Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.


A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.


The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.


This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.


The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)


In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.


The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.


It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.


Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.


Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.


Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

Welcome to the Fed’s Casino


“What Happens in the Fed’s Vegas …Spreads Everywhere.”

The article below focuses on the role of traders as the middle men between buyers and sellers of financial securities and the inefficiencies they generate from excessive churning. But trading volatility occurs in the context of a much larger issue of winners and losers in capital markets and society at large. Not only is trading excessive, but the swings in asset prices are creating massive winners and losers with arbitrary outcomes while enriching a winner-take-all circle of financial wealth that can buy up and shape our politics and regulatory policy.

These are the kinds of things that raise hackles among average Americans, but if we wish to fix the problem the more important question is how and why this has happened. It is a direct result of the Fed’s monetary policy and our governments’ fiscal policies in the face of a changing global economy. As I have explained in a previous post, Banking Vegas-Style, the focus of all macroeconomic policy on stabilizing headline statistics such as GDP growth, unemployment, and inflation has led to much greater price volatility in asset markets.

Economists refer to the past 35 years as The Great Moderation, denoting the reduction in the volatility of business cycle fluctuations starting in the mid-1980s. But to stabilize GDP growth with monetary liquidity means that excess liquidity must lead to productive investment. This is predominantly what happened with technology investment during the 1990s. But eventually excess credit leads to malinvestment and the misallocation of resources ( This is reflected in the volatility of asset prices, as we saw reflected in currency crises, the dotcom crash,  commodity and housing bubbles during this same period we refer to as The Great Moderation. Others mark this time as the transition to the Bubble Economy.

The  data that most reveals what has happened has been the explosion in trading and the transformation of capital markets into asset price casinos dominated by hedge funds, private equity, and big banking conglomerates. In other words, our policies created the hedge fund industry with currency volatility, credit bubbles and crunches, housing bubbles and crashes, commodity bubbles and crashes, and Too Big to Fail banks.

Think about it. If prices don’t move in wild gyrations, there is almost no money to be made from constant trading. Instead we’ve turned such markets into casino gambling dens.

So, should this all be a surprise to our policymakers?

Legendary Fund Manager John Bogle Calls Wall Street’s Number—–99% Of Trading ($32 Trillion/Year) Is A Waste

by MITCH TUCHMAN @  • July 30, 2015

An astonishing $32 trillion in securities changes hands every year with no net positive impact for investors, charges Vanguard Group Founder John Bogle.

Meanwhile, corporate finance — the reason Wall Street exists — is just a tiny slice of the total business. The nation’s big investment banks probably could work for less than a week and take the rest of the year off with no real effect on the economy.

The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings,” Bogle told Time in an interview. “What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.”

Rent seekers

It’s a lot of money, $32 trillion. Nearly double the entire U.S. economy moving from one pocket to another, with a toll-taker in the middle. Most people refer to them as “stock brokers,” but let’s call them what they are — toll-takers and rent-seekers.

Rent-seeking as an occupation is as old as the hills. In exchange for working to build up credentials and relative fluency in the arcane rules of an industry, one gets to stand back from actual work and just collect money.

Ostensibly, the job of a financial adviser is to provide advice. Do you actually get that from your broker? It is worth anything?

Research shows, over and over, that stock brokers can’t do much of anything demonstrably valuable. They don’t know which stocks will go up or down and when. They don’t know which asset classes will outperform this year or next.

Nobody knows. That’s the point. If you’re among that small cadre of extremely high-level traders who can throw loads of cash at a short-term fluke, fantastic. If you have a mind for numbers like Warren Buffett that allows you to buy companies on the cheap and hold them forever, excellent.

If you’re a normal retirement investor trying to get from A to B and retire on time, well, you have a really big problem to face: The toll-taker wants your money.

Dead weight

So he needs you to trade — a lot. Because that’s how stock brokers make money. Not by doling out retirement advice, but by ensuring that your account is active and churning commissions on behalf of them and their employers.

What’s a highway with no traffic on it? If you’re a toll-taker, it’s a money loser. So Wall Street’s rent-seekers need traffic in the form of regular trading. An account that sits invested for months at a time with no trades is dead weight to them.

Nevertheless, as Bogle maintains, doing nothing is the key. “Don’t do something, just stand there!” he has often said.

A portfolio indexing approach to investing codifies Bogle’s time-tested and effective way of investing for retirement — without lining the pockets of toll-taking stock brokers along the way.

The Warren Buffett Economy


This is an interesting series of posts from David Stockman’s blog. This is Part 4 of 6 – the others can be found here. Stockman gives a concise overview of recent history to explain how we arrived at the point we are today. The old saying that “the road to ruin is paved with good intentions” seems appropriate here.

The Warren Buffett Economy——Why Its Days Are Numbered (Part 4)

By David Stockman documented in Parts 1-3 (Part 1, Part 2, Part 3), the Fed has generated a $50 trillion financial bubble since Alan Greenspan took the helm in August 1987. After 27 years, honest price discovery has been destroyed, thereby reducing the nerve centers of capitalism—-the money and capital markets—-to little more than gambling casinos.

