President Obama on Inequality

The statistics about the ever higher GINI coefficient in the US are well known. Wealth inequality as such is never a problem; the reason why it has become a problem or is seen as one today, is that the real incomes of the lower strata of society are not only failing to rise, but have begun to noticeably decline. People don't care whether the rich get richer when their own economic well-being is improving. However, when the rich get richer and the middle classes and the poor concurrently become poorer, then evidently something is wrong. President Obama, whose credentials as a socialist are hardly doubted by anyone, ironically has presided over a huge decline in median household incomes:




Real median household income, chart via the WSJ. That the rich are getting richer is not the problem – that everybody else is getting poorer is.



This has evidently been noticed by the president; during his reign, the gap between rich and poor has widened dramatically. Not surprisingly, he is not taking credit for this development. In an interview with the NYT he states inter alia:


But what I also said out there is true that if we stand pat, if we don’t do anything, then growth will be slower than it should be. Unemployment will not go down as fast as it should. Income inequality will continue to rise. Wages, incomes, savings rates for middle-class families will continue to be relatively flat. And that’s not a future that we should accept.

So the entire intention of the speech is to make sure that we are focused on the right thing. It doesn’t mean that I expect Republicans to agree with all my prescriptions, but it is to say that the central problem we face and the one that we faced now that the immediate crisis is over is how do we build a broad-based prosperity.

And I want to make sure that all of us in Washington are investing as much time, as much energy, as much debate on how we grow the economy and grow the middle class as we’ve spent over the last two to three years arguing about how we reduce the deficits.”


I do worry about what’s happening to ordinary families here is Galesburg and all across the country. When we know that rebuilding our infrastructure right now would put people back to work and it’s never been cheaper for us to do so, and this is all deferred maintenance that we’re going to have to do at some point anyway, I worry that we’re not moving faster to seize the moment. When we know that families are getting killed by college costs, for us not to take bold action — which means that young people are graduating with massive debt, they can’t buy a home as soon as they want, they can’t start that business that they’ve got a great idea for — that worries me.

So as I suggested in the speech, what I want to make sure everybody in Washington is obsessed with is how are we growing the economy, how are we increasing middle-class incomes and middle-class wages, and increasing middle-class security. And if we’re not talking about that, then we’re talking about the wrong thing. And if our debates around the budget don’t have that in mind, then we’ve got the wrong focus.”


(emphasis added)

OK, so now we know what 'worries' the president. In the course of the interview he offers no diagnosis of the problem, i.e., he doesn't seem to know why there is growing inequality, or if he does know, he isn't telling. There is just one small hint in the speech he delivered prior to the interview and in the interview itself when he is quizzed regarding Ben Bernanke's successor, that he may actually have an inkling: he is emphasizing the need to keep inflation under control and to avoid the formation of new financial bubbles.


He isn't very forthcoming regarding the solutions he would propose. They seem to be vaguely associated with more deficit spending, as in the 'infrastructure spending' proposal he mentions above (one of the few concrete measures he alludes to).

'Infrastructure spending' is politically safe territory. After all, who could possibly be against such sensible spending priorities? Unfortunately, there is no way for government to tell which types of infrastructure to spend on, how much to spend on them and how to generally go about it. Should a bridge be built from A to B? Would it be better to expend the resources on new electricity pylons and cables? Should a tunnel be built between C and D? 

How can a bureaucracy possibly decide on this? If infrastructure projects were left to the free market, economic calculation could be employed to determine their profitability and opportunity costs. Government lacks this essential tool. It is a good bet therefore that the spending will end up to be extremely wasteful. In fact, the subsidization of various 'green energy' schemes stands as a glaring example of such wastefulness.

In any case, the president leaves us in the dark about what he believes the best way of achieving 'greater equality' of incomes would be. He is only convinced that 'we in Washington must do something'.

This is pretty much the opposite of what we would recommend, which would be: do nothing, or as little as possible. When politicians 'do something', it usually means they are meddling with the economy. The economy generally does best when such meddling is absent.


Why Is Wealth and Income Inequality Rising?

We have previously discussed the topic in some detail (see here and here), but here is a brief summary. As noted above, in recent years the rich have become richer concurrently with the middle class and the poor becoming poorer. In other words, there has been a kind of reverse wealth redistribution from the poor to the rich.

How is this possible, given that there is obviously no official policy mandating such an outcome? The answer is that there has been a lot of monetary inflation. Since the 2008 crisis, there have only been a small handful of months when the US broad true money supply (TMS-2) has grown at less than 10% annualized. New money adds nothing to society's wealth, but it definitely does redistribute existing wealth. This is so because new money perforce enters the economy at discrete points: someone is always the first one to get hold of it. From there it spreads out, slowly percolating through the economy like the ripples in a pond after one throws a stone into it. The early receivers of new money can spend it before it has exerted its inevitable effects on prices in the economy. Subsequent receivers, the further away they are from the point of entry, as well as those who do not receive any of the new money at all, will be faced with the fact that numerous prices will have risen by the time the money reaches them. If their nominal incomes remain the same, they will be able to afford less.

People who are already rich can become richer through no particular fault of their own in this process, simply because as a rule they already own many assets that tend to benefit disproportionately from monetary inflation, such as real estate, stocks, art works, and so forth.

