America’s Dire Inequality Demands a New Conceptual Framework. This Economist Has One.

Yves here. I’m glad to see Lance Taylor taking on some pet ideas about inequality and low growth that have sadly gotten a following among policymakers. Or to put it another way, too many economists have been reluctant to take the most obvious cause of inequality seriously: that businesses-owners and the wealthy conducted a very successful class war against workers, particularly organized labor whose negotiations provided an anchor for both other blue collar and white collar wages and working conditions.

BTW, I had the pleasure of meeting Lance Taylor last year. He came to the meetup in Bailey Island, Maine.

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

In Lance Taylor’s new book, Macroeconomic Inequality from Reagan to Trump, the noted economist examines how and why the United States, starting in the 80s, started to break down into a sharply divided country of haves and have-nots.

How it happened is hotly debated among experts. Is it the lofty rate of return on wealth enjoyed by the affluent? Or the impact of monopolistic corporations that can charge high prices for basic goods and services? What about globalization? Technological change?

Taylor, Emeritus Professor of Economics at the New School for Social Research, reveals what he sees as the insidious invisible hand that has been slipping into the pockets of ordinary people and stealing their chances for security and prosperity. This is not some natural process, he holds, but the outcome of deliberate choices and policies made by people who do not prioritize the wellbeing of most Americans. As a result, we are well on our way to constructing a society more unbalanced than what prevailed in the Gilded Age.

In the following interview with the Institute for New Economic Thinking, Taylor explains his approach to the problem of inequality and why the conclusions in his book stand in contrast to those of many of his colleagues. He issues a strong warning that misguided assumptions and methods of today’s mainstream economics block us from confronting one of the most pressing challenges of our time.

Lynn Parramore: In your new book, you name wage repression as the biggest driver of inequality in the U.S. over the last several decades. Your conclusion differs from many who have studied the issue, such as Thomas Piketty, who theorized that inequality is caused mainly by a tendency of profits to run ahead of the growth rate in the economy. What’s different about your take?

Lance Taylor: Piketty & Co. deserve a lot of credit for using tax and other data to estimate how income distribution differs across households over 200 years. The question is, what explains these differences?

I wanted to analyze how income differences among various kinds of households (poor, middle class, and affluent) came about over time. That meant drilling down into macroeconomic indicators as well as the data associated with the various industries in which people worked and the streams of income they received from them.

Özlem Ömer and I assembled what we needed by reworking Congressional Budget Office data along the lines of the U.S. Bureau of Economic Analysis (BEA) National Income Accounts. This allowed us to look at both macroeconomics and individual industries or sectors — 16 in all.

We studied changes in the structure of payments, employment, and output of products and services across these 16 sectors. What we found is that except in volatile and low-profit agriculture and mining sectors, real wages grew less rapidly than productivity since around the time of Reagan’s presidency. Wage shares decreased, but profit shares increased at the industry and macro levels, and the money from those profits ended up in the pockets of business owners and the wealthy instead of being shared.

For the most part, Americans workers have been working more productively, but they haven’t been getting paid for it due to forces that aren’t natural and inevitable. Wage repression doesn’t just happen.

It is apparent that something other than the market is at work here – like power relations, ideology about unemployment levels, and many innovations in business strategy, such as subcontracting. These are all feeding on and reinforcing processes within national political institutions that are more and more reflective only of business interests and concerns.

LP: You’ve noted that mainstream economists have been getting the story on inequality wrong. Why is that?

LT: Mainstream American PhD students are brainwashed into believing crazy economic theory.

The history for “new Keynesian” macroeconomics goes back to the “Neoclassical synthesis” that economist Paul Samuelson and many of my former colleagues at MIT developed in the immediate postwar period. One can always hope that it will change. But here’s the reality: insofar as the ideas of academics influence politics and policy formation, mainstream analysis today will not help in reducing economic inequality.

Economists would refer to my approach to inequality as a post-Keynesian way of looking at the problem, because there is no obvious way you can explain the changes observed in terms of the kind of Neoclassical microeconomics that is typically taught today in economics departments – the framework of supply, demand, and games that “ optimizing agents” play around them.

LP: Some point to monopolistic corporations, especially Big Tech, as key contributors to inequality. The idea is that companies with this kind of power can charge more for basic goods and services, for example, which hits ordinary folks hard. What’s your view?

LT: My research does not show Big Tech monopolies as a major part of the inequality story.

Since 1970, the overall corporate profit share of U.S. national income has risen 8%. The corporate share of America’s income as a nation is now around 46% — which is a huge number. Yet, the current share in income of profits in the information sector is just a bit more than 3%. Throw in parts of retail (Amazon) and you might get up to 5%. If this is Big Tech, the share of its profits in income is actually much less than the share of the real estate rental and leasing sector, which stands at 14%.

When we analyzed profit share growth across sectors over time, we found that the big movers were actually manufacturing, wholesale, retail, finance-insurance, and information — in that order. So, the narrative of Big Tech as a principal driver of rising profits and inequality is just wrong.

A very important part of the story is the spread of low wage across major parts of the whole economy. For example, seven low wage/low productivity sectors including education and health, accommodation and food, and business services saw their share in output between 1990 and 2016 fall from 48% to 41%. Meanwhile, their share of total employment rose from 47% to 61% with an essentially constant share of total wages (56%).

