Eupraxsophy

Secular humanist, freethinker, progressive, and bibliophile. I love living life, learning things, and meeting people.

An Economist's Perspective: Inequality

eupraxsophy:

Is Inequality Bringing Down America?

I’d unequivocally say yes. It seems obvious that too much wealth concentration at the top, over a long period of time, will lead to overall poverty. The most successful states in the world are those with far more socioeconomic equality.

Here’s my favorite point in the article, which sums up the real problem with the economy in a nutshell:

My responses:

Fair enough. I never get into arguments over semantics since they devolve into arguing over definitions which get nowhere fast. I’ll agree to disagree and move along.
Agreed, although don’t get me wrong: you’re absolutely right in pointing this out. I just wanted to take a whack at explaining why a lot of people speak as if government’s own economies.

Take a look at this graph and then this graph. Taken together this implies that broadly speaking tax revenue for Greece has been relatively stable if not slightly increasing in absolute terms. So, you’d think Greece would be relatively good: tax revenue is slightly increasing as the government is taking the same percentage from a larger pie. The issue  is that Greece was spending more money than it took in. When you take Greek’s Tax Revenue and subtract Greek’s Expenditures you get Greek Deficits every year since 1995. The issue that Greek is facing isn’t a result of a recession, it’s the result of the Greek Government spending more money than it had for nearly a decade. 

Let’s take a look at two more graphs. First Greek’s Debt to GDP ratio and the second being Greek’s Interest Payment on Debt. The issue is this: Why is a country which is posting huge deficits and spending more than it makes each year then paying less each year on its outstanding debt? Well, I’d suggest listening to this NPR Audio if you’re interested. If you’re in a hurry, skip to Act Four which is minute 38:00. I highly recommend the entire thing. 
Well, I consider Greece to be a special case entirely, which is why I didn’t reference it specifically (though I should’ve clarified rather than speak of a vague “state/government,” so that’s my error). The Greek government lied about its economic data, and tax evasion was a systemic problem (due both to corruption and the inefficiency of tax collection), which singles it out from most other recession-hit countries (which more or less were the ones I was thinking of when I spoke broadly of a state).
Also, I’d like to know what Greece’s revenue stream has been after 2009, when austerity really went into full force. If I recall correctly (I can’t check on this computer), tax revenue has fallen tremendously because of widespread unemployment and wage cuts. How will the government find the money to pay back debts and deficit if there is no economic growth?

