Guest Post: Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It

Washington’s Blog

I have previously argued at some length that rising inequality is one of the main causes of the economic crisis.

Famed Yale economist Robert Shiller agrees.

As the Browser reports:

Yale economist Robert Shiller argues that rising inequality in the US was a major cause of the recent crisis, and little is being done to address it.

Shiller gave The Browser a reading list of books which explain the economic crisis, including former IMF chief economist Raghuram G. Rajan’s book Fault Lines, which gives several causes for the current crisis, explaining:

The first of them is political, and the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places. One thing that this has done is it has encouraged governments, who are aware of the resentment caused by the rising inequality, to try to take some kind of steps to make it more politically acceptable. He gives other examples as well, but historically, that has often taken the form of stimulating credit: instead of fixing the problems of the poor, lending money to them. He has a chapter entitled ‘Let them eat credit’.

The US in particular has stimulated the housing market, it has subsidised lending to people, which drove up home prices in an unsustainable way. And there wasn’t that much concern about, or understanding of, the sustainability of this. That’s his first fault line

Shiller notes:

I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ not through wishful thinking. We have to understand how we get inequality and what we can do about it.

Shiller then discusses Winner-Take-All Politics: How Washington Made the Rich Richer and Turned its Back on the Middle Class, by Paul Pierson and Jacob Hacker:

This is a new book – it just came out. It’s about rising inequality and it traces back to fundamental causes. I like books that get back to ultimate causes and that think like social scientists about these causes. The question is, ‘Why is inequality getting worse in so many different countries?’ This book particularly focuses on the US. The traditional answer is – well, there are a number of traditional answers, but the most prominent among them is this idea that in a modern economy there is a skill bias in technical change. Our computers and communications have led to a winner-take-all society, where only the really smart can make money. Everyone else is technologically obsolete, with all these computers that are replacing people. It is, I think, a very important theory.

But Hacker and Pierson point out that it doesn’t really fit the recent data. In the US, we’ve seen a rapid concentration of wealth at the extreme high end. The top tenth of a per cent of the top hundredth of a per cent of the population is getting wealthy very fast. They point out that this is not true in Europe, and yet the economies are very similar and growing at similar rates. If the technology is the same, why would there be a difference at the extreme high end? And they argue that the answer is really political. There have been political changes in the US that allow the extreme high end to garner more wealth. Ultimately, it represents a failure of our society to take account of the fact that the extreme high end can lobby and can organise for its own interests, and we’ve let it happen.

The interviewer asks:

So you feel inequality is central to what has gone on and that we really need to address that?

Shiller responds:

Yes – and there is very little concrete talk about addressing it. It’s a very difficult problem. You might think that in a system of majority voting, the middle class and the poor would dominate and would prevent this kind of inequality from developing. But it hasn’t been that way – it’s been even less so that way lately, especially in the US. And once again, we have to attribute that to some change in our zeitgeist, in our way of thinking about what people view as important. That’s an underlying theme in all of these works, going back to Adam Smith. I don’t think he uses the word inequality very much – but it is about poverty and the alleviation of poverty. In Adam Smith, of course, the wealthy tend to be the kings and lords…

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

79 comments

  1. craazyman

    “Our computers and communications have led to a winner-take-all society, where only the really smart can make money.”

    Only the “really smart”? He didn’t really say that did he? Oh man. I need a vomit bag.

    This is why I can’t watch TV or hardly read the news. I have to wear a facemask like in Cormac McCarthy’s THE ROAD and keep a vomit bag within arms reach. So I just watch the TV when it’s NFL football.

    Rage on George, seriously, thanks for you efforts. Even though some good guys are total idiots (or maybe idiot-savants) at least they are blowing the idiot-wind in the right direction.

    1. DownSouth

      I think one of my famous (or is it infamous?) Reinhold Niebuhr quotes is appropriate here:

      Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.

      The most common form of hypocrisy among the privileged classes is to assume that their privileges are the just payments with which society rewards specially useful or meritorious functions. As long as society regards special rewards for important services as ethically just and socially necessary (and the reversion of equalitarian Russia to this principle of unequal rewards suggests that it will not be easily abrogated), it is always possible for social privilege to justify itself, at least in its own eyes, in terms of the social function which it renders. If the argument is to be plausible, when used by privileged classes who possess hereditary advantages, it must be proved or assumed that the underprivileged classes would not have the capacity of rendering the same service if given the same opportunity. This assumption is invariable made by privileged classes. The educational advantages which privilege buys, and the opportunities for the exercise of authority which come with privileged social position, develop capacities which are easily attributed to innate endowment. The presence of able men among the privileged is allowed to obscure the number of instances in which hereditary privilege is associated with knavery and incompetence. On the other hand it has always been the habit of privileged groups to deny the oppressed classes every opportunity for the cultivation of innate capacities and then to accuse them of lacking what they have been denied the right to acquire. When the bill which provided for supported schools was before the English Parliament in 1807, a Mr. Giddy, afterward President of the Royal Society, raised objections which could be matched in every country: “However specious in theory the project might be of giving education to the laboring classes of the poor, it would be prejudicial to their morals and happiness; it would teach them to despise their lot in life instead of making them good servants in agriculture and other laborious employments; instead of teaching them subordination it would render them fractious and refractory as was evident in the manufacturing counties; it would enable them to read seditious pamphlets, vicious books and publications against Christianity; it would render them insolent to their superiors and in a few years the legislature would find it necessary to direct the strong arm of power against them.

      “Fascism is really a euphemism for corporate welfare in a police state,” is how a commenter on Juan Cole’s blog put it yesterday.

      Folks, welcome to America!

      1. Elliot X

        “The most common form of hypocrisy among the privileged classes is to assume that their privileges are the just payments with which society rewards specially useful or meritorious functions….”

        Very nice quote from Reinhold Niebuhr, thanks for reminding us. And to think (during the 1940s and 1950s? if I’m not mistaken) he was one of the leading religious leaders in America.

