarketWatch on December 7, 2006,

The global foreign exchange market, easily the largest financial market, is dominated by London. More than half of the trades in the derivatives market are handled in London, which straddles the time zones between Asia and the U.S. And the trading rooms in the Square Mile, as the City of London financial district is known, are responsible for almost three-quarters of the trades in the secondary fixed-income markets.

So, they watch these things very closely in London.)

The Wall Street Journal reported on page B3 of its weekend edition yesterday (Dec. 1-2, 2007) that a similar run hit the Montana Short Term Investment Pool, with $247 million withdrawn from the $2.5 billion fund after news of Florida spread.

John Mauldin is a best selling author of those "how to get rich" and "how to preserve your wealth" books, who appears regularly CNBC, Bloomberg and many radio shows across the country. Last week, his free weekly economic and investment e-letter that goes to over 1 million subscribers was entitled, The Financial Fire Trucks Are Gathering

Jan Hatzius of Goldman Sachs forecasts a recession and that the growing credit crunch will reduce lending by about $2 trillion (that's with a t, thank you).


Home equity, credit cards, auto loans are all seeing a serious rise in delinquencies and foreclosures. Banks are having to eat into their capital base in order to reserve for growing losses. And that means they have less money to lend. And indeed, every survey I have seen for the past few months points to ever-tightening credit conditions for both business and consumers.


The structured security market is in a freeze, which is the funding source for much of the credit in the US and the world for such everyday things as car loans, credit cards, student loans, commercial bank loans, commercial mortgages, and construction. The CLO (mostly bank loans) market is reeling. There is no effective subprime mortgage market.


This current credit crunch has the potential for growing into a full-blown credit crisis, the likes of which we have not seen in the modern world. It is not altogether clear that cutting rates at 25 basis points per meeting is going to do anything to help, if the cost of borrowing does not come down. We are in an entirely different type of crisis than we have ever seen.

Well, actually, we have seen this before - I'll discuss that at the end.

The Real Economy Starting to Get Slammed

But how does all this high finance affect you?

In its front page story on the Florida fund run, the London Financial Times reported that Florida School Boards Association executive director Wayne Blanton said,

Jefferson County school district is having to negotiate a short-term loan to make their payroll. It is unprecedented to freeze an account like this.

Oh, I hope you’re saying.

What about home sales and home construction? According to the National Association of Realtors

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – eased by 1.2 percent to a seasonally adjusted annual rate1 of 4.97 million units in October from a downwardly revised level of 5.03 million in September, and are 20.7 percent below the 6.27 million-unit pace in September 2006.

Lawrence Yun, NAR chief economist, expected the sluggish performance. "As noted last month, temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated.  We continue to see the biggest impact in high-cost markets that rely on jumbo loans," he said.  "Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in FHA endorsements for home purchases.

"A trend away from subprime mortgages to FHA loans, which often carry much lower interest rates, is a positive development for consumers and the housing market going forward.  Still, it will take some time for the change to yield a measurably higher closed sales volume in the aftermath of the subprime collapse.  In the near term, we expect home sales to remain fairly stable."

I have to make a few comments here. First of all, I don’t think mortgage availability has improved. We listed our home in mid-August, and had had all of five lookers in a market (northern Virginia suburbs of Washington D.C.) that two years ago saw homes sell literally within hours after being listed. I’ve read anecdotal evidence that the same is happening in many other parts of the U.S. What aren’t people even looking? I suspect it is because people simply are not getting mortgages any more. Afterall, the sub-prime mortgage markets has disappeared. But try to find statistics for mortgage approvals. They don’t exist in the U.S. When I googled "rate of mortgage approvals" I got story after story about how mortgage approvals are down by a third from last year in Britain, but nothing on what’s happening in the U.S. In the U.S., mortgage applications are up significantly from last year. But that could be a sign of the increasing distress of home owners who find themselves upside down (living in a home now with less market value than what they owe for the mortgage). People who want to get out of a bad mortgage situation by selling their house will need to buy somewhere else, which means they will have to apply for a mortgage. So, more mortgage applications may actually be a signal of how bad things are, not that the housing market is coming back to an even keel.