In effect, the structure of production is being hollowed out, and the U.S. is becoming what many analysts are starting to refer to as a “dual economy” — one with good wages for a minority of people who work in areas like finance or technology, and stagnant or falling wages for the majority who work in sectors such as retail with relatively high productivity growth but low wages. That pushes overall inequality way up.

LP: Just how bad has inequality in the U.S. gotten in your view?

LT: Things have become very alarming, and there are no quick fixes.

To a large extent, rising corporate profits are transferred to the lucky few households in the top 1% of the income distribution through interest, dividends, and capital gains. Everybody else is stuck or falling behind.

The extreme inequality we are witnessing today didn’t develop overnight: It took five decades of steady growth in the overall profit share — adding up to a full 8% increase in that share, as I’ve noted — to land the economy in its present distributional mess.

I’ve experimented with mathematical models of the economy in which I test out the effects of various policies that might help reduce inequality. The results are pretty sobering: even if the government enacted fairly aggressive policies to put money in people’s pockets, it would probably take decades to get things back to what we had in the U.S. in the 1970s. At that time, things were far from perfect, but there was more balance in the economy.

Unfortunately, mainstream economists do not learn post-Keynesian macroeconomics, so they may not see the full extent of how dire things have become. That was painfully obvious in Piketty’s book, Capital in the Twenty-First Century. His famous explanation for inequality, which posits that it occurs when rates of return on capital are greater than growth in the real economy (and, by extension, growth in wages), is not really an explanation at all. It’s actually just a statement of what happens if the economy simply grows at a constant rate, what in the jargon is called the “steady state.” That assumption is also implicit in his recent book, Capital and Ideology. You can’t hope to reverse trends in inequality until you figure out what is driving it.

The problem of inequality is so urgent that it demands a whole new conceptual framework, which I have tried to offer in my book.

LP: Your work suggests that this process of wage repression is not natural and inevitable. Who or what has been holding down wages and how are they doing it? How do class conflict, politics, and the role of the Fed and doctrines like the natural rate of employment play into this?

LT: There are a lot institutional factors which have held wage increases below growth of productivity.

One is macroeconomic austerity, both in practice and as an ideology pushed by those who take an anti-labor stance. Political conflict also plays a role. This is behind federal inaction on labor issues and the rise of state-level right-to-work laws.

Employers also use divide-and-rule employment tactics in a “fissuring” labor market – you see things like pitting regular full-time employees against contractors or gig economy workers. When employers insist on non-poaching and non-competition clauses in contracts, maintaining stagnant minimum wages (now gradually increasing), and maintaining a low ratio of employment to the population (rising prior to the pandemic), inequality results.

Changes in trade and technology have also reduced labor’s bargaining power – think of globalization and outsourcing. But note that most of the 16 sectors examined in the book are industries classified as “non-traded.” The main exceptions are manufacturing, finance-insurance, information, mining, and agriculture. I have no doubt that import competition and outsourcing destroyed jobs in traded goods while contributing to onshore productivity. There is less foreign competition in wholesale and retail trade. Better inventory management and information processing pushed up productivity and generated low wage employment (think McDonald’s, Walmart, Amazon).

Economists, especially those at the Federal Reserve, used to talk a lot about the “natural rate of employment” –the idea that the number of people working is somehow determined by the market and ought not to be interfered with. In reality, this is just is a disguised version of another idea dating to the turn of the 20th century — which strangely, after around 2015, took over the mainstream — of a supposed “natural rate of interest.”

This notion holds that there is a certain interest rate which will keep the economy at the ideal place between overheating and recession. Natural interest rate theory says that the rate will adjust to bring the demand for goods and services into equality with supply. Milton Friedman’s old story relied on changes in prices, which empirically just don’t happen, to bring the economy into equilibrium at full employment. The same story was baked into the mainstream Phillips curve analyses used by economists, which assumed that getting too close to full employment leads to overheating and inflation.

LP: Why is wage repression detrimental to the overall economy? Some argue that raising wages will hurt us because we’ll pay more to buy stuff if the cost of labor is passed on to the consumer. Or maybe businesses will freeze new hires or look to outsource labor to other countries. How do you respond?

LT: While it’s true that outsourcing has played a role in holding wages down when it comes to businesses involved in traded goods, this is likely to become less important as supply chains are shortened in response to the Covid-19 pandemic. Some companies see the fallout of the pandemic and want to cut back on sourcing from other countries, and perhaps there will be some reshoring of jobs.

On the question of higher prices, if higher wages outrun price inflation plus productivity growth, it’s possible that you could see prices go up. But that has to happen if workers are to see their share of the national income recover from what has occurred in the last several decades. You have to keep in mind that wages still make up more than half of total cost of producing Gross Domestic Product (GDP). The fact that price inflation has been flat for almost four decades is strong evidence for generalized money and real wage repression. Really, that isn’t a good thing for the economy in the long run.

But before you get too worried about higher wages causing higher prices, consider that employers hire in response to the overall demand for goods and services in the economy. Households in the bottom half of the size distribution get about half their income from wages and the other half from government transfers – things like Medicaid, unemployment benefits, Social Security, and so on. They probably have negative saving rates, so higher wages for them could stimulate them to purchase more, which is good for the overall economy. More hiring and better-paying jobs could be the result.