        Can you imagine a leading religious leader saying this kind of thing in today’s America? Or is there someone that I’m unaware of?

        1. DownSouth

          I think maybe the last one to gain any mass audience was Martin Luther King, and we all know what happened to him.

          Once again, permit me to plug his speech Why I am Opposed to the War in Vietnam. It connects all the dots in such a magnificent way.

          I highly recommend listenting to the audio because the oral is so much more powerful than the written.

          1. Elliott X

            DownSouth: “I highly recommend listenting to the audio because the oral is so much more powerful than the written.”

            Thanks, I’ll listen to it the first chance I get.

            And as you may already be aware, Chris Hedges has accused America’s religious leaders of selling out: he contrasts them with the courage of Martin Luther King, who is frequently quoted in Hedges’ most recent book, “Death of the Liberal Class”.

          2. Michael H

            “Chris Hedges has accused America’s religious leaders of selling out…”

            While Chris Hedges’s proposals don’t go as far as I would like to see, nevertheless he has his moments as in today’s column where he outlines the five stages of the political theater that liberals go through:

            “Act I is the burst of enthusiasm for a Democratic candidate who, through clever branding and public relations, appears finally to stand up for the interests of citizens rather than corporations. Act II is the flurry of euphoria and excitement. Act III begins with befuddled confusion and gnawing disappointment, humiliating appeals to the elected official to correct “mistakes,” and pleading with the officeholder to return to his or her true self. Act IV is the thunder and lightning scene. Liberals strut across the stage in faux moral outrage, delivering empty threats of vengeance. And then there is Act V. This act is the most pathetic. It is as much farce as tragedy. Liberals—frightened back into submission by the lunatic fringe of the Republican Party or the call to be practical—begin the drama all over again.”

            He goes on to say:

            “We are now in Act IV, the one where the liberal class postures like the cowardly policemen in “The Pirates of Penzance.” Liberals promise battle. They talk of glory and honor. They vow not to abandon their core liberal values. They rouse themselves, like the terrified policemen who have no intention of fighting the pirates, with the bugle call of “Tarantara!” This scene is the most painful to watch. It is a window into how hollow, vacuous and powerless liberals and liberal institutions including labor, the liberal church, the press, the arts, universities and the Democratic Party have become. They fight for nothing. They stand for nothing. And at a moment when we desperately need citizens and institutions willing to stand up against corporate forces for the core liberal values, values that make a democracy possible, we get the ridiculous chatter and noise of the liberal class.”

          3. Patrice

            Hedges is getting closer.

            If I could just mix him a cocktail consisting of:

            1 part Danton’s “l’audace, et encore de l’audace et toujours de l’audace” (audacity, still more audacity, and audacity forever)

            1 part Mao Zedong’s “It Is Right to Rebel against the Reactionaries”

            1 part Che Guevara’s “Hatred is an element of struggle”

            1 part Vodka, triple sec, lime and cranberry juice

            Shake and serve, and he would be good to go. :)

      2. craazyman

        Yeah it’s the curse of the “We’re doing God’s Work” crowd.

        I think it also operates at an instinctive level to varying degrees, in addition to the consciously predatory one.

        There is a force in nature that turns animals into herds and flocks for self-protection. Humans and animals share much DNA so I suspect the same force applies and operates at a level of human instinct, where like seeks out like, forming a group around some metaphor of protective life energy — clan, ethnic group and the ultimate metaphor for the life force where there is no association by clan or ethnic group or religion — Money — both a sublimation of and the lowest level of that binding force.

        We see this energy illustrated in absurdist drama like Ionescu’s Rhinoceros and novels like Camus’ THE PLAGUE.

        The imaginary aftermath of its catastrophic violence was capture by Cormac McCarthy in THE ROAD, which may seem over the top, but is probably a fair sketch of life in many parts of the world.

        It’s astonishing how easily even so-called ‘smart’ people fall for this DNA radio mind dragon nonsense. They are not fully conscious, in my view. They are partly animals, seeking the Pilot Wave for hearding.

        I see a lot of remarks about Fascism here, but I think most miss it’s underlying unconscious structure and motivation at the level of group psychology. And it’s affinity with animal behavior.

        It’s no wonder the protagonist in THE ROAD wears a face mask pushing his shopping cart down the burned out highway. Anyt prop that disguises and protects the individual — aware and sane — in the midst of such madness is theatrically quite appropriate as a metaphor.

  2. decora

    I think inequality is awesome. Having hopes and dreams can be a real burden. But once you are ground down past a certain point, you realize it is all hopeless, and you will never get ahead. Or even get a house. At that point, a certain sort of contentment sets in, and you just start to enjoy life more. Go on, have that second twinkie. And the third. Who cares? It’s not like it matters anymore. And a new car? Hell, why not, if Crazy Eddie says I have the credit, then who am I to argue? After all, I’m nobody. Besides, we’ll probably all die in a terrorist attack anyways.

    1. Dan The Man

      I understand the nihilism, I disagree with your belief that we will die from a terrorist attack. You have a better chance of dying from falling cocoanuts, 50 to 60 cents of every dollar is being spent on defense because 3000 people died on 9/11. Meanwhile 400,000 die every year from tobacco related illness.

    1. Francois T

      “Kleptocracies are often mislabeled as meritocracies.”

      If I may:

      Kleptocracies always mislabel themselves as meritocracies.

  3. André

    Here in Brazil we are discussing just the opposite: the ast decade, for the first time a secular trend of rising inequality was broken. The last president was elected o a “eradicate the extreme poverty” plataform. What I want to say is: it is possible to change. It is not easy, but it is possible.

        1. DownSouth

          From the link:

          Hacker and Pierson’s point is that there has not been an ideological shift toward conservative positions in the country at large (at least not on this issue). Instead, it’s the game of politics that has changed, so policy has become more disassociated from the preferences of the people.