My second comment is that if "subprime mortgages to FHA loans, which often carry much lower interest rates, is a positive development for consumers", then what the hell were we doing with all these subprime mortgages in the first place? Could it be that they were simply the means for mortgage bankers and brokers to make more money than they could off of plain, old-fashioned FHA fixed rate mortgages? And brings into question the whole game of financial derivatives. If all these banks apparently were not hedging their risk with these derivatives -- which is the major reason they were created and sold -- than just what the hell was their purpose?

But, back to the effects on the real economy. Ken Simonson, chief economist for The Associated General Contractors of America (AGC), noted in an Oct. 5, 2007 news release:

Seasonally adjusted total construction employment fell 14,000 in September and was down 112,000 or 1.5 percent compared to September 2006," Simonson remarked. "But that masks divergent trends in nonresidential and residential construction.

"The BLS numbers show that over the past 12 months, employment in the three nonresidential categories—nonresidential building, specialty trades, plus heavy and civil engineering—climbed 42,000 or 1 percent," Simonson commented. "Meanwhile, residential building and specialty trades employment supposedly shed 154,000 jobs or 4.5 percent.

"That gap, while large, vastly understates the actual difference," Simonson asserted. "Census Bureau figures for August show residential construction spending was down 16 percent from a year before and nonresidential was up almost 15 percent. With all signs pointing to still less homebuilding ahead, it’s likely that residential employment is also down roughly 16 percent. That means about 400,000 ‘residential’ specialty trade contractors are now doing nonresidential electrical, plumbing and other work.

Now, look at that last number: "400,000 ‘residential’ specialty trade contractors are now doing nonresidential electrical, plumbing and other work." That means these people would be out of work if they had not been pulled into nonresidential construction. So, what happens now that the economy is heading into recession? Will nonresidential construction continue to pick up the slack? I wouldn’t count on it, not without some big government program for infrastructure building or a new Civilian Construction Corps.

Look, for example, at what the auto industry is expecting. The Wall Street Journal reported on the second page of its weekend edition yesterday (Dec. 1-2, 2007) that auto makers expect 2008 to be the worst year for new auto sales in 10 years. A survey by Wachovia Capital Markets found that 34% of dealers now plan to cut back on new vehicle orders, a very worrying jump from the 19% the same survey found in September. General Motors’ ten-months of sales through October of are already down 5.7% from last year.

Construction accounts for 5.5% of the U.S. labor force of 135.371 million, and the auto industry accounts for 7.6%. During the 1930s Great Depression, almost one third of the jobless were unemployed construction workers.

A Second Great Depression

Which brings me, finally, to the title of this diary. John Mauldin, whom I quoted above, is dead wrong when he writes that "We are in an entirely different type of crisis than we have ever seen." Mauldin was not really considering the underlying cause of income and wealth inequalities. So, let me introduce you to Marriner S. Eccles, a millionaire Mormon businessman, just like Mitt Romney. That's where the similarities end.

Eccles came from a leading Mormon business family in Utah, and took up the career of banking. In the late 1920s, Eccles was one of the few bankers in the United States to successfully meet, contain, and end a run on his bank without having to resort to outside assistance, such as turning to the government or to Wall Street. The first day of the run, Eccles instructed his cashiers to give everyone their money that demanded it -- but to serve each customer as slowly as courtesy and patience would permit. With huge lines in his banks’ lobby and out on the street, Eccles quietly brought in a few truckloads of money from his branch operations, from large business depositors, and one carload from the Federal Reserve Bank of Salt Lake City. It was just enough to meet the demand for cash the first day.

Eccles explained what he did next in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951):

At the close of the day I called together the personnel of the banks for another conference.

