September 8, 2008

Inequality of Spending

The news that the government has officially taken over mortgage giants Fannie Mae and Freddie Mac reminds me of a popular argument in recent years among libertarian pundits and economists, to the effect that:

"Well, sure, inequality in income and, especially, in wealth is increasing ... But, that's okay because inequality in spending isn't up as much. Have you seen the rims these bozos are buying these days?"

Okay, but how exactly was increased spending on flat-lining earning power ever supposed to be sustainable?

This was all just a new wrinkle on the now-discredited wage inflation policies seen in countries like Argentina, Italy, and Britain in the 1960s and 1970s. Back then, the workers would complain to the government that their wages were too low, so the government would order the employers to pay them more. The employers would then complain to the government that they couldn't pay their loan obligations, so the government would print up more money. The resulting inflation would make financial and business planning harder, discouraging saving and long-term investments, so the economy would stagnate.

One lesson the elites took away from this sorry episode was that rising wages were A Bad Thing. Thus, today you constantly read newspaper articles that simply assume that illegal immigration keeping wages down is A Good Thing.

Yet, the fundamental problem remained. So, over the last two decades, a new, unspoken solution policy evolved:

1. Keep wages down.

But if labor can't afford to buy more stuff, they'll complain, and capital will suffer as well because they can't sell their goods to labor. So, the second part of the strategy was:

2. Keep spending up.

How can you do this? Easy -- get lots of people to borrow more! Cut out the middleman (the employer). Instead of leaning on the employers to pay higher wages, the government has been leaning on lenders to lend more money to homebuyers and homeowners. And, this is politically easy to achieve, because while employers begrudge paying wages, lenders like to lend. It's what they do! It's easy and fun to create money through fractional reserve banking by just assuming that you are more likely to get paid back than you actually are.

Of course, eventually this house of cards had to come down, but the taxpayers and savers will be there to bail the lenders, borrowers, and spenders out.

My published articles are archived at iSteve.com -- Steve Sailer

29 comments:

c23 said...

...a popular argument in recent years among libertarian pundits and economists, to the effect that:"Well, sure, inequality in income and, especially, in wealth is increasing ... But, that's okay because inequality in spending isn't up as much. Have you seen the rims these bozos are buying these days?"

In that case, I'm sure they wouldn't mind getting 2% raises while their Marxist and Keynesian colleagues get 10% raises. Administrators of economics departments, take note.

Anonymous said...

Steve,
You've got the 'prices and incomes' policies advocated by various British Governments (both Labour and Tory) from the 1940s to 70s (the worst examplw is the Callaghan Government of 1976-9), absolutely and completely wrong.
The policies were applied during periods of raging inflation.The idea was that the trades unions (which actually held real power then) acted in concert with the government in holding wage claims to a certain 'target' level, in order to 'squeeze inflation out of the economy'.The only other alternative was the deflation and mass unemployment deliverd by Mrs Thatcher's government.
the 'social contract' was supposed to be voluntary on the part of the big union bosses who were supposed to keep their side of the bargain.
But, alas, certain powerful unions, who packed industrial clout, got too greedy and busted the pay ceilings, this in the infamous 'winter of discontent' of 1978-9 lead to all of the other unions (famously the low paid floor-wiper's union) joining in the fray and the policy collapsed adimst piles of stinking rubbish (which aptly sums up Jim Callaghan) festering on the streets.
The stupid bastards in the trade union movement got their comeuppance alright - in their short-sighted personal greed they allowed Maggie Thatcher to come in - who famously utterly and completely destroyed them.
- As a student of all things British during the 70s years of decay and violence (ie the sex pistols, the Clash, Elvis Costello etc) I thought you would have known this.

halfbreed said...