          I agree. I’d just add that there is a very loud and aggressive “mass minority,” as Jonathan Schell put it, active in the United States. It’s leadership hails from the blue and cloudless empyrean, but its foot soldiers come from the radical religious right. As Schell points out, a “mass minority” can come to power, as it did in Nazi Germany, if the majority is not vigilant.

          1. Cobb

            Down South, I believe you are correct about the religous right. I am a pastor. I’m a conservative Bible believer. I often tell people that one of the worst things that has happened to Christians in the U.S. was Focus on the Family, James Dobson, and the Moral Majoirty. The wealthy business/political types, convinced millions of good people to become thoughtless robots for their party. Dobson and his ilk convinced good Christians that the way to have a healthy family was to have good laws and elect republicans.

          2. skippy

            A man is about to loose all his family’s possessions, BK. He calls his religious mentor wailing over his predicament. Mentor informs him to sell it all and settle with his creditors as best he can, to which said man, in tears, laments his status lost. Mentor reminds him that his teachings are for the cleansing of the soul, morte’s passport to a better place, not status improvement / retention.

            Skippy…this is why I left as a child, too much focus on status.

    1. DownSouth

      André,

      I loved it back in 2005 when Lula and Kirchner told Bush to go stick it up where the sun don’t shine at the fourth Summit of the Americas in Mar del Plata. When it came to neoliberalism and the Washington Consensus, Kirchner pretty much told Bush how the cow ate the cabbage in his opening remarks.

      What happened to the light that shone so brightly 240 years ago in the United States? There’s only a faint glimmer left in countries like Brazil and Argentina.

      Lawrence Goodwiyn in The Populist Moment gives this explanation:

      [T]he relatively expansive pre-industrial sensibilities that had animated Thomas Jefferson, George Mason, and the original Anti-Federalists gradually lost that strand of democratic continuity and legitimacy which, in fact, connected their time and their possibility to our own through the actions of Americans who lived in the interim; the Populist connecting link was lost to the heritage. The egalitarian current that was part of the nation’s wellspring became not a constantly active source of ideas, but a curious backwater, eddying somewhere outside both the conveyed historical heritage and the mainstream of modern political thought that necessarily builds upon that heritage.

      The result is self-insulation: the popular aspirations of the people of the “third world” in the twentieth century have easily become as threatening to modern Americans as the revolt of their own farmers was to goldbugs eighty years ago. Though American foreign policy and American weapons have defended anachronistic feudal and military hierarchies in South America, Africa, and Asia, such actions being justified at home as necessary to the defense of “democracy,” neither the policy nor the justification has proved notably persuasive to the non-Americans who are the mass victims of such hierarchies. The resulting unpopularity of America puzzles Americans. The policies themselves, however, are not debatable within the limits of public dialogue sanctioned in modern America. Under such constraints, the ultimate political price that Americans may be forced to pay for their narrowed cultural range in the twentieth century has emerged as a question of sobering dimension.

      1. Diego Méndez

        DownSouth,

        aunque cualquier observador hubiera estado de acuerdo contigo hace 20 o 30 años, cuando las dictaduras apoyadas por EE.UU. poblaban el continente sudamericano, hoy la responsabilidad de los pueblos de América por sus fallos y por sus aciertos es innegable.

        No lo tenéis fácil, pero ya tenéis la base: la democracia. Perfeccionadla y no oigas las voces de sirena ni las quiméricas promesas de populistas y tiranos.

        1. DownSouth

          If you’re trying to tar Lula and Kirchner with the same brush as Chavez and Obrador, I think you’re way off base.

          1. Diego Méndez

            Lula is not Chávez, but Kirchner has continued Argentina’s long descent into banana-republic condition. Corruption, control of the press and manipulation of basic economic stats are as serious as ever.

            It doesn’t matter whether you have some economic growth over a decade, as Argentina has had, if it’s mainly because of higher commodity prices and you don’t use it for structural reform.

            If subjected to the same kind analysis we use on (Northern) Western leaders, it’s difficult to say anything positive about Kirchner. And regarding the document you posted, it’s self-laudatory and typical for Argentinian foreign affairs: we’re doing fine, thanks, but Argentina would need a bigger share of the pie than you… unless you don’t mind bribing the negotiators?

            I can understand why Argentina would demand fairer trade with North Atlantic countries. The problem is: they don’t hold themselves to the same standard of fairness inside their own country. Moreover, they demand fairness (meaning trade asymmetry) out of habitude, to every country, including Brazil in the Mercosur… which happens to be poorer than themselves.

  4. Cathryn Mataga

    If the the rich are hoarding capital,
    and the poor are too poor to
    consume, there will be too much money to
    invest, and no one will be consuming anything.
    No consumption will lead to economic failure.
    For businesses to make money, somebody out
    there has to buy something.

    Of course there is another way out of this.
    Provide incentives so that the ultra-rich
    spend more of their cash. If we’re going
    to have a 19th century style divide between
    rich and poor, in order for the society to
    function, the rich have to hold up their end
    and buy more stuff. To stimulate the
    economy, each banker should be required to
    build a lavish mansion with
    large staff of maids and butlers.
    Each mansion might have a large estate
    with lavishly tended gardens. In this way
    Bush/Obama’s efforts to bail out the banks would
    provide at least some employment. Of course
    the maid and butler income could provide the
    basis for employment for an even lower tier
    of service workers.

    Perhaps we could bulldoze the
    suburbs to make way for the new estates.
    Each complex would house an ultra-rich guy
    with barracks for the staff required to keep
    the complex running. This would also help
    the banks to turn their large hoards of
    foreclosed property into cash, thereby helping
    to preserve bank balance sheets. Bulldozing
    the suburbs provides the additional benefit
    of reducing the supply of single-family homes,
    again raising the value of remaining homes
    even further, and additionally preserving
    bank balance sheets.

  5. eyesoars

    André: kudos to Brazil and other Central and South American countries for their recent successes. You seem to be going in the right direction, with incentives for education.

    Here, it’s getting harder and more expensive to get an education, not easier. And our criminal “justice” policies are also not improving. And there’s nothing at all happening to diminish the increasing income fraction the top .1% are receiving.