Legend has it that Henry Ford paid his workers well so that they could buy his cars, recognizing that wages and prices are not a zero-sum game.

LP: Are you concerned that employers will use the pandemic as an excuse to repress wages?

LT: Yes, but I hope that the pandemic will mobilize workers to pursue higher wages, even against the institutional barriers mentioned.

LP: You observe that instead of a single, unified economy, America now has two separate economies, a “dual economy.” What does this mean to someone newly entering the job market? How will working life look different?

LT: Of course, race, class, and gender come into play here. The share of the labor force forced into low end jobs has been rising steadily. More and more people will be caught unless there is economic structural change involving producing sectors with relatively high employment having demand growth exceed productivity growth over a period of years. Big Tech will not suffice.

There could be possibilities for health and retail in the Covid era, but laws and labor rules will have to change to realize them.

LP: Your research suggests that it’s not just low-wage workers who are impacted by the wage squeeze. How has the middle class been affected?

LT: Middle class income still mostly depends on wages. People in the middle class have seen their share of national income squeezed from above by the higher income (mostly from profits) of the top 1%, and from below by bigger transfers to low income households. The squeeze has amounted to around 3% of total income – not trivial. Their position is slipping, making things like paying for college or retiring comfortably more and more difficult.

LP: You note that another big factor in surging inequality is the benefits the rich have received from a rise in the prices of assets like stocks, bonds, and real estate, which produce capital gains. Who or what is behind this rise? Why is it a problem for people who aren’t affluent?

LT: This is a bit complicated, but let me try to explain. The story here has to do with both rising profits and interest rates and the decisions of the Fed.

Say you have an asset – you have stock in a company. The value of your stock roughly depends on the flow of income it generates divided by what economists call the “real” interest rate (adjusted to remove the effects of inflation). That is, the value is your stock’s return “capitalized” over time at the ruling interest rate.

Economists talk about something called “Tobin’s q.” That is the ratio of company stock market valuations to the total value of their capital stock. The level of q economy-wide tracks pretty closely to the corporate profit rate (net of taxes, depreciation, and financial payments) capitalized by the real interest rate. Financial payments, that is to say, interest and dividends, from business to households amount to 11% of GDP. Almost half of these payment, 5%, are going to the top 1%.

Why does such a large chunk of these payments go to the rich? People who own assets have enjoyed increasing rates of profits thanks to wage repression and low interest rates since the days of Alan Greenspan, who headed the Fed from 1987 to 2006. The Fed has held down rates with the explicit goal of supporting asset prices. In other words, the Fed gives the rich an extra boost on top of what they get from just rising profits due to wage repression.

Capital gains, or annual increases in asset prices, do not figure in the BEA accounts because they are not an actual cost of production. They come off the top of what the enterprise makes. Capital gains are transfers of wealth from economic actors who issue liabilities to those who hold them. In the conventions of national and financial accounting as practiced by the BEA and the Fed, corporate shares are liabilities issued by business and (mostly) held by households.

Any institutional sector’s increase in wealth is equal to its net saving. The BEA data show that business net saving has fallen short of the sector’s “holding losses” on equity (Fed data) due to rising share prices since the mid-1980s.

In plain English, more than 100% of net profits have been transferred via financial flows and capital gains to households, predominantly in the top 1%. Share repurchases are another, more recently popular vehicle for transferring business net worth to households.

Let’s repeat this point: Through various channels, including capital gains, more than 100% of business profits are getting transferred to households, predominantly in the top 1%. Depending on which source you look at, rich households today hold about 40% of total wealth. Given their access to profit income and high saving rates, my simulation model suggests that their wealth share might tend in the long run toward 60-70% — that’s far higher than it was even during the Gilded Age.

That level of inequality is detrimental to the entire economy. It certainly makes corporations more vulnerable to financial shocks, for example.

LP: Some politicians, including presidential candidate Joe Biden, have expressed interest in raising taxes on capital gains so that wealthier people pay the same rate on this type of income as ordinary people pay on their wages and salaries. Would this be part of the solution? If not, what might work?

LT: The only reason why capital gains are not taxed seriously is the political clout of the rich. They are zealous about protecting their offshore tax havens and “carried interest” while resisting taxation of capital gains.

Back in 1990, President George H. W. Bush (who with his class background certainly represented the well-to-do) was forced into agreeing to tax increases, with a “high” rate of 28% on capital gains. Bush was pilloried by Republicans for reversing his “read my lips” pledge not to raise taxes. Since then there has been no serious proposal, even though realized gains are visible and relatively easy to tax.

The top rate now in the U.S. is 20% on realized gains from assets held more than a year. In contrast, a poor person may be “taxed” at a 30% rate in terms of reduced benefits if she earns some extra money. Clearly this is unfair and helps to cement inequality.

So what can be done? Confronting the outsized power of capital in the U.S. requires bolder thinking than what you generally hear discussed in the political arena. My model simulations show how a 50% tax on gains with proceeds transferred to a wealth fund managed for public purposes could hold the wealth share of the top one percent to around 40%. That would be one approach to the problem. Similar proposals to help balance the power of workers with those of shareholders within companies date back at least to a plan proposed by Swedish labor back in the mid-1970s, known as the Meidner Plan, which almost succeeded in being implemented.