A case in point being the Fannie/Freddie bailout. But here, instead of rims, the non-savers were buying houses instead. So instead of subsidizing rims, the taxpayers are now subsidizing entire houses. Ironically, the government may have to pay less than predicted on this entire mess because of immigration: there are now roughly 40 million more people in the country than there were in 1991, during the last, albeit less severe, housing downturn. So the demand for housing is going up, while the supply is remaining (temporarily) static, which will eventually result in prices going up again. I'm no fan of immigration, but it is immigration which will get us out of this housing downturn. The recovery will start with the low end houses which were financed by subprime mortgages, which is what started the whole collapse in the first place, and then gradually extend upward. And the reason it will start there is because that's where the greatest increase in demand is, among immigrants.

BTW, from what I understand, there were plenty of irresponsible middle- and upper-income buyers of houses as well. Prices had been going up so long that everybody, of whatever income level, just figured that gravy train would last forever, and stretched as far as they could when buying a house. On a percentage basis, I'm sure the irresponsibility was less among the well to do, but I've heard plenty of stories on an anecdotal level which show the irresponsibility of the rich.

I've also seen it firsthand. I worked as a bond trader on Wall Street for 12 years during the 80's and 90's, and you'd be amazed at how many guys there were who after making, say half a million dollars a year for ten years, would have a net worth of maybe two or three hundred thousand dollars. First, a lot of them were just sloppy with their money, not bothering to pay close attention to their investments. Second, they all figured that they would be making that kind of money forever, so they spent way very freely, often on conspicuous consumption items like fancy cars and summer rentals in the Hamptons. And third, a lot of them would end up divorced, which is of course the single worst financial decision you can make. Not everyone would behave this way, but a surprising percentage would.

Anonymous said...

Why are you concerned with income inequality? Democrats and socialists used to be concerned with poverty. Now that poverty is pretty much gone, suddenly there is a new justification for more government control of everything - equality.

Wealth produces income so equality requires confiscation of wealth (or its products). Since people have different abilities and put forth different efforts, equality requires replacing consentual agreement with government force. The founders of Google changed your life every day, yet you think it is injust if they get paid in accordance with capitalism.

Byrne said...

Okay, but how exactly was increased spending on flat-lining earning power ever supposed to be sustainable?

Because one of the main drivers of inequality is age. If you have people earning $25,000 a year and spending $30,000 in their 20's, but earning $60,000 and spending $40,000 in their 40's, it's not such a big problem. Unfortunately, you have to compare different generations, and each generation seems a little less willing to save (probably egged on by the policies you mention).

airtommy said...

The Federal Reserve explicitly targets wages. They want to keep them down. However, when monetary inflation manifests itself in other parts of the economy, like asset values, the Fed ignores it.

Anonymous said...

And with this bailout of incompetent plutocrats, I assume nobody will be shocked when the hoi polloi begin to stop voting against socialized medicine, higher marginal rates on top income earners, and expanded EIC's.

--Senor Doug

Anonymous said...

Steve, The Internet is calling Russell Brand(your Earth-Day-post guy) the worst host in MTV Video Music Award's history.

milam command said...

Steve, I haven't heard any libertarian economists say any such thing--"in essence" or plain English. I know you really hate you some libertarians, but you could at least bother to argue against them (us) directly rather than inventing ridiculous straw man rhetoric. You're better than that. And so are they.

Anonymous said...

In any wealthy society, the group living in the margins can become very large ...

At some point, someone realizes that they can marshal those living in the margins as their power base, and then the fun starts ...

Over time, those not in the margins become inured to the pathetic appeals, but by that time their once comfortable existence might have been destroyed.

Tanstaafl said...

the government has been leaning on lenders to lend more money to homebuyers and homeowners

Of course, eventually this house of cards had to come down, but the taxpayers and savers will be there to bail the lenders, borrowers, and spenders out.

You make it sound like an accident. The lenders were eager to lend. Everyone knew the formerly red-lined borrowers couldn't pay. The lenders/government knew their pyramid-system was not sustainable. They knew it would need and get a bailout. They privatived the profits and now they're socializing the costs.

We are witnessing one of the largest ripoffs in history. Subsidies for red-liners. Subsidies for lenders. Taxes for the rest of us.

beowulf said...

Paging Dr. Batra...