"Now listen," I said. "A lot of people who've been at work will only hear about this run for the first time when they get home tonight. Tomorrow there will be the makings of another crush, and we are going to meet it by doing the opposite of what we did today. Instead of opening at ten, we are going to open at eight. Nobody is going to have to wait outside of the bank to start any sort of line. When people come in here, pay them very fast. Don't dawdle over signatures. Pay out the accounts in big bills. Above all, don't let any line form. It will mean a continuation of the panic."

This tactic was a homely application of how a compensatory economy worked. On Tuesday the amount we paid out exceeded that of the first day, but the important objective was reached. No lines formed to inspire a hysterical belief that the bank was in trouble. On Tuesday customers came into the doorway of the bank, looked furtively around the lobby, and, seeing that things were peaceful and serene, walked away. And that was the end of that run.

Eccles gave a lot of thought to what had happened, and was happening in the national economy as the Great Depression unfolded. He concluded that the underlying problem was the widening disparity in income and wealth. And he was not shy about expressing his views to his fellow bankers. Eccles recalled the reception given his remarks before the Utah State Bankers Convention in June 1932:

Spoken by anyone else, remarks of this sort might have been followed by a riot. But the bankers could not very well throw me out. They could not surmount the fact that though I talked like a dangerous radical, and though I defied all the canons taught by our fathers, the banking organization I headed successfully overcame a series of crises caused, in some instances, by the failures of other banks.

Some of the bankers nodded their heads in agreement when one among them said: "Eccles is like a poker-player. He plays tight and talks loose." Others shook their heads sadly and repeated what a president of a Western railroad said. "Poor Eccles," he confided to a friend, "he must have had so terrible a time with his banks that he is losing his mind."

From within my own organization there were similar reactions. One day even my close associate E. G. Bennett came to me and said: "All of us know you are overwrought by the general economic situation. But you should also know that some of the members of the board of directors are disturbed by the views you are expressing, They think you are hurting business.

In November, 1934, Eccles was summoned to Washington D.C. and was asked by President Franklin Roosevelt to serve as the Chairman of the Federal Reserve. This was the position from which Eccles helped lead the country out of the Depression and through the industrial mobilization for World War Two. Eccles served as Fed Chairman from November, 1934 to February, 1948.

In his 1951 memoirs, Beckoning Frontiers, Eccles discussed what he concluded had caused the Great Depression. Read it, and see if anything strikes you as vaguely familiar:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. (emphasis in original) Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently  produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

END of quote from Eccles, pages 76 to 78

Not enough consumption?! If this makes your had spin, then you’re too much of an environmentalist to be of much use in the approaching financial strom. But think about it. For example: there is not a large enough market for electric cars. Why? Because an electric car is too expensive? Or because the average worker does not make enough to afford an electric car and is forced to make the socially poorer choice of sticking with an internal combustion engine?

See, the thing is to provide incentives for those things we want to have consumed – electric cars, buildings and houses that are hyper energy-efficient, solar energy – and penalties for those things we want to discourage – Hummers, energy-inefficient McMansions, coal- and gas-fired power plants. But first we have to whack the financial system back into line, and get wages and earnings growing again.

I know that this whole wealth inequality / consumption angle is going to go down hard with a lot of progressives who have rejected our overly materialistic culture. But I don't hear them talking about saving the working class and the middle class from the economic disaster we are falling into. It's not those 120 million American with an income under $20,000 that are driving those Hummers. And if this credit crisis unfolds the way it did in the 1920s and 1930s, I suspect most Americans are going to have little tolerance for considering anything other than solutions to the Second Great Depression. Please don't make the same mistake the Dodd campaign is making, and try to treat the symptom rather than the disease.

Comment crosspost from Daily Kos.

I have to say this, you've done a magnificent job here.

One brief, ironic, comment.

Economic inequality does matter, because it generates the deadweight social welfare losses (deadweight loss economic model) that are the abstraction which the Right uses to attack the idea of living wages and other measures that redistribute income from the economic elite to the working masses.