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47 comments

  1. Sound of the Suburbs

    The USP of neoclassical economics – It concentrates wealth.
    Let’s use it for globalisation.

    Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.
    “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

    The problem:
    Wealth concentrates until the system collapses.

    That’s why Keynes put some redistribution in.

    Reply
    1. Bruce

      Capitalism must grow or die. It cannot pause or stop or yield. But, like climbing Everest, it is harder the farther one goes. Profit margins decline, growth lags. Labor is needed but must be devalued to maintain positive profits. Wage repression, taxes and inflation are tools capitalist states use to do this. Neo-liberalism is simply capitalism trying keep up the pace. But the mountain gets steeper and oxygen levels fall. And don’t forget: there is no summit.

      Reply
      1. Synoia

        Labor is needed but must be devalued to maintain positive profits.

        Impoverishing one’s customers is not a successful strategy long term.

        Step 1 – Get started
        Step 2 – Become a monopoly
        Step 3 -Crush you employees
        Step 4 – Die

        Reply
  2. Henry Moon Pie

    Thanks for Parramore’s review of Taylor’s book. This debunking of the oft-asserted “natural” explanations for the increase in inequality is an important part of the process of change.

    That said, I’d argue that we should drop inequality as a political argument. It’s too abstract. Too many people don’t believe in “equality of outcomes.” It’s too easy to claim that attacking inequality is “punishing” “successful” people. Most importantly, an emphasis on inequality obscures rather than illuminates policy choices.

    Instead, we should be arguing that a wealthy, advanced society in the 21st century must have certain minimum living standards–especially for children–that society needs to maintain not only for the good of those who see their living situations improved but also for the society at large because the cost to society of allowing children to be deprived is too high over the long run. These minimum standards would be set for housing, food, health care, education, cultural access, transportation and perhaps other areas. In each area, that core argument would be, “Every child deserves to have …” Every policy advocated to address it would be a universal concrete benefit because “every child deserves” it.

    This would also allow us to separate discussion about the harm or benefit to society of allowing people to accumulate huge amounts of wealth and what to do about that. This would, in turn, allow us to better separate tax policy from the bestowing of concrete material benefits.

    I am not arguing that inequality is not a bad thing in and of itself. My point is that it has not made a strong political argument to date.

    Reply
    1. rhodium

      Right, I think the politically correct statement for what has hereby been called the goal of “decreasing inequality” should now be called “increasing social cohesion” or something like that. It sounds more positive and infers the reality of how the extreme variance in income/wealth distribution is ripping apart social cohesion as it steadily fuels rising sentiments in support of class warfare. The terminology should not imply financial equality in the literal = sign sense (which is unfair to people who really do work harder and have valuable skills/knowledge/ingenuity which is part of the backlash even among those in the middle class) but the sense that the rich need to realize there’s a limit to how much more they can have (especially if they haven’t earned it fairly which shouldn’t even be the case) before class warfare starts to rip the peace and national identity turns against itself. By that I mean we don’t see ourselves as people working together, but people who justifiably need to fight each other.

      Reply
      1. hemeantwell

        And why not fight to reduce the level of exploitation or end it entirely? I agree with your reservations re the effectiveness of inequality critique. But one of, perhaps the most important, driver of the neoclassical ideological effort was to erase the concept of exploitation and attendant notions like a fair wage. Your proposal still yields that point to them and allows, as Marx put, what goes on behind the factory doors at the point of production to be a mystery, beyond rational calculation. While it’s true that the division of the benefits of production is determined by struggle, it doesn’t mean that the idea of a “proper return” is completely arbitrary.

        Reply
    2. Medbh

      I like that framing. Something similar could be used from a workers perspective too. If someone is working 40 hours a week they should be able to support themselves and access food, shelter, medical care, and clothing. And it should come from the company itself, not offloaded onto the government through benefit programs.

      It makes me crazy that companies like Walmart do not offer a wage that enables employees to survive, then directs them to the government for support. Companies that do not provide a living wage to their employees are freeloaders.

      Reply
  3. Christopher Herbert

    All this is fine and dandy. But the real cure is embedded in the principles of Modern Monetary Theory macro. Congress creates new money when it pays a bill. When it applies a tax it extinguishes money. Spend in, tax out. You can’t get it any simpler, or cleaner, or more transparent. Spend into the bottom cohorts. Spend into R&D, public education, EV everywhere, infrastructures and a national job guarantee etc. etc. Then tax the wealth at the top end of town. You could crush income inequality in a very short period of time. Except the corridors of power are filled by the One Percent. As long as the proles fight among themselves, the One Percent is comfy and their wealth is safe and growing. The corridors of power is all politics, everywhere, all the time.

    Reply
    1. Code Name D

      I agree. Surly the picture is more complex than just suppressed wages. There is also job instability; the speed and ease one can lose a job compared to the monumental efforts at finding and securing a new job. Predatory behavior from pay-day loans and other such institutions. Difficulty in finding affordable banking. Street-inflation which causes the price of everything to become more expensive. Asset erosion; homes and vehicles decay without proper maintenance, and such maintenance can become prohibitively expensive. Judicial “taxation”, where even minor infractions result in huge financial burdens. Tax ratchets, the shift of tax burdens from wealthy tax bases to poorer tax bases. The erosion of public benefits. It all accumulates.