The most damaging factor to our economy today is the Wage-Productivity gap. This refers to the increase in the hourly output of workers vs. the increase in hourly pay. This concept is described quite well in Chapter 6 of economist Ravi Batra's book, "Greenspan's Fraud."

During times of true economic prosperity, wages have kept pace with productivity increases. Workers have shared in the benefits of their increased productivity. The result is that wages remained sufficient to purchase our nation's industrial output. Borrowing, or debt-financed consumer spending, was unnecessary to maintain sufficient consumer spending to purchase our production. More production can be purchased because more wages are paid. Demand, created by wages, matches supply, which is created by productivity. This creates a balance that makes massive borrowing unnecessary. And such balance maximizes economic "growth."

This balance has not been maintained, however, during recent years. It has worsened greatly under the Bush administration. Productivity has increased significantly during the Bush years. In contrast, wages have actually decreased..."
http://www.advancingwomen.com/politics/56500.php

Steve Sailer said...

Milam Command writes:

"Steve, I haven't heard any libertarian economists say any such thing--"in essence" or plain English."

NYT OP-Ed, 2-13-08
You Are What You Spend
By W. MICHAEL COX and RICHARD ALM

WITH markets swinging widely, the Federal Reserve slashing interest rates and the word “recession” on everybody’s lips, renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

Anonymous said...

Sorry Halfbreed, immigrants aren’t going to save the day because they on average make much less then US citizens and the big problem is that we have so much RE that is overvalued compared to the ability of Americans to buy it. Sure you can lower RE prices to match the immigrant income but that just puts even more banks into bankruptcy and as we see the debt just gets thrown onto American taxpayers and their children. This debt will strangle the economy. You can’t create a rich country by having more and more Americans in a lower and lower income category

DJ

milam command said...

Okay, at least you cited some real libertarian economists.

Still, Cox and Alm's main points...

1) that true purchasing power isn't reflected in standard income statistics, and,
2) that global free trade (not the same as free immigration) makes things more affordable for everyone...

...have nothing whatever to do with the crude characterization of their argument with which you began your post. Nor do they justify your rather convoluted theory of why the powers that be want to keep wages down by keeping borders open.

You may be shocked to learn that it's possible to both support libertarian economics and immigration control. And that all of our economic problems aren't caused by hordes of little brown invaders.

Theophilus said...

Steve,

I don't think you have the libertarian/economist argument quite right. To a certain extent, those on the bottom have been "keeping up" through debt, but the bigger issue for those of us who don't worry about inequality, is the decline in prices for the goods and services that are consumed by those on the bottom. In other words, we would argue that the standard of living enjoyed by the poor (and lower middle-class) has been steadily increasing thanks to more and more goods and services available at cheaper and cheaper prices. Thanks to increased efficiencies throughout the American economy (in distribution, manufacturing, etc.) the bottom-half of the income distribution can continue to enjoy a decent standard of living.

Anonymous said...

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

Forget income, look at consumption. It's just as inane an argument as Steve said.

The Times is a real treasure trove of idiocy, isn't it?

halfbreed said...

Anonymous who addressed me --
My observation has been that some recent Mexican immigrants do in fact buy houses; they may finance them by having 20 illegal boarders, but they do buy them. I know of several near where I live in CT who have bought. Again, how they finance them I don't know, and whether they pay taxes or obey zoning laws is another question. But I know for a fact they do buy in the poorer areas.

Anonymous said...

Halfbreed says “My observation has been that some recent Mexican immigrants do in fact buy houses; they may finance them by having 20 illegal boarders, but they do buy them. “

Sure many immigrants got mortgages but as we see from the mass foreclosures they did not buy them since if you can’t pay your mortgage you in the end don’t own anything. Don’t mistake having a mortgage with ownership, the bank owns it until you are paid up. Just try not paying your mortgage, at most you can get some of your equity back, but you won’t get the house.

Also your twenty illegals living in one house is called a tenement or slum and those lower property value which makes not only the loan upside down but also many of the other homes in the neighborhood upside down in their loans as well.