They've mispecified their model, and failed to recognize that the redisitribution of wealth from sectors of the economy where it will be recycled creating economic growth (e.g. $50 given to a single mother working at Walmart will create demand stimulus, while the same money given to Bill Gates will most likely be invested abroad.)  So what happens is that as income is redistributed from people who spend it creating demand to people who invest it expanding supply, is a collapse in demand and oversupply.  

Keynes lives!

Behind the economic models of the Right spouting economic welfare is a political reality where they endeavour to improve the relative gains of their donors even if it creates social losses.  Why?  Because, once one passes the point of material satiation,(e.g. I can't eat another piece of steak) they enter the world of positional consumption, conspicous consumption whose value is driven by how much one has relative to others rather than the absolute quantity.  And the economy becomes a zero sum game.

Economic growth harms social welfare, because it is directed at this status competition instead of satisfying material needs.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Dec 3rd, 2007 at 10:40:29 AM EST
I worked out why you're wrong: you're assuming that everyone competes for status in the same way. They don't, so the economy need not be zero-sum.

There may be some people whose assessment of their own status depends directly on their income, so economic growth may harm those people, but most people don't compete that directly on net worth.

by Colman (colman at eurotrib.com) on Mon Dec 3rd, 2007 at 10:45:25 AM EST
[ Parent ]
It doesn't have to be, but the key is to reduce the competition for status.  This competition is more intense where there is greater economic inequality, because individuals have to compete ever harder to maintain relative position.  See what's happened as higher education has been reduced to an exercise in credentialing by which people are able to justify why they should have leadership roles.  The qualifications for jobs are subject to escalation, so that where a secondary degree may have been sufficient to enter the civil service previously, a university degree is now required.  So increasing portions of one's life are spent in school, of which a decreasing portion is acutally dedicated to the teaching of skills that are useful in the workplace.

The key is to reduce economic inequality, so that the intensity of positional competition is driven down, and the portion of the economy dedicated to material needs is increased.  Doing so may reduce gross economic output (even so much so at to create negative economic growth rates), but improves social welfare and makes the economy more sustainable in the long term.  The impact on environmental economics is profound.  

Consider the pursuit of the country house as something that shows "you've made it", which I understand has led to rampant urban sprawl as Ireland has grown wealthy.  Everyone wants a house in the country, but the process of building houses in the country turns it into suburbs that are neither city, because they lack walkability and public service, nor countryside, because you're surrounded by cookie cutter houses.  So you have building extend further and further out until you have people driving (!) 60-70 kilometers each way each day to work.  So you have a massive increase in the use of gasoline without an increase in social welfare.  It's insane.  If you can ratchet down the positional competition, you can have people live in cities, and substantially reduce the use of gasoline.

This case is particularly notable, because cheap gasoline allows the elite to abandon large portions of the city, and avoid the consequences of their actions.  If everyone who lives around you is from your own class, how are you to know that the economy is shit for the people on the bottom.  Urban diffusion reduces the social relevance of phenomena like the Paris suburb riots, because the fear factor for the elite is reduced.  They can go own and fuck over the poor some more, because it isn't like the backlash is going to reach their country house.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Dec 3rd, 2007 at 11:08:38 AM EST
[ Parent ]
It doesn't have to be, but the key is to reduce the competition for status.  This competition is more intense where there is greater economic inequality,

Well, the key is to reduce the effects of the competition for status. And - as you say - a good way to do that is to narrow the available limits. People will still be happier if the prize is a bigger car and not a private jet. Positional display is relative, not absolute. There's no chance to buy a Moon Yacht today, so no one misses one.

But there's something else happening here.

Competition in the US has always had a sociopathic edge to it. It's not just that people want more even if it means harm to others, or they don't care if it means harm to others.

A minority want more because it means harm to others. They actively promote and enjoy the creation  of poverty and lower living conditions for everyone except their cronies. How else can you explain Bush's contempt for Katrina or his decision to try to close teaching hospitals?

