The Equanimist

Dropping Money from Helicopters and Other Hard Choices (Update 1)

Posted in Economics, Economy, Political Economy, Political Philosophy, Public Policy, Socioeconomy by equanimist on December 18, 2008

 

i.

Hardly conservative, over-consolidation of wealth at the expense of the US middle class is a reckless game. High productivity and rapidly cycling currency fuel high living standards and rapid growth. Therefore, no long-term solution to the financial crisis is likely to exist apart from (1) upward wage pressure on the bottom 95% of US Americans (2) re-regulation to include incentivization of productivity and innovation and (3) re-inculcation of some sense of civic duty. Near term recapitalization of the US middle class should be the single most effective measure to stave off the ugly prospect of a deflationary spiral.

Much of what is being written, like this short ‘glossary’ entry at the Guardian, explains that “quantitative easing” is akin to dropping money out of helicopters. But, that does not rightly describe recent actions by the Fed. What the Fed has done is to make borrowing very cheap.

Potential borrowers aren’t any more credit worthy now than they were last week (or last year). Moreover, in the event that there are well capitalized bankers who can be persuaded to make risky loans, additional credit now will only kick the can down the road. We all know the one about the guy who borrowed money from Peter to pay Paul.

The current crisis is in some ways not unlike a balloon that, having developed a tiny pin prick, gets a big hole in it. It deflates and cannot be re-inflated until it’s patched. The balloon need not deflate entirely if something can interrupt the process. Might we not either (a) stop up the hole until it can be permanently patched or (b) balance loss with gain?

Unlike an ordinary balloon, a hot air balloon is at once inflated and constantly hemorrhaging air. In fact, there is a current of air flowing through the balloon. This is kind of what the current economy is like. Right now there is a shortage of air flow (liquidity) and a big hole (a lack of confidence). So to avoid a nasty tumble, supply air (real money) until the hole can be patched.

ii.

For some time now nothing has been worth more than some smaller fraction of the price at which it sold because of shrinking real relative middle-class profit shares. Only over-confidence made possible too-easy credit, which, in turn, made the relatively high US lifestyle possible in the face of excessive wealth consolidation.

As is well documented, real profit shares distributed to the bottom 95% of the US population peaked decades ago and income inequality has since risen sharply. A graph of top decile income shares makes this pretty clear (from Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” The Quarterly Journal of Economics, Vol. CXVIII, Feb 2003, issue 1).


At the outset of the Great Depression of the 20th C. income inequality was very high. In years that led up to US involvement in the Second World War, income inequality plummeted, and, it remained relatively low and constant for decades. Disparity in income ramped up throughout the 1970s and exploded in the 1980s (and again in the 2000s; see the International Labor Organization press release cited below) not because productivity and profits began a long decline but because the uppermost decile (later the uppermost 5% and, still later, some smaller fraction thereof) accorded itself increasingly large pieces of the pie (for specific data to augment the above see, for example, Productivity change in the nonfarm business sector, 1947-2006 at the US Dept. of Labor, and Historical Income Tables, Table H-2 and No. HS-26. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Families: 1947 to 2001 at the US Census Bureau). This graph, unfortunately, stops at 1998. The International Labor Organization estimated that “in the United States in 2007, the chief executive officers (CEOs) of the 15 largest companies earned 520 times more than the average worker.

Now fully 80% of US Americans make a real relative pittance unprecedented in the post-war era. That they don’t think they’re poor doesn’t mean they’re not – only that authority figures from the lowliest parent to the Commander-in-Chief have successfully convinced US Americans to compare down and trade down the socioeconomic ladder (to a more or less indentured servitude as debt ballooned).  See, for detailed analysis, the Trade Union Advisory Committee to the OECD summary of “Growing Unequal?” (to which I have linked here).