  6. Jeff

    Winner Take All Politics dismisses technology as a primary cause because income is highly concentrated at the top: the argument is that if technology is the issue then the concentrationw would be milder, with perhaps the top 20% of more educated people getting the benefit.

    What this misses is how technology scales. If a large corporation can use technology throughout its organization and eliminate thousands of jobs, the majority of that gain goes directly into the CEO’s pocket in the form of a larger bonus. In the same way, advanced computer technology enables much of what is happening on Wall St…hedge fund managers can easily control and profit from huge amounts of capital, and new innovations enable new forms of leverage. All that depends on computers.

    For more on this issue and where it is likely to lead, check out this book:

    The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future

    http://www.thelightsinthetunnel.com (free PDF available).

    1. purple

      Then eliminate the role of CEO; it’s a club anyway. Eliminate private capital control and allocation, they don’t seem very good at it judging by 2008. These are two vectors of artificial scarcity.

      Technology is just fine, we can do less work and spread it around.

    2. readerOfTeaLeaves

      What this misses is how technology scales. If a large corporation can use technology throughout its organization and eliminate thousands of jobs, the majority of that gain goes directly into the CEO’s pocket in the form of a larger bonus.

      Precisely.
      And it’s insanity.

      It’s as completely stupid as pretending that Bill Gates made every single OS for every single desktop unit, therefore he should get all the wealth because no one else ever lifted a finger.

      The technology can scale without the social and economic rules using that technology to concentrate wealth in the way that we have allowed; indeed, we’ve enabled this concentration.

      But nothing about this technology inherently required that all its benefits be used to capture and control capital; if the rules regarding its ownership, patent rights, and corporate structures were more aligned with social benefits, we would not have the problems we are seeing.

      Nice to see Schiller join the party in pointing out that inequality is creating huge problems throughout our economic and social structures.

  7. Grump Old Unix Hacker

    Technology is a cheap excuse to explain income inequality. I’ve worked on so many badly managed software projects and large scale applications that it is simply a miracle that anything works at all.

    And technology enabling ONLY the smart !? How does that explain most corporate and movie studio execs?!

    If anything it enables the stupid and the lucky to succeed more then anything.

    1. Mike M

      “And technology enabling ONLY the smart !? How does that explain most corporate and movie studio execs?!”

      Right, and, let’s not forget about the politicians, or, even pseudo politicians, like Palin. I’d like to have half of her ’10 gross.

  8. attempter

    “Rising inequality was a major cause of the recent crisis.”

    Yes, by premeditation. Because further acceleration of inequality was also the shock doctrine goal of the recent, i.e. now permanent, crisis. The Permanent Bailout proves that.

  9. electriclady281

    We’ve all been scammed. Our two political parties’ politicians are playing good-cop/bad-cop and We, the People, are pitted against each other, whereas we should be united against the oligarchy that already exists and continues to expand its power and wealth at our expense. You think you have it bad now? Just wait and see what’s in store for us if we continue to be manipulated into denial of the obvious.

  10. James Cole

    Rising inequality is a simple matter of supply vs. demand for labor in the global labor market–there is a heckuva lot of excess labor capacity in the world compared to the actual amount of humans needed to make all the stuff we apparently need, and technology has freed capital to find and exploit the cheapest source. This leaves USA as a nation of corporate executives and the accountants, bankers, lawyers, chefs, drivers, handymen, and security guards who serve them. What mystifies me is the near-religious belief that somehow the economy is magically going to be able to create enough jobs for full employment.

    1. DownSouth

      James Cole said: “Rising inequality is a simple matter of supply vs. demand for labor…and technology has freed capital to find and exploit the cheapest source.”

      Nah. Technology had little if anything to do with it. It was politics that “freed capital to find and exploit the cheapest source.” And there’s nothing new or innovative about it. Imperialism has been around since the ancients.

      America’s neo-imperialism becomes appallingly clear when one takes a look at the extreme measures the U.S. took to open up Latin America to free trade and capital flows. The U.S. sponsored a number of murderous dictators in Latin America, including those in Argentina and Chile, who tore down the barriers to the flow of goods and capital into and out of their countries. Paul Cooney explains how it went down in Argentina here. Greg Grandin explains how it went down in Chile here.

      All this was done in the name of democracy and capitalism: “imposing the rule of law, property rights and other guarantees at gunpoint if needed” as the neocon writer Max Boot put it. But the rank and file of Argentina and Chile certainly didn’t benefit. It has been immiserated, just as the rank and file of the United States has been. The only winners have been a handful of wealthy US, Argentine and Chilean bankers and businessmen.

    2. Georgann Marks

      Jeremy Rifkin – The End of Work.

      He predicted the excess labor capacity and proffered ideas for how to stave off an Old Testament comeuppance for the beneficiaries of the heist.

      Burning McMansions and kidnapped kids of the wealthy will become spectator sport in my lifetime. I saw this in Latin America in the 70’s. People cheered the assassins and gangs as they robbed and killed the elites.

      Although we are being conditioned for large scale die offs and ‘natural’ disasters – it won’t be enough.

      Too few gangsters at the top – and a hitherto strong middle class of aging boomers, are about to become an even more muscular, and revolutionary force in America and Europe.

      When someone like me looks forward to the revolt – our governors have a large problem. I’m the classic mainstream right of center voter. A lifetime self employed Perotista.

      People like me don’t root for bank robbers and assassins.

      When they flip us… they have flipped OUT.

      It’s comin. The new Spectator Sport.

      1. DownSouth

        Georgann Marks said: “Burning McMansions and kidnapped kids of the wealthy will become spectator sport in my lifetime. I saw this in Latin America in the 70’s. People cheered the assassins and gangs as they robbed and killed the elites.”

        Yep. That’s a pretty accurate description of what’s going on in Mexico now.