You could make a good case for suggesting that the common thread linking Iraq with Bush's domestic policy isn't some grand imperial scheme, but simply a need to pour contempt on as many humans as possible.

You'll find less severe, but still very toxic, versions of the same mindset throughout the financial markets.

Stability is impossible while this is rewarded instead of being minimised.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Dec 4th, 2007 at 06:52:13 AM EST
[ Parent ]
Ideally you'd channel the status competition down routes useful to society  - which is the real value of philanthropy of course - rather than into damaging behaviours.

But you're right that the current rules reward sociopathic behaviour rather than punishing it.

by Colman (colman at eurotrib.com) on Tue Dec 4th, 2007 at 06:54:44 AM EST
[ Parent ]
Here's the ironic thing about this.  Capitalism is supposed to make mean more peaceful by taming the passions (i.e. I'm going to get glory by killing those heathen mother fuckers over there) that depend on the relative position of oneself to others, by the interests (i.e. I'm going to make a million dollars, and I don't care how much the rest of you make.)

So spoke Albert Hirschman in The Passions and the Interests in which he traces this idea from the 17th century on, showing that before capitalism was justified on the basis of efficiency it was justified on the basis that it was a more peaceful way than the blood and iron of the earlier period in which the passions were central.  

I can't locate the diary now, but Martin Wolf made this exact same argument recently in the FT, making the point that it's much better to live in a world in which people seek status through wealth than by war.  Schumpeter made much the same point earlier, and would seem to be the source that Wolf drew from.

Now, the interesting thing is that it just may be (and probably is) that as economic inequality increases you have the rise of these other ways in which to pursue status for those disenfranchised by the market.  One way, socialism, seeks equality, the other way, fascism, creates an explicit in group (Aryans, etc.) that is equal and an out group that is supposed to be exploited and/or exterminated for the benefit of the in group.  Capitalism gives us fascism, because it isn't concerned with economic distribution, only total economic output.

Status seeking is part of most human existence, but this points to the need for a recognition that you need social rules and social order that is both collectivistic and egalitarian, you need social democracy.  Liberalism is a failed ideology, the choice is between social democracy and fascism.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Dec 4th, 2007 at 10:15:19 AM EST
[ Parent ]
I believe in a growing economy it is possible for people to lose status but still increase their standard of living in real terms, and so growth can lead to more social mobility. On the other hand, when growth stops the only way to retain one's standard of living is to concurrently compete for higher status and, as growth is captured by those at the top, social mobility ceases.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 10:34:43 AM EST
[ Parent ]
Unfortunately, you're missing the point.

Economic growth is fundamentally anbigous, because it doesn't distinquish between economic output that is material (i.e. bread) and economic output that is positional and must come at someone elses expense.  All goods have components of both, but some are more pure cases.  Education is largely a positional good.  Most people get a university degree not for the love of knowledge, but in order to improve your position relative to others.

The higher the level of economic inequality, the higher the percentage of economic output dedicated to things like Lexuses (Lexi?) instead of Olive trees.  It's about stroking people's egos, and the ostentatious display of wealth in order to convey status instead of making sure people have enough food to eat.

In a world where only absolute gains matter, economic growth is great, because it makes everyone better off.

But in a world where relative goods are what is driving economic growth, economic growth is a zero sum game.  In order for one person to be better off, another must lose.

Social mobility is relational.  It's about the social distance between persons.  Where you have a large middle class, this distance is small, and you don't have the idea that this person has extreme wealth and should be respected, and this person is poor and can be treated like shit.  Capitalism becomes a threat to democracy where it creates economic inequality, and makes some animals more equal than others.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Dec 4th, 2007 at 10:51:07 AM EST
[ Parent ]
Education is not positional in the same way as a Lexus. For one thing, as someone said, if we exchange ideas we each end up with two ideas, whereas if we exchange cars we still have one car each. In fact, now that so many people go to college, a university degree is not even a positional good. It's an entry requirement.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 11:21:18 AM EST
[ Parent ]
This is a brilliant diary, NBB, (I'm thinking of the full one on Orange). Sorry you had problems with the images, because it would be great to have the whole thing here.