      Reply
    2. Carla

      “Except the corridors of power are filled by the One Percent.”

      Well, isn’t that always the rub.

      Time to stop sleep-walking, 99%, and take the power back.

      Reply
  4. Livius Drusus

    Great stuff. To be honest, I wouldn’t mind paying more for goods and services if it means they are produced in America by union labor. We used to have an economy like that and it was a relative golden age for the working class. Even if post-war society was not entirely fair to everyone (non-whites, women, gay people) at least on a purely economic level it was a lot better than what we have today. I feel like I always need to clarify that I do not support a return to segregation, women being stuck at home and gay people in the closet but we are at a point where ANY praise of the post-war system can get you accused of conservatism or worse.

    In any event, there are the wider social problems that come from living in a highly unequal country that makes whatever savings we get from outsourcing and union busting not worth it. I am thinking of the deaths of despair, the increasingly cutthroat culture where “average is over” and if you are not a superstar you are going to be in trouble, which encourages a nasty culture of cheating,backstabbing and general unfriendliness. Even before COVID-19 the country was full of stressed out, unhappy and unhealthy people and much of the reason for that is our highly unequal “winner take all” economic system.

    Reply
    1. drumlin woodchuckles

      We could call it the ” Decent Society PrivaTax”. And we could achieve it if we institute militant belligerent Protectionism and remove America from every Free Trade Agreement and Treaty.

      Free Trade is the New Slavery. Protectionism is the New Abolition.

      Reply
  5. LowellHIghlander

    One of my academic mentors from graduate school (at U-Maine), the late Professor Robert E. Prasch, thought and spoke most highly of Dr. Lance Taylor. This interview shows why.

    May I add that another source of inequality is the widespread phenomenon of econmic rents, especially in the forms of patents and copyrights? This is something that modern-day classical economists, such as (but not only) Dean Baker, strive to bring to the public’s attention. I suspect that Dr. Taylor might agree, but am not certain. So, here I ask: Would he?

    Reply
    1. jaaaaayceeeee

      Lance Taylor does not break out how much economic rents contribute to redirection of income upward. He answers Parramore’s second question, which includes monopoly price setting by big tech, for example, as contributing to inequality less than his big five (“…manufacturing, wholesale, retail, finance-insurance, and information”). Collecting economic rents is only one of the ways income is redirected upward to kill the economy and cause dangerous levels of inequality.

      Reply
      1. Procopius

        Actually, he didn’t answer the question about monopoly. He diverted to the question of whether Big Tech was the problem (it isn’t). As I read the interview I was disappointed that he didn’t return to the degree of consolidation we’ve suffered in every industry and endeavor over the last fifty years. The decision by both parties to end enforcement of anti-monopoly laws has not been good for the country.

        Reply
  6. Tom Pfotzer

    Antipathy between capital and labor isn’t new. The techniques cited above to repress labor were in common use in the 19th century. What’s different now is the relentless acceleration of technology, and the effectiveness of the technology in concentrating the capacity to generate wealth (and dominate markets).

    The difference in sheer effectiveness of the people at the top of the pyramid .vs. those at the bottom is widening too fast.

    Even if we do even more redistribution of wealth, it won’t work. After one or two spending transactions, all that injected money (like the $3T stimulus) will be back in the hands of the few.

    It seems like we need to redistribute wealth-generating capacity. Maybe C. Herbert’s idea of using government spending to inject new capacity into the hands and minds of the many is the right navigational heading. That kind of “big thinking” would require a great deal of in-kind “big thinking” on the part of the 99 pct.

    C. Herbert also said “politics controls / infects all”, so…. top-down change probably isn’t going to happen. Not just because the 1% would object, but also because the 99% would not be intellectually nor emotionally prepared to do the “in-kind” Long March required to make it work.

    The leveling of capacity to generate wealth is where the core of the problem is. We have the basic tools needed to generate new capacity in the hands of the many; the technical obstacles are not so daunting. The bigger challenge to overcome is the awareness and commitment hurdles at the 99% level.

    Reply
  7. Janie

    Yesterday’s Wapo ran an article about life in rundown and abandoned motels in Kissimmee (Orlando) – last stop before living on the street. One interviewee works at Taco Bell for nine something an hour and less than 40 hours/week. Someone helping rehouse these people said it was not possible to find an apartment if you make less than $25 an hour. I would have liked to see numbers on median wage/median rent.

    Reply
  8. michael hudson

    The problem with Taylor’s analysis is that it ignores totally the financial sector.
    Wealth is not gained mainly by profits, but by financialized capital gains. (I call them finance-capital gains.”) This asset-price inflation occurs on credit, so it goes hand in hand with debt, obliging the bottom indebted 90 percent (and the corporate sector, and now also the state and local government sector) to pay more and more interest and financial fees to the creditor Ten Precent.
    Nothing about the FIRE sector. Back at the New School (I left just before Taylor came in), they got furious about my emphasis on debt. Americanized “Marxists” said all inequality came from employers exploiting wage-earners — not seeing how employers also were bled by the financial sector.
    It is time to realize that finance capitalism is not industrial capitalism, but is in many ways antithetical to it, and destructive in fighting to re-establish a rentier economy.