This is great news if you want to collapse housing prices but as we see with today’s bailout this costs will be shifted to the American people and everyone is poorer. You do not create a rich country by increasing the number of poor people, though some will make money off of that policy. There are lots of bankers who made lots of money off of giving loans to those who could not pay them back.

DJ

Steve Sailer said...

One of the anonymices says:

"You've got the 'prices and incomes' policies advocated by various British Governments (both Labour and Tory) from the 1940s to 70s (the worst examplw is the Callaghan Government of 1976-9), absolutely and completely wrong.
The policies were applied during periods of raging inflation."

Okay, but why was there raging inflation?

I was specifically thinking of the Tory governments of the early 1970s, when there was a massive increase in the money supply.

Anonymous said...

And that all of our economic problems aren't caused by hordes of little brown invaders.

I dont think any reasonable person would disagree with that statement. However there are few, if any, economic problems that are solved by hordes of little brown invaders and some that are made worse.

none of the above said...

halfbreed:

Jesus, I remember exactly the same pattern among dot.com aspiring millionaires and stock-option-holders. Work 70 hour weeks, save nothing, and hope to God the IPO really happens and you get rich.

Richard A. said...

Increasing wage inequality in the US is due directly to immigration (the importation of an underclass). The MSM has falsely shifted the blame to free trade to cover up the damage immigration has done to US workers.

Anonymous said...

Steve,
The Government of Ted Heath was elected in 1970 after unexpectedly beating Labour at the polls (really, the victory was solely down to Enoch Powell's 'Rivers of Blood' speech, but that's another story).
Well, anyway Heath was elected on a strict monetarist ticket - and he promised to do away with all incomes policies etc and rely on interest rates and cuts in public spending.At this time Britain was just emerging from the effects of Harold Wilson's 1968 devaluation, and the temporary relief in the trade deficit turned very sharply downwards.Matters were not helped by Nixon's repudiation of the dollar/gold peg.
The upshot was that unemployment rose to the then unacceptable figure of 1 million (this would be considered ridiculously low these days).Memories of mass unemployment in the 1930s were still very live then, so Heath 'did a U-turn' (famously eschewed by Maggie), abandoned his monetarism and plunged into an extreme Keynesian reflation in 1972-3 in which the British economy experienced freakish growth (in fact consumer goods were snapped up so fast that there was a 6 month wait for electric motors for domestic appliances!).
Matters were not helped by the National Union of Mineworkers pushing a very high pay demand (which resulted in power black outs), and of course there was OPEC's little matter of quadrapuling oil prices overnight.
All in all, the poor, unfortunate Mr. Heath (who fundamentally was a very decent man), was left with the most ill-starred legacy and inflation reached 30% per annum in 1975 and stayed high for the rest of the decade.
The flip-side is that this decade of strife, turbulence and decline produced some of the most inventive British rock musc ever.From the glam rock of Bowie at the beginning, through the pomposity of prog rock it ended in the anger of punk, sweetened slightly by the emergence of New Wave and Two Tone.
The telly was rather good too.Spawning such classic british shows as 'The Sweeney' (probably the most authentic take of the life and mores of the now ethnically cleansed English working class you'll ever get. Monty Python, Benny Hill, Upstairs Downstairs etc.

halfbreed said...

DJ --
What you say about getting a mortgage vs. buying is true, though by that definition very few people actually "buy" their homes. And it is also true that creating a tenement lowers property values, but I think that's less true for neighbourhoods which are already heavily Hispanic (where the property values have already been lowered).

Anyway -- and I mean this -- it's a pleasure to argue with someone who's so even-keeled. Too much hotheadedness on such subjects, even in the comments section of a blog like Sailer's.

None of the Above --
I have to admit, I always felt a certain schadenfreude when I'd hear about those dotcom millionaires going bust.

birch barlow said...

There really should be a more merit-based immigration policy. The problem is that US elites believe their own lies about the talent of peasants. I don't understand why *anyone* would choose a poor peasant over a beautiful, 5'-9"+ East Asian, spicy Latina, or Nubian goddess with an IQ of 125+.

