A Circle Turning Vicious

Dolors & Sense

by Sanford Rose

KISSIMMEE, FL—(Weekly Hubris)—10/25/10—Practically everyone who is anyone is now saying something about the core of the economic problem: the increasing inequality of incomes in the US and the rest of the developed world.

From the 1930’s to the 1970’s, income inequality decreased. We had emerging strong unions. We were outraged by the “plutocrats.” Washington was New Dealing, then Fair Dealing.

Income taxes rates for the rich got high.

Bankers didn’t get paid so very much more than the average salary.

The Gini coefficient fell. (For a definition, see an earlier column. Editor, am I permitted to cite myself? Note from Editor: Indeed you are, Mr. Rose.)

Then, it all changed. The country’s populist roots were slowly deracinated.

Unions were “corrupt.” (Like Jimmy Hoffa).

Taxes “sapped” initiative and innovation. The rates went south. Keynesianism was passe.

Monetarism was triumphant.

Regulation, especially financial regulation, was unnecessary.

Millionaires, especially sports millionaires, flourished (maybe a Bush or two, but it seems like a whole forest).

They battened in part by getting municipalities to issue bonds to fund their stadia.

Then globalization happened. Four hundred million new Chinese and Indian workers entered the labor market, drafted from rural areas. When a factor of production suddenly gets overabundant, it grows cheap, relative, that is, to other factors.

The relative returns to labor fell. Median wages in the US stagnated, even dropped.

The Chinese got very rich very fast. They had no experience handling all that money. So they gave it to US bankers.

We outsourced production to China. She outsourced her banking operations to us.

The demand for US bankers, especially those who knew how to invent new debt securities, mushroomed. The relative returns to finance soared.

Then a strange thing happened. People, ordinary people, started noticing that while some were realizing their dreams, others were falling far shorter than they had in the past.

This is a society of political correctness. It pretends that people have what they really don’t have.

If people don’t have the resources to buy McMansions, we’ll pretend they do. We’ll give them credit.

“Let them eat credit.” That’s how one economist titled a memorable chapter in a memorable recent book.

Credit was a substitute for higher wages and salaries, for a more equitable distribution of income.

But what happens when reality intrudes, when people can’t service their debts?

We know what happens: the economy crashes; jobs disappear; houses are repossessed.

Does that exacerbate the inequality of income distribution?

Does inequality of incomes and wealth, which caused the crisis, worsen because of the crisis? And, this time, irremediably so, because political correctness cannot find a viable method of edulcoration.

Absent a massive wave of mortgage modification, which is certainly a novel and titillating form of income redistribution, the answer would appear to be yes.