    Reply
    1. Carla

      “It is time to realize that finance capitalism is not industrial capitalism, but is in many ways antithetical to it,”

      Got that, Dr. Hudson.

      “and destructive in fighting to re-establish a rentier economy.”

      Not sure I understand that last. Do you mean “and finance capitalism is destructive of industrial capitalism because finance capitalism is fighting to re-establish a rentier economy” ?

      Sorry to be so literal, but please tell me if I’m interpreting your point incorrectly. Thank you.

      Reply
    2. DTK

      The FIRE sector soaks up so much income that for the average US citizen having a surplus is very difficult.
      Our small business, over the last 23 years, has paid an ungodly amount of insurance and interest. In the case of the the insurance outlays, we have nothing to show for it but the “security” of being covered for all those years.

      Reply
      1. Rod

        This!
        No good customer rebate? For all those years.
        From my experience, we both supported a lifestyle way better than ours(or at least mine) in transferring our wealth into the FIRE.
        Reflecting on my payment versus claims, I’m 98cents paid for every 2 cents of claim.

        Reply
  9. Noone from Nowheresville

    So I keep coming back to the thought we are all Irish “white chimpanzees” now. Plus the Ninth Doctor’s dinner conversation with Margaret Blaine. (HMP’s Think of the Children reference helped kick me down these roads)

    So the Fed just created / leveraged say $5 trillion (or more) with the CARES Act and handed it out to “save the economy.” That keyboard money didn’t filter down to the bottom 81%’s economy. When it does hit, it could be quite ugly.

    $500 billion of it shows up in the Federal Deficit as an accounting entry from the CARES Act. So even though that other leveraged $4.5 trillion doesn’t show up on on the Federal Budget Deficit, I assume that since austerity is coming that there’s a plan to mop up (destroy via taxes, fees) that full “excess” plus the rest of the “transfers.” Even if the budget deficit more or less remains the same. Cudgels are good!

    Will we do what we’ve been doing for decades now and pull any so-called excess from the bottom 81% while also throwing in a bit of pain at the bottom of the remaining 18% so they can blame the bottom 81% and thank their lucky stars for those above them. What about other countries around the world, what / how will we be pulling / destroying resources from them to pay off this “debt?”

    There’s no way wages or transfers can ever make a dent in (compete against) inequality generated like this. I don’t even see how you can clawback / tax something like this. Yeah, yeah, I know keyboard giveth keyboard taketh away but that would assume that the game wanted some other outcome than it’s getting.

    Reply
  10. James J Kennedy

    Not one word about the impact of immigration on American Labor’s pricing power? Odd.
    That sink will keep leaking until it gets fixed.

    The tax on wealth to fund a public wealth fund, like Norway’s oil-money fund, would be a great improvement.

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  11. Jack Hayes

    An excellent analysis, but the author totally omits the influence of immigration (both legal and illegal) on depressing the wage levels of low-skilled jobs. I agree with raising taxes on capital gains. Purchasing publicly traded stocks does not raise capital for the company. Perhaps there could be a tax break for equity investments that directly finance a company’s growth.
    I would add that, since most of my capital gains are in IRA’s, 401(k)’s, etc., I and a lot of other folks taking RMD’s, am already paying ordinary income tax rates on capital gains.

    Reply
    1. Code Name D

      But that is the main point of the article was attacking the very notion of “natural pricing”, IE that “market conditions” somehow “naturally” set prices, that labor conditions have any influence over wages.

      Wages are low because corporations fight to keep them low. And they do so by building their own power base, eroding the power base on the workers side of the equation, and by capturing government agencies that might otherwise intervene, such as through minimum wage laws.

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      1. Ian Ollmann

        That has been my experience. Foreigners are not a threat. I’m pretty sure we will hire the best people we can find, whoever they are. If we couldn’t hire them because they are foreign, there would be a substantial decrease in the quality of applicant that we end up hiring. We interview 100 zeros for every gem we find. Limiting ourselves to just US citizens would be beyond counterproductive. We’d either almost never hire, or have to lower standards quite a bit once we got desperate. The products would not be exceptional, anymore. Really, it wasn’t too many years ago that my employer and many like it were found guilty of colluding with anti-poaching deals. I think the author has it right.

        I am a US citizen. I feel that if immigrants still want to be here, especially NOW, after all the crap they’ve been through along with the rest of us at the hands of domestic idiots, and more over and above because they aren’t citizens, then we should fast track their citizenship application. Admit tens of millions! They clearly want to be part of the team. This we need. We aren’t doing “team” very well these last few years. Also, the food they bring with them tends to be substantially better than what we invent here. It will only improve us.

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        1. tegnost

          um…10’s of millions have already been admitted. I see you mention
          If we couldn’t hire them because they are foreign, there would be a substantial decrease in the quality of applicant that we end up hiring.
          So you seem to be one of the boss class who likes to see labor battling for survival while you feather your nest. Open borders is a koch brothers wet dream. Maybe you’re one of the republicans that supports biden, so the perfect new dem. How do you feel about unions?
          Limiting ourselves to just US citizens would be beyond counterproductive. We’d either almost never hire, or have to lower standards quite a bit once we got desperate.
          Total BS

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        2. drumlin woodchuckles

          If we do what you suggest, I sincerely, truly and really hope that your personal income and wealth goes down to what their personal income and wealth will be.