        This corrido, which honors the Mexican drug lord Chapo Guzman, offers an accurate reflection of what is now happening in Mexico. The Mexican government, which the Mexican people accurately perceive as having betrayed their interests, has absolutely zero credibility with the Mexican people. The result is that crime organizations have more credibility with the Mexican people than does the Mexican government. The cartel leaders thus become folk heroes in the eyes of the Mexican people.

        1. Stelios Theoharidis

          Having been to Latin America briefly I have always wondered about the inequality / social instability issue. I don’t know if anyone wants to comment on the subject but it seems apparent that the costs of incarceration and maintaining a security state to effectively protect the wealthy is more expensive than actually utilizing social programs to pacify the poor. A secondary cost of inequality also spreads rapidly to corruption in government and enterprise and large scale misallocation of capital.

          An interesting sidenote on this issue is China. Their GINI borders South Africa and Brazil, but their elite are still relatively safe by comparison. There is a bit of a collective ethos involved in the China project that may mitigate rising civil instability to a point. However, as it becomes more evident that party elite and their scions have secured the reigns of industry this may change significantly. I suspect that either concessions to the poor will be made or civil instability will become more of an issue.

          The USA already has low level warfare in gang areas, they haven’t taken the impetus from their South American counterparts to get into the business of kidnapping. However, the Mexican and Central American gangs already have considerable experience on that front and may expand their operations to this side of the border.

          This is all to suggest to those wealthy members of society reluctant to pony up for social programs, that dealing with the inequality issue is not only a matter of conscience but it also maybe more cost effective than expanding our already massive US security apparatus or dealing with the risks associated with rising crime. The disparity between a good primary education and a bad one in the US is upwards of 8K per child per anum, the cost of incarcerating someone in the US Justice system is upwards of 40K per anum.

  11. liberal

    I think “rising inequality is a cause of the recent crisis” has things backwards.

    Rather, _rising rent collection_ is a cause of rising inequality and the recent crisis.

  12. liberal

    “He gives other examples as well, but historically, that has often taken the form of stimulating credit: instead of fixing the problems of the poor, lending money to them. He has a chapter entitled ‘Let them eat credit’.”

    I think a better take on this is from Michael Hudson: it’s all part of an effort to allow FIRE to “tax” (i.e., collect rents) on everything. One difference between paying the lower paid more and giving them credit is that the latter gives banks a steady flow of income.

    “The US in particular has stimulated the housing market, it has subsidised lending to people, which drove up home prices in an unsustainable way. And there wasn’t that much concern about, or understanding of, the sustainability of this.”

    I doubt Shiller really understands it either. While he deserves kudos for calling the bubble very early on, my impression from his writings is that he (like many other modern economists) doesn’t have a good fundamental understanding of land economics. Why? He insists that the value of housing has risen historically at the rate of inflation. The fact is that the bubble was about _land_, not housing, and there are good reasons to think that aggregate land value with rise with GDP, not merely inflation. Otherwise, land value will asymptote to zero in relation to the size of the economy, and the supply/demand dynamic for land doesn’t work that way. (I.e., supply is ultimately fixed, and demand is (empirically) tied to ability to pay, hence roughly no less than a fixed proportion of income.)

    1. liberal

      “with rise with” ==> “will rise with”

      Demand isn’t _a priori_ bounded below by a fixed fraction of income, but it comes out that way given limited supply

  13. Jim the Skeptic

    The USA always had the capacity to do this but we didn’t.

    After WWII the tax rates on the highest income earners were left very high and the economy boomed. President Kennedy lowered that highest rate to 77% and in 1965 it was lowered to 70%. But that was still very high.

    Think about that a minute. The highest tax rate was 70% from 1965 to 1982. This was the period when the Boomers were entering the work force. The economy managed that feat with very high taxes.

    So what happened when President Reagan lowered those tax rates 38.5%?
    Number 1. The middle class wages stagnated!
    Number 2. The richest saw their incomes and wealth boom!
    Number 3. We became a banana republic with a freshly installed oligarchy.
    Number 4. Our economy decayed but that was masked by Alan Greenspan’s Fed until 2008.

    So what do the richest do with their accumulated wealth besides bribe our elected politicians? They try to privatize Social Security! They set up charitable organizations to try to cleanse their names. Oh and they have sown the seeds of the next reform or the next revolution.

    Here are the interesting tax rates:
    Year__Tax Rate Over $4000__Highest tax rate__For Income over
    1925_________3%____________25%___________$100,000
    1932_________8%____________63%__________$1,000,000
    1936_________8%____________79%__________$5,000,000
    1941________17%____________81%__________$5,000,000
    1942________25%____________88%___________$200,000
    1944________29%____________94%___________$200,000
    1946________26%____________91%___________$200,000
    1951________27% ___________91%___________$200,000
    1952________29% ___________92%___________$200,000
    1954________26% ___________91%___________$200,000
    1964_______23.5%___________77%___________$200,000
    1965________22%____________70%___________$100,000
    1977____19%_(>$3600)_______70%___________$102,000
    1979____18%_(>$4400)_______70%___________$108,300
    1982____16%_(>$4400)_______50%___________$41,500
    1983____15%_(>$4400)_______50%___________$55,300
    1984____14%_(>$4400)_______50%___________$81,800
    1985____14%_(>$4580)_______50%___________$85,130
    1986____14%_(>$4750)_______50%___________$88,270
    1987____15%_(>$1800)_______38.5%__________$54,000
    Note : The rates stayed the same between the years shown.
    Rates from: http://www.taxfoundation.org/publications/show/151.html

    1. call me ahab

      the tax rates only tell part of the story. Sure they were high, but there were mulitple loop holes so that someone who was making $200,000 or more (at that time) could pay zero taxes- and thus the AMT was born . . .

      I get tired when people keep trotting out these tax charts as if they mean anything

      1. Jim the Skeptic

        call me ahab says: “the tax rates only tell part of the story. Sure they were high, but there were mulitple loop holes so that someone who was making $200,000 or more (at that time) could pay zero taxes- and thus the AMT was born . . .”