Actually, there may be a reason for this--competition. Our elites do not want competition. Or maybe it's just too crude to put immigration policy in the terms I used above. I guess it really doesn't pay to say those kinds of things in print.

food for thought said...

"In other words, we would argue that the standard of living enjoyed by the poor (and lower middle-class) has been steadily increasing thanks to more and more goods and services available at cheaper and cheaper prices. Thanks to increased efficiencies throughout the American economy (in distribution, manufacturing, etc.) the bottom-half of the income distribution can continue to enjoy a decent standard of living."

Theopholis

I'm not so certain greater efficiency is at the bottom of this greater equality in purchasing power. I can think of two popular brands, Sony and Schwinn, that just aren't made as well as they once were so that their products can be priced competitively. I've noticed a similar trend with clothes. Some fabrics are as good as those from 20 or more years ago but you can't tell by brand, by retailer or by price if a shirt will fade or pill within a few months or if a pair of jeans will fall apart by the end of the year. I wonder about the houses that have been hastily built by the "hordes of little brown people" as well. Common knowledge from before the invasion has been that boom driven construction tends to be shoddy. So while more people can afford a closet full of clothes, electronics and houses, they may be getting what they are paying for rather than benefitting from advances in manufacturing or cheap labor.

"Actually, there may be a reason for this--competition. Our elites do not want competition. Or maybe it's just too crude to put immigration policy in the terms I used above. I guess it really doesn't pay to say those kinds of things in print."

Birch Barlow

I don't want the competition from above or below but if I had to choose, I'd choose to have immigrants from a variety of countries, ethnic and socioeconomic backgrounds. If we really need immigration on a large scale, I'd feel much better about a policy that prevented South Americans from simply taking advantage of a shared border. Why is it taboo for the US to set its own immigration policy for its own benefit and enforce it?

Anonymous said...

"...don't understand why *anyone* would choose a poor peasant over a beautiful, 5'-9"+ East Asian, spicy Latina, or Nubian goddess with an IQ of 125+."

Sometimes I find my smiling at the diversity and of ths blog

If you are a regular to the principles underlying race realists, you know that "Nubians" (if you mean sub-Saharan blacks Africans and not the current presidential candidate) with IQs of 125+ are as rare as tall, blonde Mexicans. They do exist, but...
Ditto the spicy Latinas with the IQs of 125+, if by "latina" you mean mestizo, though they are a little less rare than tall, blond Mexicans.

PCites are always a giggle as they try to cover their butts.

birch barlow said...

^
I agree that a particular weakness of intellectuals in general is to focus on the rare, on the specks of reality that are interesting and pleasing to them rather than what is really common. In some ways this is worse than obsession over obviously impossible fantasies and fairy tales, because the grain of truth in such things covers the big (implicit) lie of their commonality.

For example, I think a lot more about subzero temperatures and blizzards in Southern California, which are very rare (and only happen in a very small geographic area in SoCal), as opposed to the glut of 80, 90, and 100 degree hazy days that are far more common in SoCal, which are (to me) gross, boring, and generally unpleasant to think about.

Another example of my thinking is that I find it much more fun to think about successful people who use recreational drugs regulary and heavily, rather than the much larger groups who use drugs regulary and heavily and are a mess, or of successful people who have never or very rarely even smoked a joint.

More on the topic of my original statement, Sailer has written, I believe more than once, about geeks' obsession with butt-kicking babes, who in reality are extremely rare but are again fun for (some) intellectual-type males to think about.

So while essentialist thinking can be quite irritating, untrue, and ignore important facts of life, as well as being very boring, it is in some ways more accurate and useful than that of leftist and libertarian bougeois bohemian intellectuals. And of course a big problem with the far left is that, unlike me, they will argue endlessly stupid fallacies (and call Gospel) such as the fallacy that overlap means equality. At least I have the balls to admit I am an idealistic and obsessive snob.