Would you allow me to copy the diary from DKos and do the image markup myself? I could then update this diary with the full text and graphics. Then I'd be happy to front-page it.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 3rd, 2007 at 03:21:14 PM EST
Yes, of course, please do repost it from Daily Kos. I can email you the text, and the pics, if you need. Thanks!
by NBBooks on Mon Dec 3rd, 2007 at 08:37:07 PM EST
[ Parent ]
Now done.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Dec 4th, 2007 at 02:37:27 AM EST
[ Parent ]
One of the best ET Diaries I have read, NBB, and the standard here is high.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Dec 4th, 2007 at 04:36:58 AM EST
Thank you for your illumnating post and you are correct about the problems with the US as well as the UK are about inequality of income. You can trace the decline in real wages for the majority of people in both countries almost exactly to the decline in collective bargaining (unions etc) and the rise of the financial sector and their ability to lobby with vast amounts of concentrated funds (bribes).

Not only does the inequality of income effect the economy but the actual quality of life; where people in Greece who earn much less median per capita than the US or the UK have a longer average lifespan. The following link is to a review of a book about the inequality of income by an English professor who has spent years researching the effects.

The title of the column is :Inequality kills
What counts is not wealth or poverty, says Polly Toynbee after reading Richard G Wilkinson's The Impact of Inequality, but your place on the social ladder

Link is :


The inequality of income is caused by the loss of the underlying ethos which is 'social justice'. Whether its healthcare, education, not caring for those less fortunate as long as I have mine; we have lost this cardinal principle of what used to be the goal of the US. The first step is to enact a 'Federal living minimum wage' as opposed to the minimum wage. It has been done in the US in a few different areas but it needs to be done nationally. Clean up the corruption; force the national and local media legally to have extensive debates broadcasted naionally and locally for all elections and try as best as possible to set small contributions and outlaw soft money. Otherwise, the present trend will destroy the US and UK societies and we will be back in the plantation owner/slave days with 1% of the societies controlling 99%. It is already up to to high a percentage.

by An American in London on Tue Dec 4th, 2007 at 04:50:25 AM EST
Unfortunately we tend to focus purely upon distribution of income and thereby to ignore the distribution of (income producing) Capital.

I repeat my oft-stated view that a tax or levy on the privilege of private property in Commons such as land and knowledge is a necessary part of a fair society.

The principle that those who have exclusive rights of use over a Commons should compensate those they exclude underpinned the work of one of the greatest of Americans, Henry George.

He was once the second best known man in the US for his book "Progress and Poverty" and his proposed "Single Tax", but he has long since been airbrushed from history.

Unlike him, I doubt that such a tax or levy will be sufficient, but I do see it is as necessary.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Dec 4th, 2007 at 05:04:36 AM EST
[ Parent ]
John Kenneth Galbraith once said of Eccles, "he was the most important Keynesian of them all."

When I think of the blinkered fools that have run the Fed during most of my lifetime--esp. Paul Freaking Volker--I am even MORE impressed by Eccles.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Dec 4th, 2007 at 09:57:03 AM EST
How would you have dealt with stagflation?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 10:09:06 AM EST
[ Parent ]
I wrote a book on the subject.

But the answer is NOT--run the prime interest rates to 21% and plunge the whole world into a depression (see 1981).

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Dec 4th, 2007 at 12:59:07 PM EST
[ Parent ]
I'm rather attracted to helicopter drops of money....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Dec 4th, 2007 at 01:03:58 PM EST
[ Parent ]
While I read your book... What was the cause of stagflation? Was is that much of a problem? What would it have taken to fix it?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 02:05:07 PM EST
[ Parent ]
Stagflation was caused because the OPEC countries wanted more money for their crude oil.  The only proper response would have been to embark on a large scale industrial project to make the economy less dependent on oil.  Jimmy Carter had actually started this process.  And it would have worked.