        Those tax rates mean as much for taxes back then as they mean for taxes today.

        We all understand that there were deductions, credits, and whatever back then.

        But if you believe that the rich do not use deductions, credits, and whatever today then you must be living in a dream world!

        AMT is still drawing lots of complaints because of it causing increased taxes.

        Have a good day.

        1. call me ahab

          you are not too bright are you Jim. If we look at a top rate of 92% on income over $200,000 why would you bother making more than that? What would be the incentive if it’s all taxed?There were a myriad of legal remedies to avoid this which were eliminated when they reduced the rates . . .

          but believe what you want . . .as if it matters

          1. Jim the Skeptic

            call me ahab says: “you are not too bright are you Jim. If we look at a top rate of 92% on income over $200,000 why would you bother making more than that? What would be the incentive if it’s all taxed?There were a myriad of legal remedies to avoid this which were eliminated when they reduced the rates . . .”

            Bright enough.

            When they lowered the tax rates in the 1980’s they didn’t do away with all the deductions, credits, and whatever for the highest wage earners. They just made a big show of eliminating a few. The proof of that, is the number of complaints about the Alternative Minimum Tax.

            If the income tax rate went to 70% tomorrow would Carl Icahn, Warren Buffet, and Bill Gates quit work? What work would that be?

            All the business done by the bankers, stock and commodities traders, and developers would continue to be done. Every once in a while someone would retire, and there would be a rush of candidates to fill his job.

            You haven’t thought this through.

  14. upnorth

    The concentration of wealth at the top end has its roots as a corruption of the American Dream story. About 30 years ago this manifested itself in the granting of stock options as a regular course of action. The logic behind this is sound, but if some is good, then more must be better. The first bell rang when Disney awarded Mr Eisner his half billion dollar “award”. That was some 25 years ago, so translate that into today’s currency value. Anyway, that set the standard for all CEO’s to target. Compensation committees were struck, experts materialized and theory said that if you wanted the best, you had to pay the best. After this point, the wage disparity between the few at the top and the rest at the bottom widened dramatically.

    The ensuing stock price fetish had its downside. A flaw in the theory supporting this movement is that stock prices are not always in the control of CEO’s. The last 10 years is a reminder of that fact. It also leads to a malicious vice called “short termism” which favours short term gains at the expense of long term goals. The investment banks’ compensation schemes are but one manifestation of that vice.

    I would suggest that this is the “American Dream Gone Wild”. The television rights to that story have already been exercised.

    1. Georgann Marks

      I was living in colorado springs when Western Pacific began taking a larger and larger share of the Colorado market from United Airlines. The upstart carrier [much like Southwest] grew to where buses were bringing passengers from Denver – and surrounding fields were turning into long term parking.

      Finally the stockholders brought in Carl Icahn to make a deal with United – and then the corporate raider sold off the company for parts.

      BOOM! – Colorado Springs airport became a ghost town. United raised fares and reclaimed their stranglehold on Denver and the whole state.

      And Carl Icahn wasn’t murdered in his sleep. How does this happen? — when millions of people were devastated by his raid? — He was deserving of an Old Testament end.

    2. DownSouth

      Everything you say is without a doubt true, but I believe the real flowers of evil sewn by the miguided compensation scheme is what Bill Black calls “control fraud.”

  15. Georgann Marks

    In 1994, I was sitting at my kitchen table reading an editorial by Sir James Goldsmith – hawking his new book, The Trap – and he predicted exactly what has happened.

    If you allow multi national corporations to move production to the poorest of poor nations, and ignore working conditions and product safety regulations – all production will move away from the US and Europe.

    The phrase that stuck with me was when he predicted that the American Middle Class would lose half their advantage over, say East Indians and Brazilians – as those wages rose, ours would sink and they would meet somewhere below the halfway mark.

    He said it was madness to allow production of consumer goods to be sent overseas without high tariffs for their importation.

    He called it madness. Americans had no choice – both political parties were beholden to K Street money, and majorities on both sides committed treason since the GATT and NAFTA accords. Bill Clinton should be in prison for treason. Ditto for the Bush family and now Obama.

    They all committed treason against Small business and labor in America.

    1. DownSouth

      Georgann Marks said: “…he predicted that the American Middle Class would lose half their advantage over, say East Indians and Brazilians – as those wages rose, ours would sink and they would meet somewhere below the halfway mark.”

      Well I don’t know what happed in India and Brazil, but in Argentina, Mexico and Chile it certainly has not worked out that way.

      Take Mexico, for instance. Neoliberalism I (which includes eliminating barriers to the free flow of goods and capital, among other things) was imposed on Mexico as a result of the economic crisis of 1982. Neoliberalism II, which is Neoliberalism I on steroids, was imposed on Mexico as a result of the economic crisis of 1994.

      What has been the result? The complete wipeout of the Mexican middle class.

      Many of those who had steady employment have been forced into the “informal economy.”

      Those lucky enough to still have a job have seen their pay inexorably eroded away since Neoliberalism I was imposed.

      Meanwhile, Mexico was converted into a laissez faire capitalist’s wet dream and the banksters were unleashed on a vulnerable population.

      U.S. workers have no idea how bad it can get. But I have a sneaking suspicion they’re fixin’ to find out.

      1. DownSouth

        Those lucky enough to still have a job have seen their pay inexorably eroded away since when Neoliberalism I was imposed, as this report documents:

        http://www.ratical.org
        /co-globalize/NAFTA@7/mx.html

        The automatic censorship devices on this blog are a bitch, so I had to break the link down and put it on two lines in order to fly under the radar. The link will work, however, if the first line is reunited with the second line (with no space in between).

  16. carl spackler

    “The top tenth of a per cent of the top hundredth of a per cent of the population is getting wealthy very fast.”

    Check me if I am wrong here but is this not another way of saying 30 people?

    tenth of a percent = 0.001
    hundredth percent = 0.0001

    So 0.001*0.0001*300 million people = 30

    Seems like one could easily ascertain why these 30 people (which probably include Brin, Page, Zuckerberg etc.) increased their wealth (not income) very fast.