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        3. Michael Cooper

          “Limiting ourselves to just US citizens would be beyond counterproductive. We’d either almost never hire, or have to lower standards quite a bit once we got desperate.”
          Or perhaps you and your brethren become more interested in the quality of primary education around where you live and work and support local school budgets for better outcomes? Immigration allows capitalists to defund public school in the US.

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  12. William Hunter Duncan

    When I was at Sam’s Club in 1991, I made $7hr.

    In 2020, starting wage at that outlet is $9.

    CPI Inflation puts $7 in 1991 at about $14 today.

    That is thirty years of stealth wage THEFT.

    Now contrast the growth in wealth of the Walton Clan.

    I am certain I have repeated this claim at least 200 times the last 15 years. I’m pretty sure not once has anyone engaged me, even to refute it. Future historians puzzling over failed-state America might deconstruct how people stolen from could act as if it is inevitable.

    Economics for the most part, being a method for making wicked acquisitiveness moral.

    Walmart was celebrated for redefining the labor market. Now it is Bezos, treating people like they are machines, lionized for daring to get starting wages back to where they would have been if they had kept up with (doctored) inflation.

    Reply
  13. chuck roast

    Well done. Seems to be an advance on Piketty’s foundation…much more granular. Just prior to the Punic Wars I took an advanced macro class from a Keynesian. Well, they were all Keynesians in those days. We viewed him as a good professor, but he was good with the theory and not so much the practice. He never bothered to send us into the library to dissect national accounts and we criticized him for it…to his extreme annoyance. Puttering around with data from various sectors of the economy would have been very satisfying for those of us who viewed distribution as far more important than aggregation.

    As for the lumping together of interest, profits and capital gains, you can scratch the interest account. Interest rate repression has not only punished those who use a modest cash margin as an income enhancement tool, it has forced many to engage in the kind of risk taking that induces extreme anxiety. Wanna’ buy a 30 year muni that pays 2.4% interest? Not really. I guess that almost covers inflation. And here we have oceans of junk-bonds that produce 4% interest and near cardiac arrest. The alternative is hoping not to outlive the cash in the mattress.

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  14. Kirk Seidenbecker

    A more accurate accounting methodology would be great ammo in arguing for “increasing social cohesion” – using data to counterweight the fantasy data being pushed by the financial press – don’t think Ethics in Aggregate Accounting is a course tho –

    http://mattrognlie.com/kn_comment_rognlie.pdf

    https://www.nakedcapitalism.com/2019/09/michael-hudson-asset-price-inflation-and-rent-seeking.html

    Totally on board with MMT, but to my knowledge it doesn’t address the unearned income dynamic – ceteris paribus, all other things being equal, a full employment economy flush with paper will eventually be soaked up by the rentier/creditor parasites.

    Reply
    1. Ian Ollmann

      After getting a taste of it this Spring, I have regrettably come to the conclusion that MMT is as broken as communism. Yes, MMT is axiomatic. Yes, we can and probably should print money to cover shortfalls in regions of the economy. The problem is we won’t print money to cover the shortfalls and protect the weak, we will print money to further enrich the wealthy and powerful.

      Just like communism.

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      1. Michael Cooper

        No one said implementing the policy would be easy or that MMT magically makes politics disappear. MMT’s framework itself is a political tool, perhaps a necessary one but certainly not a sufficient one for the task at hand.

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        1. LakeRacine

          The lens of MMT enables us to move the argument about financing to the end of the conversation. “How are we going to pay for that?” tends to be a conversation stopper, a buzz killer. If we can achieve consensus about whether or not to undertake a project, the question of financing the project becomes moot. We all know that when we all agree that something needs to be done, we never begin by haggling about price. Our real constraints are available resources, and in exigent circumstances, such as melting ice on a warming planet, available time.

          And speaking about consensus, one can learn a lot about the difficulty of achieving consensus in a democratic society by reading David Graeber’s “Democracy Project”. Sadly, we learned that he no longer walks among us, since the 2nd of September. The New York Review of Books offers some moving eulogies written by people who knew him.

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      2. Synoia

        Are you conflating MMT and a ruling practice?

        If so, them I believe the an Apples and Concrete comparison.

        It is the use of MMT which is the political practice. Communism is a description of a political ptacrive, which attempts to eliminate Human foibles (Insert 7 deadly sins here,) and just as the Church fails to deliver on human foibles, so does Communism.

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  15. Susan the other

    This left me wondering what the percentages of the shares of society should be. The Meidner Plan in Sweden sounded like a good way to gain more of a share from corporations for society by having a state policy for buying up to 30% of the shares in the/any corporation. So would an overall balance be 30% of a country’s “productivity?” That leaves decisions in the wrong hands still. I wonder also why it seems to be an unspeakable obscenity to suggest that sovereign countries simply invest in sovereign corporations dedicated to producing the things the country needs. And creating a job for everyone. Still leaving open the opportunity for dog-eat-dog capitalism for anyone who still has a stomach left for it. Capitalism has been given 40 years to get its act together. It probably doesn’t do it because it cannot do it. Capitalism demands that its gladiators fight to the death. It is an absurd ideology for the 21st century and I’m almost offended that people are treating the subject so delicately.