Instead, with the high interest rates that came because of Volker and his merry band of idiots, a conversion to a non-oil based economy became impossible because the industrial system that could have made it possible was systematically destroyed.

And we won't even mention the millions of people whose lives were utterly destroyed by the neoliberalism he helped usher in.

P.S.  I AM flattered you read my book.  I cover this subject in detail in Chapter Six.  I would change a few paragraphs since I first wrote them, but the essential thrust is still the same.  And by golly, we are STILL refusing to come to grips with our economic addiction to oil.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Dec 4th, 2007 at 03:30:34 PM EST
[ Parent ]
Actually, can you get me a dead tree version? HTML and PDF are nice, but I'm old-fashined like that.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 03:43:33 PM EST
[ Parent ]
Don't blame OPEC: the oil crisis was enabled by the Oil Peak in the lower 50 states as Texas lost the ability to fix price by increasing output sufficiently.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 03:45:23 PM EST
[ Parent ]
Not enough consumption?! If this makes your had spin, then you're too much of an environmentalist to be of much use in the approaching financial strom. But think about it. For example: there is not a large enough market for electric cars. Why? Because an electric car is too expensive? Or because the average worker does not make enough to afford an electric car and is forced to make the socially poorer choice of sticking with an internal combustion engine?
When I read Keynes' General Theory last year I was greatly impressed. And, in Keynes' view of macroeconomics, demand makes the world go 'round and expectations drive demand. That's how you get the focus on consumer confidence, which for many years I thought was a joke of an indicator when I saw if mentioned in the news.

Now, this may be down to my poor knowledge of economic writings, but I don't think Keynes' theory which he outlined in a qualitative, handwaving way, has actually been developed. IMHO he's economics' Galileo waiting for a Newton.

Now, if you're an environmentalist and believe in some sort of steady-state economics as the necessary configuration of our global economy, I am not quite sure how that is compatible with Keynes' macroeconomics. But it must be, somehow.

Great diary, by the way. And I really enjoyed the story of how Eccles ended a bank run in two days. Clearly too many retail bankers, even today, don't know about this. Or, at least, the bozos at the helm in Northern Rock didn't know about it.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 10:29:59 AM EST
There's some interesting stuff from Gunnar Tomasson on the Gang 8 list at the moment...He takes a rigorously acadaemic approach (makes my head spin) but IMHO beats the bastards on their own ground by exposing the poverfty of their assumptions.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Dec 4th, 2007 at 12:28:27 PM EST
[ Parent ]
If you're truly an environmentalist, you must recognise that overpopulation is the cause of world-wide over-consumption.  Yes, we can squeeze in more people if we all consume less, but what's the point?
Overpopulation is also the fundamental cause of flat and decreasing wages: labour is worth less as its supply increases.  It is natural and nearly inevitable that income disparities grow as populations grow.
Being an environmentalist does not require a belief in a probable solution to mankind's or the world's woes.
by Andhakari on Wed Dec 5th, 2007 at 03:13:53 AM EST
[ Parent ]
If you assume a fertility rate of one child per woman you end up with a vegetative growth rate of about -1% which means it takes about 70 years for population to drop to the level of the 1960's which is where I believe it might be sustainable assuming average consumption also drops to 1960's levels.