Accordingly, speculative rent-seeking in the financial arena has replaced enterprenurial innovation and supply side investment and productivity as the modus operandi of the US economy. This has resulted in a severe diminution of main street growth and a massive redistribution of windfall wealth to the tiny share of households which own most of the financial assets. Warren Buffett’s $73 billion net worth is the poster boy for this untoward state of affairs.

The massive and systematic falsification of asset prices which lies at the heart of this deformation of capitalism is a direct and unavoidable consequence of monetary central planning. That is, the pursuit of Keynesian business cycle management and stimulus through central bank interest rate pegging and massive monetization of existing public debt and other securities—-especially since the latter has no purpose other than to artificially goose the price of bonds and lower their yields; and also via other indirect  methods of financial asset levitation such as the Greenspan/Bernanke/Yellen doctrine of wealth effects and the implicit central bank “put” which underpins the economics of buy-the-dip speculators.

As previously indicated, the Keynesian bathtub model of a closed, volumetrically driven economy is a throwback to specious theories about the inherent business cycle instabilities of market capitalism that originated during the Great Depression. These theories were wrong then, but utterly irrelevant in today’s globally open and technologically dynamic post-industrial economy.

As reviewed in Part 3, the very idea that 12 people sitting on the FOMC can adroitly manipulate an economic ether called “aggregate demand” by means of falsifying market interest rates is a bad joke when in it comes to that part of “potential GDP” comprised of goods production capacity. In today’s world of open trade and massive excess industrial capacity, the Fed can do exactly nothing to cause the domestic steel industry’s capacity utilization rate to be 90% or 65%.

It all depends upon the marginal cost of labor, capital and materials in the vastly oversized global steel market. Indeed, the only thing that the denizens of the monetary politburo can do about capacity utilization in any domestic industry is to re-read Keynes’s 1930 essay in favor of homespun goods and weep!

As I detailed in the Great Deformation, the Great Thinker actually came out for stringent protectionism and economic autarky six years before he published the General  Theory and for good and logical reasons that his contemporary followers choose to completely ignore. Namely, protectionism and autarky are an absolutely necessary correlate to state management of the business cycle and related efforts to improve upon the unguided results generated by business, labor and investors on the free market.  Indeed, Keynes took special care to make sure that his works were always translated into German, and averred that Nazi Germany was the ideal test bed for his economic remedies.

Eighty years on from Keynes’ incomprehensible ode to statist economics and thorough-going protectionism, the idea of state management of the business cycle in one country is even more preposterous. Potential labor supply is a function of the global labor cost curve and now comes in atomized form as hours, gigs, and temp agency contractual bits, not census bureau headcounts.

In fact, the Census Bureau survey takers and the BLS numbers crunchers have not the foggiest idea as to what the real world’s potential labor force computes to, and how much of it is deployed on any given day, month or quarter. Accordingly, printing money and pegging interest rates in pursuit of “full employment”, which is the essence of the Yellen version of monetary central planning, is completely nonsensical.

Likewise, the Fed’s current “soft” target of 5.2% on the U-3 unemployment rate is downright ridiculous. When in the year 2015 you have 93 million adults not in the labor force—-of which only half are retired and receiving social security benefits(OASI)—-and a U-3 computational method that counts as “employed” anyone who works only a few hour per week—-then what you have in the resulting fraction is noise, pure and simple. The U-3 unemployment rate as a proxy for full employment does not even make it as primitive grade school economics.

At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.

By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!

Yes, we have to allow for non-working wives, students, the disabled, early retirees and coupon clippers. We also have drifters, grifters, welfare cheats, bums and people between jobs, enrolled in training programs, on sabbaticals and much else.

But here’s the thing. There are dozens of reasons for 180 billion unemployed labor hours, but whether the Fed is monetizing $80 billion of public debt per month or not, and whether the money market interest rate is 10 bps or 35 bps doesn’t even make the top 25 reasons for unutilized adult labor. What actually drives our current 43% unemployment rate is global economic forces of cheap labor and new productive capacity throughout the EM and dozens of domestic policy and cultural factors that influence the decision to work or not.

To be sure, for a brief historical interval—-from roughly the New Economics of the Kennedy Administration to the 2007 eve of the housing crash and financial crisis—- the Fed did levitate the GDP and meaningfully impact the labor utilization rate. That was owing to the one-time trick of levering up the household and business sector through the inducements of cheap debt.

Household Leverage Ratio - Click to enlarge

But that monetary parlor trick is over and done. Household’s are still de-levering relative to income, and the Fed’s bubble economics have channeled incremental business borrowing almost entirely into the secondary market of financial engineering. That is, borrowings which are applied to stock buybacks, M&A deals and LBOs result in a re-pricing of existing equity claims and more gambling stakes in the casino, but do not add to demand for new plant, equipment and other tangible assets.