    Am I missing something here?

  17. ChrisTiburon

    “You might think that in a system of majority voting, the middle class and the poor would dominate and would prevent this kind of inequality from developing….”

    Chris Hedges, author of “The Death of The Liberal Class”
    in a Q&A session:

    http://www.youtube.com/watch?v=bYCvSntOI5s

    “…If people don’t want to buy our debt, the buyer of last resort becomes the federal reserve which means in essence printing endless amounts of money and that point our currency becomes junk. That’s where we are headed. We better start waking up, because if we don’t wake up, we are going to get whacked. And the tragedy of American culture is that across the political spectrum, we are fed this mantra that if we dig deep enough within ourselves, if we focus on happiness, if we find our inner strength, if we grasp that we are truly exceptional, we can have every thing that we want. Reality is not an impediment to what we desire. That’s magical thinking. It’s rammed down our throats. Oprah does it every week. Everybody does it and that in essence has created a culture that is probably the most illusioned culture on the planet.
    An illusion is different from a dream. A dream is something that you seek, you drive towards, an illusion is something that you live in and when you live within an illusion you remain in a state of perpetual infantilism, childishness, you never grow up. And now that gap is opening between the illusion of who we think we are and where we are going and the reality. And when finally when our personal world collapses, when it’s our house that’s repossessed, or foreclosed, when we go bankrupt because we can’t pay medical bills, when we finally grasp that that job we had is never coming back not only for us but for our children, then we react like a child, we scream for a demagogue, for a savior, for some buffoon like Glenn Beck who promises moral renewal, revenge and new glory. That story is as old as time,
    Aristophanes wrote about it in the collapse of ancient Greece, I watched it happen in the collapse of the former Yugoslavia, it happened in Weimar, it opened the door for Lenin and the Bolsheviks and that is where we are, that’s the precipice that we are standing on…”

  18. Georgann Marks

    There are those who think my enthusiasm for violent revolt is too incendiary for polite company.

    I say – polite company is too incendiary for these times.

    For Those who Profess to favor freedom
    and yet deprecate agitation
    Are those who want crops without
    plowing up the ground.

    They want rain without thunder and lightening
    They want the ocean without the awful roar of its waters

    This struggle may be a moral one
    or it may be a physical one
    Or it may be more and physical
    But it must be a struggle
    POWER CONCEDES NOTHING WITHOUT A DEMAND
    It never did, and it never will

    Find out just what people will submit to
    And you have found out the exact amount of injustice
    And wrong which will be imposed upon them
    and these will continue until they are resisted
    With either words or blows, or with both

    THE LIMITS OF TYRANTS ARE PRESCRIBED BY THE
    ENDURANCE OF THOSE WHOM THEY OPPRESS

    Frederick Douglass 8/4/1857

    I don’t mind being a cheerleader. My home hasn’t been taken. My business shuffles along with few debts and fewer competitors. I will survive.

    The Old Testament comeuppance will begin with those with nothing left to lose. It’s always the outcasts and miscreants who storm the castles. I’m content to watch – until and unless I lose what I have.

    And then – Mr. Multi National gangster will have awakened a monster he never thought possible. Hell hath no fury like an educated Boomer without their dreams.

    TICK TOCK…. as the clock runs out on aging Boomers – as we lose our retirements, our second homes, and the dreams for our children and grand kids – We may watch for awhile, as the marginal players grab the headlines with random acts of violence.

    But as our dreams evaporate – the American governing class will rue the day they taunted this giant – and denied us our our holiday in Brittany and Cabo.

    I have every expectation that my generation will take back America from the gangsters.

    Without breaking a nail.

    1. Elliott X

      I’m aware that the situation in the United States can in no way be compared to that of Tunisia, nevertheless it’s interesting how quickly that country erupted into protests and riots. Rising food prices may have helped tip the balance, but all it took for the country to erupt into widespread riots and protests was for a 26 year old young man to douse himself in petrol and light himself up in front of a local police station. Followed by another young man who climbed up a telephone pole and electrocuted himself.

      Two suicides protesting the terrible working conditions in that country and the government’s failure to address these conditions. And within a short time word of these suicide protests spread over the country and eventually led to two weeks of riots and protests and the downfall of of President Zine el Abidine Ben Ali.

      Not that this will lead to any radical transformation of Tunisian society, as it’s one thing to bring down a dictator, but this is still a long way from removing all of privileged elites in the entire country.

      Nevertheless removing a dictator is a start. And people have to start somewhere, it’s not like the privileged elites will ever give up one inch unless they are forced into giving it up.

      1. DownSouth

        In 1984, President Reagan’s National Security Council expert on Latin America, Constantine Menges, told Casey that things in Mexico had gotten even worse. It was on the verge of chaos, if not revolution, he insisted. Mexico was strapped with a more than eighty-billion-dollar foreign debt, rampant corruption, and many other social problems. About the same time, an intelligence board that advises the president issued a top-secret report charging that the CIA wasn’t paying enough attention to political instability in Mexico. This prompted Casey to order a CIA estimate of the Mexican situation. He picked his national intelligence officer for Latin America, John Horton, to head the project. Horton, who had been the CIA station chief in Mexico, picked another analyst, Brian Latell, to work up a draft report. Latell visited Mexico and wrote a report that listed the familiar items: urban and rural unrest, large foreign debt, enormous capital flight, and widespread corruption. Horton agreed with the facts in the draft but not with Latell’s conclusions that Mexico was ripe to fall. Horton refashioned the report so that it concluded there was at best a 20 percent chance of a collapse in Mexico. A Horton footnote indicated that most U.S. intelligence didn’t even support a number that high. Latell’s mistake in making direr predictions, Horton told Casey, had been to assume that Mexicans would react the same way that Americans would to such conditions. Americans would revolt.

        “Americans would revolt.” That is from Patrick Oster’s book The Mexicans: A Personal Portrait of a People.