The article you linked is exactly what I talked about in another post. Keynes basically says this: Say’s law can fail to hold for indefinite periods of times because in order for Say’s law to hold prices have to adjust and prices can be sticky. Austrians say this: Say’s law has to hold in the long run, prices need to adjust but let them adjust: don’t mess with the economy. Say’s Law is a law; it must hold true in the long run, but in the short run Say’s Law need not hold. This is pretty much the entirety of Keynesian Economics: Say’s Law might hold in the long run, but in the long run we’re all dead so what does it matter. Because of this their policy advice is to use Government to force Say’s Law to hold in the short run, but the issue is what consequences does forcing Say’s Law to hold bring about? 
I understand what you mean now. But I’d ask something similar: what is the consequence of not holding Say’s Law? Will an economy really recover on it’s own without any state intervention? When has that ever happened, and if so, at what cost to the public at large or in the long run? The longer austerity persists, the more poverty increases, and with that a reduction in business confidence and tax revenues. Debts and deficits will increase, which will lead to more calls for austerity, which in turn leads to more economic malaise, and so on.
Businesses are sitting on record amounts of capital, but they’re not investing it. Despite popular belief, austerity has yet to increase business confidence enough to get them to boost the economy. That’s why wealth continues to concentrate upward, where it is mostly saved or offshored, rather than emerge among the large consumer base that helps drive the economy. So what happens? How do free markets address this?
What the unintended consequences are of forcing Say’s Law to hold are a credit expansion, inflationary monetary policy, and an artificial boom which must end in a bust. This analysis is called Austrian Business Cycle (ABC). This ‘[…] is precisely why debt piled up in the first place: people were using [artificially low interest bearing] credit and loans to artificially prop up their declining disposable income, much to the benefit of lending institutions’ Your conclusion isn’t far from the truth but how you get there is a bit flawed.
But notice how this wasn’t an issue in economies where banks were properly regulated to prevent such practices. Wealthy special interests essentially colluded on this: businesses have failed to raise average wages in line with productivity and cost of living (even though CEO pay has gone up exponentially in the same span of time); at the same time, banks - which often cross-pollinate with these companies through overlapping ownership and such - stepped in to give people artificial wealth in the form of loans and credit. They devised all sorts of legal scams - derivaties, credit default swaps, etc - for people to seemingly shore up loss income. This arguably wouldn’t have happened (and indeed didn’t happen in some countries) were it not for better regulation.
The issue is that Government isn’t necessary to get out of a recession. The issue is that Government exacerbates recessions. Robert Murphy who is an Austrian uses Krugman’s own numbers and data to show: By Krugman’s own admission, the two worst panics occurred after the Fed was formed. […] Using Krugman’s own source, we find that the establishment of the Fed generated (a) the two worst panics in US history and (b) a string of panics that were on average more than twice as bad as the average panic from the pre-Fed era.
True, but all this shows is that government doesn’t always work, not that it can’t in principle. No serious economist has ever admitted that state intervention is flawless: if anything, I’ve always been taught that it’s merely the least bad option.
A timeline of recessions shows that recessions were still, on average, less severe and less common post-Fed than pre-Fed, especially in countries that had much better regulated central banks (ours is hardly exemplary in my opinion). The US has had 47 recessions since independence (give or take a few), only 11 of which occurred after 1945. Those 11 were on average several months shorter than pre-Fed recessions too. 
Furthermore, as you no doubt know, the Federal Reserve is just one side of the coin (monetary policy). Fiscal policy is arguably more important in some circumstances, and many of those recessions and panics were worsened by administrations that weren’t willing to adjust taxation and spending accordingly. Even Ben Bernake admitted not long ago that the Reserve had exhausted all options, and that resolving this current dilemma is a matter of fiscal policy. The problem is that the government often doesn’t don’t enough on all fronts.
You present an interesting hypothesis: banks avoid taxes so government has to borrow money from the banks to make up the difference. All you have right now is a hypothesis, without data I’m taking it as an opinion and and interesting thought and nothing more. Intuitively I’m going to disagree with you. 
I appreciate that you at least give me the benefit of the doubt. I don’t think it’s entirely hypothetical. Look at the history of fiscal policy and politics following the 1970s. An upswell of pro-business lobbies emerged, organizing many different private institutions, which pushed for lower taxation on all fronts. At the same time, this was when average wages and median household incomes began to stagnate (as they remain to this day).
The private interests that curtailed revenue-funded spending also curtailed benefits and wages, leading to a system where both government and the public needed credit and loans. It’s no coincidence that as manufacturing jobs dissappeared and the econony took a downturn, we saw an unprecedented “financialization” of the economy.
I’m not sure about that at all. I’m not sure what the ‘perverse framework’ of the US Regulatory system is in regard to expansionary monetary policy. Expansionary monetary policy is independent of financial regulation. If you want to argue that the financial system collapsed because of deregulation that’s one thing, but to argue that somehow lax regulation is somehow responsible for banks profiting from expansionary monetary policy is just beyond silly to me. I’m not exactly sure what you’re getting at here because it doesn’t make sense to me at all. 
