Wednesday, May 14, 2008

Economic U Turn?

Thomas Frank, author of What's the Matter with Kansas, has an editorial in the WSJ today about, what else, economic inequality:

Median "nonelderly" household income, we find, fell consistently through the first half of this decade, despite the solid economic growth enjoyed by the country as a whole.

Some nonmedian folks did just fine, of course: The top 20% of households earned more, after taxes, than the rest of the country combined in 2005, while the topmost 1% of the population took home more than the bottom 40%. The top-earning hedge fund manager of 2007, in fact, made about as much last year in nominal dollars ($3.7 billion) as J. Paul Getty, one of the richest men in the world, was worth in the mid-1970s.

Real hourly wages for most workers, on the other hand, have risen only 1% since 1979, even as those workers' productivity has increased by 60%. What's more, American workers now clock more hours per year than their counterparts in virtually every other advanced economy, even Japan. And unless you haven't read a newspaper for 15 years, you already know what's happened to workers' health insurance and pension plans.

It has not merely "happened"; it has been done to us. The distinction is an important one to keep in mind as we survey the ruins of the affluent society. What has overtaken America's working people is not a natural disaster like "globalization," and not even some kind of societal atavism in which countries regress mysteriously to their 19th-century selves. This is a man-made catastrophe, a result that proceeded directly from the deliberate beatdown of organized labor and the wrecking of the liberal state.

It is, in other words, a political disaster, with tax cuts, trade agreements, deregulatory measures, and enforcement decisions all finely crafted to benefit one part of society and leave the rest behind. Few of the voters who gave Ronald Reagan his landslide victories, it is fair to say, intended for this to be the outcome. They wanted their country to stand tall again, certainly; they wanted the scary regulators off their backs, maybe; but I can recall no conservative who trumpeted those long-ago elections – or any of the succeeding contests, for that matter – as a referendum on plutocracy.

I would like to see a more equal distribution of income and wealth in the US too as I think the polticial consequences of inequality are ones we want to avoid. Unfortunately, Mr. Frank and most of the others who decry the inequality present the problem as one of evil rich people taking from the poor. That vision is not only wrong but counterproductive to solving the problem.

What has happened over the time that Mr. Frank references is inflation. Inflation is beneficial to whoever receives that newly printed dollar first. The financial intermediaries are the first to receive a newly minted dollar and that can be seen by observing the expansion of the financial industry in this time. Next in line would be the rich as these financial intermediaries always loan to those with the ability to repay easily first. Middle class may benefit somewhat less and the poor don't benefit at all. It is the actions of the Federal Reserve that has caused the inequality problem and it won't be fixed through tax policy (tax the rich!) or any other policy preferred by Mr. Frank and his friends. It will only be fixed by reforming or eliminating the Federal Reserve system.

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