In other words: overpopulation is so bad of a problem at this point, as there isn't much that can humanely be done to reduce population faster than 1% per year, that reductions in consumption also need to be undertaken. Over to you.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Dec 5th, 2007 at 03:49:11 AM EST
[ Parent ]
I agree that modest population control and decline is not enough, absolutely; but I believe that any proposed 'solution' to the ills of the world, be they environmental, economic, social, or what-have-you, is just so much smoke in the wind if it ignores population issues.
Over-population IS the fundamental problem behind so many we face.  If we can't face it, then f%# it.
by Andhakari on Wed Dec 5th, 2007 at 10:01:27 AM EST
[ Parent ]
I'm beginning to lean towards triage.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 5th, 2007 at 10:26:16 AM EST
[ Parent ]
Overpopulation can only be remedied with an increase in literacy as Emanuel Todd has pointed out. There should be tremendous incentives to have the world's population become literate; then they can experience personal freedom and realize their quality of life will improve if they procreate less.
by An American in London on Thu Dec 6th, 2007 at 03:38:58 AM EST
[ Parent ]
I've heard that for the last 40 years, and the world population has bloomed like the red tide...
by Andhakari on Fri Dec 7th, 2007 at 05:13:59 PM EST
[ Parent ]
My rejection of over-population as a problem is shaped by being familiar with the rejection of Malthus, made explicit my American commentators and economists in the 1800s. Most especially, look at Henry Carey's 1851 Harmony of Interests, in which he assailed British economics.

Carey was the greatest U.S. economist of the 19th century; I generally find that I can take any recent book on economics and judge its worth by looking in the index to see how many mentions of Henry Carey there are. If there are none, or perhaps just a short note, the book has always, ALWAYS, turned out to be some apologia for monetarism or some other dementia.

British economic thinking, Carey wrote,

is unsound and unnatural, and second, a theory invented for the purpose of accounting for the poverty and wretchedness which are its necessary results. The miseries of Ireland are charged to over-population, although millions of acres of the richest soils of the kingdom are waiting drainage to take their place among the most productive in the world, and although the Irish are compelled to waste more labour than would pay, many times over, for all the cloth and iron they consume. The wretchedness of Scotland is charged to over-population when a large portion of the land is so tied up by entails as to forbid improvement, and almost forbid cultivation. The difficulty of obtaining food in England is ascribed to over-population, when throughout the kingdom a large portion of the land is occupied as pleasure grounds, by men whose fortunes are due to the system which has ruined Ireland and India. Over-population is the ready excuse for all the evils of a vicious system, and so will it continue to be until that system shall see its end... (pp. 64-65)

In conflict with the British system, Carey was a proponent of what was  known until about the 1920s, as the American System of political economy. There is an excellent write up of it on Wikipedia.

I would like to see, for example, a calculation of the lost opportunity cost of having thousands of the most brilliant minds in physics, mathematics, and computer science, working the past three decades on quantifying and modeling the behavior of the financial markets, instead of working on problems like replacing carbon-based fuels, or redesigning urban environments to end suburbanization.

by NBBooks on Thu Dec 6th, 2007 at 04:13:36 PM EST
[ Parent ]
Well, it's not as if the earth can support an infinite number of people, so there's clearly some limit to population. Whether it's 2B, 4B, 6B, 10B or 20B is another matter.

I'm in the process of reading Malthus, but the introductory essay suggests that, as usual, what we're told he said is not what he actually said.

by Colman (colman at eurotrib.com) on Thu Dec 6th, 2007 at 05:45:35 PM EST
[ Parent ]
Human Carrying Capacity of Earth
by NBBooks on Thu Dec 6th, 2007 at 07:23:03 PM EST
[ Parent ]
So, between 500M and 14B is the carrying capacity? Given that we're close to 7B and population as doubled in the last 30-40 years, I think we do have a population problem.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Dec 8th, 2007 at 06:05:14 AM EST
[ Parent ]
Let's be real for a moment.  Anyone spending their life modelling financial markets is, by definition, NOT the most brilliant.
You'd have to be an urban animal, and a very insulated one at that, not to see costs associated with population growth without resorting to convoluted and probably meaningless mathematical perambulations.
by Andhakari on Fri Dec 7th, 2007 at 05:26:36 PM EST
[ Parent ]
Right, the most brilliant minds in mathematics, physics and computer science are in academia. The idea that the financial industry is employing the smartest people on the planet is a marketing line.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Dec 8th, 2007 at 06:07:57 AM EST
[ Parent ]

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