        Wow! Was Oster ever wrong!

  19. Cynthia

    Ben Bernanke, Tyler Cowen, and other other like-minded neoliberals have argued that having a more educated workforce will go a long way towards closing the gap between rich and poor. This is probably true if you assume that the more educated you are, the more money you make. But this assumption is wrong. The way to make lots of money in America has little if anything to do with how well educated you are, it has everything to do with how well connected you are, including how good you are at ripping people off and getting away with it. Do a quick profile of all the people that have struck it rich in our rent-seeking society and you’ll have little doubt that I am wrong on this.

    I suppose that if we return to a time when our society placed more value on making productive things like cars and other industrial products than on making non-productive things like credit default swaps and other financial products, we’ll see more people striking it rich by being well educated and highly skilled at doing productive work rather than by being well connected and highly skilled at doing unproductive work, particularly unproductive work that’s geared towards ripping people off. But I don’t see any of this happening until we face up to the fact that economic power is shifting to Asia not because our workers are less skilled and less educated than their Asian counterparts, but because our well-connected, rip-off artists from the FIRE economy (i.e., Finance, Insurance, and Real Estate) are better than their Asian counterparts at turning their own country into a safe haven for rent-seeking parasites.

    1. DownSouth

      Cynthia,

      I was graduated with a degree in Mechanical Engineering, second in my class. And while I had an excellent technical skill set that served me well, I nevertheless had no education. And let me assure you, my awakening to this fact has not been an easy pill to swallow.

      What happened?

      I think Lawrence Goodwyn, in The Populist Moment, provides the answer:

      However they were subsequently characterized, Populists in their own time derived their most incisive power from the simple fact that they declined to participate adequately in a central element of the emerging American faith. In an age of progress and forward motion, they had come to suspect that Horatio Alger was not real. In due course, they came to possess a cultural flaw that armed them with considerable critical power. Heretics in a land of true believers and recent converts, they saw the coming society and they did not like it. It was perhaps inevitable that since they lost their struggle to deflect that society from its determined path of corporate celebration, they were among the last of the heretics. Once defeated, they lost what cultural autonomy they had amassed and surrendered their progeny to the training camps of the conquering army. All Americans, including the children of Populists, were exposed to the new dogmas of progress confidently conveyed in the public school system and in the nation’s history texts.

      1. Cynthia

        DownSouth,

        It’s hard for me to believe that you are uneducated. Nevertheless, I see your point about the powerful trying to strip the powerless of their ability to think on their own.

  20. i

    The bottom line is this. Communism may have failed, but class warfare is alive and well.

    Just now, the upper classes (the few) are winning against the lower classes (the many). Because there’s still enough food, shelter, entertainment and drugs, it’s still a cold war.

    For obvious reasons, this could change in a day, or a month, or a year. We’re one food and/or energy shock away from that war going hot – in a world where the internet plus an airplane or two can become effective weapons.

    1. Psychoanalystus

      I’m not sure I’d agree about communism failing. China is still a communist country on its way to surpassing the US in a few years. Cuba is also communist and, despite this shameful US blockade, it still has a medical system that is by far superior to the criminal medical scam we have in the US. 

      I agree that the Internet can be effective, but only for people/revolutionaries abroad – the average American is so brainwashed, so paralyzed by fear, and so narcissistically convinced about America’s exceptionalism, there will never be even a hint of rebellion here. 

      Psychoanalystus

      1. Roland

        China post-Mao has been communist in name only. They have their own budding elite no less enamoured with real estate speculation and financial shenanigans than their US counterparts.

        But to have ever expected a really Marxist revolution in what were pre-industrial countries like Russia or China was misconceived in the first place. Those countries merely ended up with a delayed ascension of their bourgeois classes–an ascension now taking place.

        In China, the elite still has the narrative of national resurgence with which to reassure and pacify the proletariat and recently displaced rural smallholders. China, as a nation, has been down so long, humiliated so often, that most Chinese are willing to endure long hours, low wages, and urban overcrowding simply in order to restore their collective pride. By giving the masses an Olympic spectacle, a few space launches, and a bit of sabre-rattling over Taiwan, the elites should be able to retain the loyalty.

        Unfortunately, global capitalism is still in its adolescence, still immature.

        Before facing any proto-revolutionary condition at home, US elites were choose the well-worn Imperial road. I think most of the American working class is so deeply attached to the notion of their national greatness that they should fall for the propaganda. Besides, most of the American working class is still deluded that they’re somehow a “middle class,” just because they had a generation or two of high wages.

  21. Psychoanalystus

    I really think we need to give trickle down economics a few more years… I am pretty sure market forces are going to resolve this “inequality issue”, or whatever it’s called…

    Psychoanalystus

      1. Psychoanalystus

        I also think we all should start a “Milton Friedman quoting contest” around here… The one who quotes the most gets to apply for a job with Halliburton, Bechtel, or Blackwater… For which one do you work, alex?

        Psychoanalystus

  22. Hugh

    Wealth inequality is the natural result of a successful kleptocracy. Class warfare is how the masses are divided and distracted to allow the looting to occur.

    I get the impression that Shiller has not quite made the connection between the “political causes” of wealth inequality and kleptocracy. The distinction is an important one. You see Shiller can cling to traditional economic theory if these political causes are only distorting the underlying economic system which his economics seeks to describe. But the crucial insight here is that the concentration of most of the country’s wealth in the hands of a few percent of its population means that this is not the product of a manipulation of the system. It is the system. This invalidates all current economics including Shiller’s. We have no economics of kleptocracy or kleptonomics.

    Shiller comes a little closer than most but he, much like Krugman, still commits the liberal Establishmentarian fallacy of critiquing aspects of the system rather than completing the analysis and challenging the system itself.

  23. KnotRP

    Ever play monopoly?

    The game’s money becomes worthless right about the time someone gets mad and flips the board because there is no way to continue to play.

    That applies to real life as well, though it’s a rare child who rebalances the game just to keep it going.

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