As you noted, banks love lending to governments. They love it in this country especially because regulations are lax enough to allow them to charge exorbiant interest rates to borrowers (and not just the state but average folks as well). In other countries, such as Canada, which weathered this crisis better, central banks lend at much lower interest rates to governments (not that their system is perfect, just relatively better as far as mitigating the recession). 
And the perverse framework is exactly the one I explained before: financial institutions came up with all sorts of useless and opaque financial instruments that they used to profit from people’s need for credit and loans - a need which increases during austerity, as income and services dry up. Poor regulations allowed banks to be bailed but not restructured, largely because small-government proponents did not want the state involved in the matter.
But private If you’re so concerned about incomes, why not support tax cuts? If your argument is truly that people should earn more money than one simple way of doing that is to decrease taxes. What I hear is this: Government shouldn’t take less money from people but Businesses should give more money to people. I’m not sure where that logic is coming from. 
Because the problem isn’t taxes: our tax rate is the lowest among most developed countries, and as well in our history (and not that average incomes were growing steadily, among all classes, even during decades of much higher taxations, such as the 1940s to the 1960s). Countries with far higher taxes have weathered this recession far better than we have, so the size of the state isn’t in itself the problem.
My logic is, I believe, simple: average real wages have not grown in four decades, even though productivity has grown, and CEO pay has skyrocketed. The problem is that companies hoard all the wealth at the top, leaving people with less money, who thus need to turn to government and/or lending institutions to shore up these losses.
Government’s wouldn’t have to spend or tax as much if corporate executives didn’t skimp on providing their workers with better pay and benefits, which they could easily afford to do (while still getting paid plenty) if they were willing to make that investment. Companies have twice made record profits during this recession, and that has yet to be reflected in increases in average wages or investments in the economy. If the markets really did produce wealth more efficiently, than more people would see greater fruit from their labor (to the benefit of the economy as a whole), rather than see real income dwindle despite working harder and more hours. 
At a fundamental level you’re caught up in this idea that the only thing people need is money and if they had money they’d spend it. It’s a very Keynesian ideaology: get people to spend money as quickly as possible and try to get them to spend as much of it as possible and if they can’t do it Government should. What you’re saying is this: ‘I don’t want demand to shift left! Let’s get government to stop it!’ but you never defend exactly why a shift in demand is ‘wrong’ or ‘bad’. The only argument you have is that the transition to lower prices will be rough (i.e a Recession). Granted, recessions are bad but you never look at the cost associated with mitigating a Recession’s effects. This is often why Keynes’ theory is called a Theory of the Bust while Austrian theory is called a Theory of the Boom. 
Again, I must ask: when has an economy recovered without any sort of government intervention of some kind? Why is it that all the other countries that have bounced back from this recession just happened to have pursued state intervention, fiscal regulation, and the like, to some degree? And I’ve already defened why a shift in demand is wrong and bad: an economy cannot grow without demand. Businesses have stated in surveys that this is their main problem. A transition to lower prices hasn’t occured because prices haven’t fallen as quickly as average income has.
I’m well aware of the cost of mitigating a recession’s effects; but the point is that the costs are far less than waiting a recession out, which has yet to produce results in any of the countries that have pursued unbridled austerity. Whatever Austrian economics is called, it’s a distinct minority within economics, which doesn’t mean I’ll dismiss it outright, only that its arguments aren’t accepted by the majority of policymakers and economists, giving me some pause as to it’s efficacy. 
You need to ask yourself this question: What are the consequences of forcing Say’s Law to hold in the short run? I highly suggest reading about the Austrian Business Cycle Theory to begin to develop an answer to that question.
Fair enough, but what are the consequences of not forcing Say’s Law? Consider the viscious cycle of austerity and economic malaise that I highlighted in the beginning.
Besides, I’m not sure how seriously I could take ABCT: most economists have dismissed in for being inaccurate, even the likes of Milton Friedman and Bryan Caplan doubt it’s accuracy, despite their own free-market preferences. The problem is that ABCT seems to be an a priori theoretical explanation: in what empirical instance have resources naturally (i.e. through the market) become reallocated back to more efficient uses following a recession? There are several countries, past and present, that recovered from recessions through state interventions (Germany, Canada, Australia, to name only the bigger and more comparable examples). I ask this genuinely, because I’m unaware of any examples.
This has been interesting, but I’ve had some personal matters come up halfway through this re-blog, so I’m not sure I’ll have the time or energy to respond. So in any case, you can have the final word on this. Thanks for your time and illumination. 

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11 months ago
  1. suns-of-liberty reblogged this from whakatikatika
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