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  16. shinola

    Taylor, from the article: “The Fed has held down rates with the explicit goal of supporting asset prices.”

    IMO this is an important factor in the creation & maintenance of inequality. Low interest rates force what used to be savers into speculators. I’m old enough to remember when you could get 4-5% interest on an FDIC insured “passbook” savings account at your local bank. Those days are long gone and probably won’t come back in my lifetime.

    A good example of asset price support that is simple to understand for nearly anyone (as told to me by a realtor many years ago): Lower mortgage [interest] rates = higher house [asset] prices.

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  17. fwe'zy

    I think it has something to do with the voracity of capital: it must constantly push for more host to feed on. It’s “an unspeakable obscenity to suggest that sovereign countries simply invest in sovereign corporations dedicated to producing the things the country needs” because that is limiting opportunity.

    “Freedom” works so well as a concept because it goes to wealth-generating capacity, which somebody discusses very nicely here in the comments.

    The more opportunity, the more capacity for more people to make their own wealth. Makes perfect sense. Libertarian logic, but not reality, because capital accumulation is “sticky”: the more you have, the more and faster you will gain and the more effectively (and inexorably) you will dispossess your neighbors Because The Market. Is this an example of Jevons paradox? My knowledge is limited to pop economics.

    Reply
  18. willfulknowledge

    It always amazes me when people spout buckets of words over something they believe is a profound insight. Just what in the hell does anyone think is going to happen in the long run when it takes fewer and fewer workers to produce more and more goods and what is produced is often nothing more than a solution looking for a problem. The steam engine was a boon to the productivity of both labor and capital whilst a fitnesss watch isn’t much of boon to anyone’s producticity. GDP is a measure of economic output, NOT of economic well being. Increases in GDP created by increases in productivity have not been equally divided between the contributory value of labor and capital. To put what fwe’zty says in another way, increases in capital
    can and will be leveraged of said capital because capital can be accumulated. Increases in labor productivity decrease labor input and will always produce capital increases that flow primarily to capital, not labor, simply because labor is more diffuse and capital more concentrated.

    Reply
    1. Yves Smith Post author

      Your comment is counterfactual.

      How the productivity gains are shared is a political decision. They were split pretty equally from the Depression through the 1980s. There are also entire societies where the split is pretty equitable, such as Japan.

      And gains in automation have repeatedly resulted in more overall employment, albeit with significant dislocations within sectors and at some points in history (the early Industrial Revolution in England, as opposed to the second half of the nineteenth century). That is arguably different now due to resource constraints, but you make a sweeping claim is far too absolute to be accurate.

      Reply
  19. Jack Parsons

    Executives don’t really care about money, they care about status: the company car, executive washroom etc. were all tools used to anoint the special ones and motivate the rest to move up in the ranks. Under progressive taxation, there is no point stealing money from shareholders to increase your own salary because you can’t keep much of it. Non-salary perks were major tools in this HR process.

    Index funds are absentee shareholders. They don’t vote their proxies.

    These two factors both started accelerating in the 1980s. They are part of the inequality answer. Not all of it, but part.

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  20. Billy

    The New School For Social Research?

    The 80+ year old intellectual infection from Europe that has brought nothing but civic disunity, social division, academic rot and promoted racial hate to the United States, while conveniently camouflaging with distractions and never addressing the trillion dollar thefts pulled by their cousins a few miles down Broadway?

    Never mentioned,
    “options”, “puts”, “hedge funds,” “private equity,” “high speed trading”, “bail outs”, nor “Federal Reserve.”

    “My model simulations show how a 50% tax on gains with proceeds transferred to a wealth fund managed for public purposes could hold the wealth share of the top one percent to around 40%.”

    “managed for public purposes” Like California’s state budget? ~12% tax on capital gains that are treated like regular income, plus gas tax after gas tax, fees, bonds, higher tolls, toll freeways, Etc. Most of the money goes to health benefits for immigrants, legal and now illegal.

    Tin cup and tax laws in hand, the state is coming around again, backstopped by the mobs incited in part by the New School For Social Research’s recently completed Long March through academia, spilling down the steps and onto the streets demanding the forceful extraction and redistribution of wealth from those deemed historically undeserving.

    These people always overtip their hand.

    Reply
  21. Berl Kaufman

    I don’t understand this statement: “The problem of inequality is so urgent that it demands a whole new conceptual framework”. Why is it now so urgent?

    As a thought experiment, consider that proposition that the inequality “issue” goes away completely if everyone is wealthy. That is, let’s say all the lower income folks each had $1,000,000 even though there were still folks like Gates and Bezos who had hundreds of billions. Would you still be writing such articles? You might, but no one would care.

    So, the question is really, how to make the poor people wealthier. We’ve never see income redistribution to be a long term solution. Indeed, lower taxes, lower regulation, lower obstacles to employment, freer trade are the answers to that question. Take for example occupational licensing. NY State recently tried to pass a regulation requiring assistant shampooer in hair salons to undergo hundreds of hours of training to get licensed. Every such license requirement hurts the unskilled poor. Economists should be focused on identifying barriers to entry.

    Reply

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