So the transmission channels through which monetary central planning could historically impact the labor utilization rate are now broken and done. The Fed’s default business, therefore, is inflating the financial bubble and subsidizing carry trade speculators. That’s all there is to monetary policy at the limits of peak debt.

In that context, consider the complete foolishness of school marm Yellen’s campaign to fill up the bathtub of potential GDP by causing labor utilization to reach full employment. And start with the case of non-monetized labor.

Back in the 1970s during one of those periodic debates about full-employment, legendary humorist Art Buchwald proposed a sure fire way to double the GDP and do it instantly. That was in the time that most women had not yet entered the labor force and politically incorrect discussion was still permitted on the august pages of the Washington Post.

Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers factored into the labor force and their contribution to the economy’s real output in the labor utilization rate.

As a statistical matter—-even though four decades of women entering the labor force have passed since Buchwald’s tongue-in-cheek proposal—- there are still approximately 75 billion un-monetized household labor hours in the US economy. Were they to be counted in both sides of the equation, our 43% unemployment rate would drop to 25% for that reason alone.

Needless to say, whether household labor is monetized or not has no impact whatsoever on the real wealth and living standards of America, even if it does involve important social policy implications. The point is, as an economic matter Janet Yellen can’t do a damn thing about it, even as she dithers about asking Wall Street speculators to pay 35 bps for their overnight borrowings.

And the same thing is true for almost every single factor that drives the true hours based unemployment rate. Front and center is the massive explosion of student debt—now clocking in at $1.3 trillion compared to less than $300 billion only a decade ago. The point is not simply that this debt bomb is going to explode in the years ahead; the larger point is that for better or worse, Washington has made a policy choice to keep upwards of 20 million workers out of the labor force and to subsidize them as students.

Whether millions of these debt serfs will get any real earnings enhancing benefits out of this “education” is an open question—–one that leans heavily toward not likely in either this lifetime or the next. But these 40 billion potential labor hours are far greater in relative terms than under the stingy student subsidy programs which existed in 1970 when Janet Yellen was learning bathtub economics from James Tobin at Yale.

Likewise, there are currently about 17 billion annual potential labor hours accounted for by social security disability recipients. Again, that is a much larger relative number than a few decades back, and it is owing to the deliberate liberalization of social policy by Congressional legislators and administrative law judges. The FOMC has nothing to do with this form of unemployment, either.

Then there is the billions of potential labor hours in the un-monetized “underground” economy. While the work of drug runners and street level dealers is debatable as a social policy matter, it is self-evident that state policy—–in the form of the so-called “war on drugs” and the DEA and law enforcement dragnet—–account for this portion of unutilized labor, not the central bank.

The same is true of all the other state interventions that keep potential labor hours out of the monetized economy and the BLS surveys—-most especially the minimum wage laws and petty licensing of trades like beauticians, barbers, electricians and taxi-drivers, among countless others.

Finally, there is the giant question of the price of labor as opposed to the quantity. And here it needs be noted that “off-shoring” is not just about shoe factories and sheet and towel mills that went to China because American labor was too expensive. Owing to the rapid progress of communications technology, an increasing share of what used to be considered service work, such as call centers and financial back office activities, have already been off-shored on account of price. And that process of wage suppression has ricocheted into adjacent activities owing to the willingness of off-shored workers to accept lower wages in purely domestic sectors when push comes to shove.

Indeed, the cascade of the China “labor price” through the warp and woof of the entire economy is so pervasive and subtle that it cannot possibly be measured by the crude instruments deployed by the Census Bureau and BLS.

In short, Janet Yellen doesn’t have a clue as to whether we are at 30% or 20% unemployment of the potential adult labor hours in the US economy.  But three things are quite certain.

First, the real unemployment rate is not 5.5%—–the U-3 number is an absolute and utterly obsolete joke.

Secondly, the actual deployment rate of America’s 420 billion potential labor hours is overwhelmingly a function of domestic social policy and global labor markets, not the rate of money market interest.

And finally, the Fed is powerless to do anything about the real labor utilization rate, anyway. The only tub its lunatic money printing policies are filling is that of the Wall Street speculators.

And that’s what the Warren Buffett economy is actually all about.

In Part 5, the possibility that the free market in finance could function just fine without activist monetary policy intervention and bubble finance fortunes like Warren Buffett’s $73 billion will be further explored.

Ben the Blogger

BenBernankeReposted article by David Stockman responding to Ben Bernanke’s first blog. I hope Ben’s baseball commentary is more insightful.

Central Banking Refuted In One Blog—–Thanks Ben!

By David Stockman

Blogger Ben’s work is already done. In his very first substantive post as a civilian he gave away all the secrets of the monetary temple. The Bernank actually refuted the case for modern central banking in one blog.

In fact, he did it in one paragraph. This one.

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.

Not true, Ben.  Why not ask the author of the 1913 Federal Reserve Act and legendary financial statesman of the first third of the 20th century—–Carter Glass.

Read more