Steve Waldman: "Inequality and the Credit Crisis"

Steve Waldman has a great little post on how the end of the consumer credit bubble is going to expose rifts papered over by the illusion of rising living standards for all. In fact, average real wages have been stagnant since the mid-1970s; the gains in income have accrued entirely to those at the top of the food chain.

Thomas Palley has made a similar argument with a different emphasis. He contends that policy-makers retreated from full employment as a goal, since it allows workers to demand higher wages, which in turn causes inflation. Reducing worker bargaining power led to disinflation, lower interest rates led to rising asset prices, which in combination with financial innovation, created an until-recently reinforcing cycle whereby rising asset prices funded consumption. Palley noted that that cycle was at its limits, and Waldman discusses the implications.

My favorite section:

Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a “banana republic”. We are making a choice, in how we respond to this crisis, and so far I’d say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that “wage pressures are contained”, protecting the macroeconomy of the wealthy from the microeconomy of the middle class.

Go read it here.

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  1. esb

    Debt is always the defining characteristic of a banana republic,

    debt, followed by insolvency, followed by revolution.

    There is just something about Texas totalitarians George Walker Bush and Richard Bruce Cheney that cries out for the broom of revolution to sweep on in,

    but alas, it is not to be, and these sorry ass plutocrats get to depart with handshakes instead of the imprints of the soles of boots on the seats of their trowsers, which is precisely what they deserve and even that is far too a benevolent a punishment for thier colossal malfeasance.

  2. Anonymous

    This is sooo true. I don’t know how many times I have seen mass immigration promoted as good because it “reduces wage pressures”.

    Holding down wages is a good thing? On what planet? A tighter labor market and higher incomes for working Americans should be applauded, not condemned.

    Strangely enough, anyone who dares to suggest such a thing is denounced as “anti-immigrant” or even “racist”.

  3. Anonymous

    The only thing that can cause overall increase in customer prices is increase in the total amount of available money (that includes credit). Theories saying otherwise are junk economics.

    This money increase is orchestrated by FED and those who get the additional money first, i.e. players in financial sector, profit the most – hence the divide between the rich and the poor widens.

    We’ve come to understand what’s going on, we just refuse to believe it and act on it. The politican’s promises and lies are too tempting.

  4. CrocodileChuck

    Q: What was the greatest thing Henry Ford did? A: (not the Model A nor T); but, paying his workers $5 a day-SO THEY COULD AFFORD TO BUY ONE. Business and the USA have impoverished the American workforce-AFTER offshoring as much manufacturing as they could. They (BigBusiness) have gotten everything they wanted-and now, no one can purchase their goods and services….

    Be careful what you wish for…


    ps what DOES it take to foment unrest in the US these days?

  5. Chris

    Immigration plus job creation (decent wages) plus education and health = solution to social security mess + solution to deficit. “Payment” or “pay-back” of such initiatives would be realized through reproductive life span of healthier better educated more productive citizens.

    Life cycle economics
    (see Book 1 of Aristotle’s Politics and Book 5 of the Nichomachean Ethics)

  6. Anonymous

    Yes, we live in troubled times. And John McCain has famously described his own lack of understanding of all things economic. Thank goodness he balanced his ticket by choosing for VP a woman who is not only conversant with all the issues Yves covers here at naked capitalism; but, in addition, is also a woman who can lead others toward the resolution of these issues.

  7. Anonymous

    Observing the ever increasing chasm between workers wages and senior management remuneration has left me astounded.
    The last 6 years have made me a fool, i truly believed that those in charge would not follow this path. Alas life continues to educate, greed is indeed mercilous.
    No economy, NO SOCIETY, can maintain such inequality. Hopefully the day of reckoning has come,the wriggling is continuing but the hook has been set. Where are the leaders who can slap this nation into reality.
    This is the same as an intervention on a compulsive gambler. They will go to any lenghth to prolong the status quo but are praying for the end.

  8. Anonymous

    Folks, read pension tsunami website. You think the problem is Bush or republicans, wait to you see what public employee unions, governors, mayors, reps, etc. have done to the future of this country. Wages, class struggles aren’t going to mean a thing in the next years. Your children are going to be poor, regardless of their jobs or pay or who is president.

  9. Anonymous

    I have always assumed that just as water will always try to flow downhill,production will move toward the areas of lowest wages. This of course is what we have seen happen in this last generation.
    The only way that you can get water to rise in one place is to impound it; as behind tariff walls.
    Then within a closed system economic principles about how to raise wages etc. can come into play. A series of one-off events (say a landslide) built a dam and our standard of living rose. But when water rises too high it flows over the dam and starts to breech it.
    Our inflated standard of living is gone. I think there was an understanding of this, on some level amongst our people. The support for Bush’s contrived “War on Terror” was a denial of this process, a Canute-like inflation of our superiority. We destroyed our infrastructure to provide rubble to seal the breech.
    All in vain. Our economy is open.

    The only next closed system is global. We can only hope that our nation has the sense and the will to build a series of locks to less us down gently.

  10. John

    The Republicans WILL win as long as they stick to the message that has won for them in the past:

    1) It’s all “those people’s” fault. (You know “those people” – wink, wink – and “those liberals” that like “those people”).

    2) The economy is just god’s punishment for all the fornicating harlots in this country. The honest hardworkin’ SMALL bid’ness men of `merica have been sold out by the fornicating harlots and “those liberals” that like those fornicating harlots.

    3) The trrrrst are comin’ to git ya, and they’re gonna take your women-folk. Only the military can save you, but “those liberals” hate “the troops”.

    Sorry, you liberals on here don’t stand a chance in November!

  11. Francois


    ps what DOES it take to foment unrest in the US these days?”

    A system seemingly at rest, (social peace) but with active internal dynamics (brewing discontent) can tip over anytime. Chaos Theory shows that a catalyst triggering significant instability (unrest) doesn’t need to be obvious.

    One thing is sure: the next few years will be nothing like we’ve seen before. The reasons why are clearly explained at:

    The whole Martenson serie is well worth your time.

    PS: Note to those who see the world only in terms of “liberals versus us”
    You shouldn’t listen to it. I don’t want to be responsible for exploding heads and scattered brains.

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