I reiterate what I have previously written: to attribute the current crisis to a lack of liquidity is to miss the point entirely. The balance of US stewards now promulgate economic visions and institute policies without even a foothold in reality. On the one hand, average US Americans are sold an outsized bill of goods while, on the other, the elite who profit on sales hoard and lobby for deregulation to further consolidate means. When convenient, the US consumer is ‘resilient’ and can be depended upon. S/he won’t ‘let the terrorists win’. S/he’ll ‘go out and spend’. And, ‘The free market will sort itself out.’ When convenient, consumerism is decried and the same beleaguered people are told that it is some fault of the US consumer that s/he cannot manage money and, moreover, that s/he does not need (or deserve) and should not get a bailout!

Credit cannot and will not now change the fact that many among the bottom 95% can no longer afford to pay debts they’ve been encouraged to amass, and, will (if furnished) only run the average US household further into debt (compound the problem per se).

But, the point is moot. Bankers should not be so foolish as to make loans that they know borrowers cannot repay. Potential borrowers, then, should not contract loans. Therefore, home prices should continue to plummet until they are priced so cheaply that these poor citizens can afford them. Likewise, goods and services should be sold ever more cheaply or sit on store shelves because the unreal equity (over-confidence) that fueled US consumerism is vanishing. Businesses, then, should be unable to meet their obligations and, unable to recoup even costs, they should fail putting more people out of work.

Mounting job losses, then, should force more homeowners into foreclosure or disadvantageous home sales… More importantly, US productivity and means of production along with the service sector should contract sharply as the supply of goods and services races to catch up with rapidly contracting markets. But, in the event that this is the new economy of extraordinary income inequality, the world furnishes way too many material goods and services – that is, precisely, in a new low-income world too many people are currently employed.

iii.

Congress must act now

The housing market cannot be expected to resolve itself any time soon. As clearly illustrated in the following graph (excerpted from, “‘Pay option’ mortgages could swell foreclosures,” MSNBC.com) foreclosures should be expected to accelerate through the first half of 2009 and only briefly stabilize in the second half before the bottom likely falls out on the housing market in 2010.


In the meantime, socioeconomic stability and quality of life, in addition to productivity and innovation, should continue to deteriorate. Poor, hungry, homeless, shiftless people are not conducive to democracy and should be expected to undermine national security and public safety. [Even wayward adolescents know what Libertarians and Republicans reject – that poor, hungry, homeless, shiftless people are easily “turned”. (Why do we feel allegiance? To whom and to what institutions do we feel it?)]

Still, these are only risks (however probable).

The fastest, surest way to avert these risks is to revalue goods and services by proxy relative to the bottom 95%. The more dollars there are chasing some constant goods-and-services the more expensive they will be. If hoarders cannot be persuaded to recapitalize the US middle class (i.e., furnish dollars to prop up their own way of life) then it falls to legislative bodies and appointees to make the hard choice. Give real money to those who will spend it and more to those who are more likely to spend it than to those who won’t. (Heaven forbid, right? Redistribution is only “right” when money moves up the socioeconomic ladder.)

Still, no long-term solution should be complete that does not effect upward wage pressure. That is, if the US middle class does not have continued support when government programs wind down, all else being equal, things will just revert. So, for example, though enough money might stabilize property values over the short- to medium-term, property values will again fall right away as government money is withdrawn. Bring income inequality back down to more optimal levels (approximately what it was throughout the 1950s, for example).

Short of legislation of pay scales, radical upward wage pressure will only be effected by either increasing the number of jobs out of all proportion to the worker pool or decreasing the number of workers to fill those positions that exist. To that end, I reiterate, it seems most reasonable to impose controls over outsourcing and insourcing as same controls are in the interest of national security.

Giving banks money does nothing to any of the aforementioned ends. Stop doing it. As ought be clear, this cannot and will not jumpstart the US economy and, it would be achieved just as well if the US middle class were recapitalized – dropping money from helicopters.

Advertisements

One Response

Subscribe to comments with RSS.

  1. Anonymous said, on December 19, 2008 at 9:08 pm

    Well written and describes a lot of what I have been feeling – the harder I work, the less I have over these year from the ’80s.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: