Monday, June 13, 2016

The Economics of Inequality - A Healthy Economy is Healthy for Everyone.

The climbing stock market of the last few years as well as the anemic GDP growth are correlated to growing income inequality. Income inequality is a poorly understood economic issue that feeds speculative behavior and undermines economic growth. On the face of it, income inequality means there are people that earn a hell of a lot more than other people. It is about income not wealth, easily confused terms, although often one begets the other.

Growth is negatively impacted when financial assets and rents are accumulated by a small minority of higher level executives and majority owners who have a limited amount of capacity to spend it all. Said a different way: there is only so much stuff you can buy. So most of the money accumulated through inequality does not go into growth-generating consumer spending.

Typically that excess money ends up in financial markets of some sort: stock market and other financial games that do not contribute to economic growth, per se, when transformed into speculative bubbles. Of course, not all the climb of the market of financial instruments is speculative, as corporate assets, expected profitability and dividends are (or should be) the real drivers of the underlying value of a stock.

A major purpose of issuing stock is raising capital to invest in assets and company growth. If the human resources of a company are not considered assets but rather, easily tradable commodities, then maximization of profits (the fiduciary duty of business executives) logically dictates a policy of wage suppression. When wages can be maintained low, profitability increases and higher dividends are paid out. Increasing and steady dividends make for higher stock prices. And with a higher stock price, executive compensation climbs, and so on and so forth in a self perpetuating cycle. This falls under the classic category of market failure, i.e. a condition in which an imperfect structural allocation of resources creates inefficiencies and negative social outcomes—such as stagnant national economic growth. A structural situation like this typically requires third party intervention and direction, hence minimum wage laws.

But avoiding speculative financial market bubbles and decreased consumer spending are not the only reasons to intervene in the natural tendency for wage suppression by free enterprise. As Nick Hanauer has said, by maintaining the price of labor below the threshold of “living wages” many individuals and families, even when working much more than 40 hours a week, are forced to rely on public assistance for various basic needs, including housing, food and health. In other words, wage suppression shifts the true price of labor to the taxpayers. This is an egregious example of corporate welfare.

There is no substitute for money as a social program, as Daniel Patrick Moynihan famously argued. All instances of public assistance such as Medicaid, food stamps and public housing tend to erode the value of wages. In a counterintuitive and contradictory way, large businesses suppressing wages at a level under “livable income” are taking advantage of welfare and “socialist” programs, while groups and personalities pushing for a higher minimum wage are in fact advocating capitalist economics by defending the basic mechanism for distributing rents under such economic model: the salary.

The slowing pace of productivity has been blamed by many as the culprit of anemic GDP growth over the last few years. But income inequality is as culpable if not more, and the good news is that policy can change that, both materially and in expectations. This is not a case where the boss threatens the employee to fire him when said employee asks for a raise. This is leveling the floor and giving a raise to America, in order to give the economy a boost.

Metrics and indicators can be confusing and are open to interpretation. Mark Twain was famously eloquent about that: Lies, damned lies and statistics—the three ways to obfuscate the truth. Yet some probable consequences of raising the minimum wage can be inferred. Inflation will increase and stock market indices will be impacted adversely and naysayers will read these metrics as negative. Thinking it through, though, gives us a more mixed analysis. Negative interest rates and deflationary pressures are creating havoc in Europe and Japan. Experiments in cities around the country have not found that a rise in the minimum wage leads to sustained unemployment. Increased inflation will be more prevalent in the service sector, as manufacturing in the US is a relatively small portion of the economy. Interest rates on treasuries will increase, benefitting retirees and boosting the value of the dollar even more. This in turn will put downward pressure on the cost of imported goods, counterbalancing service sector inflation, but affecting exports. And finally, as disposable income in the less affluent sectors of society and the middle class increases, GDP growth will expand and pressure on social welfare programs will decrease. 

Depending on which noisy or quiet metric is focused upon at any given moment, the “economy” will be viewed, written about or politicized as prosperous or in the tank. But the growing level of income inequality is unequivocally unsustainable and certainly needs to be addressed. Not to do so most definitely will eventually bite the economy in its xxx even harder. America is not a household, and its budget accounts are different. America is not a business, and its operations work differently. America is a nation with a national economy; and America needs a raise.


We celebrated in a recent event held to commemorate the 75 th anniversary of the adoption by the United Nations of the Universal Declaratio...