The Federal Reserve regularly defends its war on savers by asserting that its policies 'help the economy' and that this will ultimately be to the benefit of everyone, even those who are the most obvious losers of its policies (i.e., all those people who have been prudent with their finances). We know however that printing money (whether directly or indirectly) cannot increase real wealth. So how can it possibly 'help' the economy? On the contrary, the Fed's additions of fiduciary media to the system have one overriding goal, namely to manipulate interest rates below the natural rate. In other words, the Fed asserts that the economy can be 'helped' by a central planning agency's attempts to falsify one of the most important market signals, which distorts prices and ultimately leads to a falsification of economic calculation on a broad front. The argument that this 'helps the economy' is an absurd claim.

The redistribution of wealth monetary inflation engenders is perhaps a less obvious, but no less real phenomenon. It has been known since Richard Cantillon's “Essay on the Nature of Trade in General”, published in 1755, that this phenomenon exists. The effect is even named after Cantillon. Since the Fed is allegedly manned by people that are widely regarded as eminent monetary theorists and even well-informed economic historians (such as 'depression specialist' Bernanke), they are surely aware of this. Of course we cannot really say if this is the case, since they have so far failed to mention it.

However, it could be that the president knows more than he lets on, given the emphasis on inflation and bubbles in his recent speech. An interesting side note to this are the recent speculations over who is going to succeed Mr. Bernanke as Fed chairman, with both Janet Yellen and Larry Summers reportedly in the running. See in this context this recent article on Zerohedge on why Scotiabank analyst Guy Hasselmann believes Larry Summers' chances to be quite good. Summers is more of an old-style Keynesian, in that he believes deficit spending to be a more effective method of reviving the economy than money printing (as Fed chairman he will only have control over the latter though). We suppose there is therefore something to the idea that  the president might favor Mr. Summers. 

A recent editorial in the WSJ blames the president's focus on wealth redistribution over wealth creation for the dismal performance of the middle class during his reign, and no doubt there is something to be said for that criticism. However, as a long term chart comparing economic productivity to real median household income shows, there is a more profound and longer term trend at work that cannot simply be blamed on president Obama's economic policies, as worthy of criticism as they may be. Take a close look at when the two data series begin to visibly diverge – we would submit this is no coincidence.



Productivity_and_Real_Median_Family_Income_Growth_1947-2009Real median family income and productivity compared.



In fact, if there is a president deserving of blame, it is Richard Nixon. Real median family income growth has begun to stagnate from the very moment Nixon 'temporarily' closed the gold window and made the dollar into an irredeemable fiat currency. This removed the last check on the willy-nilly expansion of the supply of money and credit, both of which have since then exploded into the blue yonder. The massive growth of the money supply since 1971 has not been accompanied by higher economic growth – on the contrary, real economic growth has been far lower than prior to the unleashing of the full-fledged fiat money system and the unfettered credit expansion associated with it.


There is a Better Way

Finally, it should be noted that if the president were to study economic history, he would find out that the period of the greatest real economic growth in the US, a period that was marked by sharp growth in the real incomes of the broadest possible swathe of the population, was that otherwise dreaded age of the 'robber barons', the Gilded Age, in the decades  prior to the founding of the Federal Reserve. Prices during that era of extremely small money supply growth were almost continually in a mildly declining trend, thereby inexorably raising the real incomes of workers and the then up and coming middle class. It is interesting in this context to look at the Wikipedia entry on the Gilded Age, which is full of complaints about the poverty of the time and the two crisis that 'interrupted growth'. At first one gets the impression that it must have been a truly terrible time (even the term 'Gilded Age' was actually meant to be sarcastic). However, a few paragraphs in, one finds the following:


“During the 1870s and 1880s, the U.S. economy rose at the fastest rate in its history, with real wages, wealth, GDP, and capital formation all increasing rapidly. For example, between 1865 and 1898, the output of wheat increased by 256%, corn by 222%, coal by 800% and miles of railway track by 567%. Thick national networks for transportation and communication were created. The corporation became the dominant form of business organization, and a scientific management revolution transformed business operations. By the beginning of the 20th century, per capita income and industrial production in the United States led the world, with per capita incomes double that of Germany or France, and 50% higher than Britain. The businessmen of the Second Industrial Revolution created industrial towns and cities in the Northeast with new factories, and hired an ethnically diverse industrial working class, many of them new immigrants from Europe.

Wealthy industrialists and financiers such as John D. Rockefeller, Andrew W. Mellon, Andrew Carnegie, Henry Flagler, Henry H. Rogers, J. P. Morgan, Leland Stanford, Charles Crocker, Cornelius Vanderbilt of the Vanderbilt family, and the prominent Astor family would sometimes be labeled "robber barons" by their enemies. Many of these captains of industry, in addition to building up the American economy, participated in immense acts of philanthropy. Andrew Carnegie, who gave away over 90% of his wealth, said philanthropy was their duty–it was the "Gospel of Wealth". Private money endowed thousands of colleges, hospitals, museums, academies, schools, opera houses, public libraries, and charities. John D. Rockefeller, for example, donated over $500 million to various charities, slightly over half his entire net worth.

This emerging industrial economy quickly expanded to meet the new market demands. From 1869 to 1879, the US economy grew at a rate of 6.8% for NNP (GDP minus capital depreciation) and 4.5% for NNP per capita.

The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled. Real wages also increased greatly during the 1880s. Economist Milton Friedman states that for the 1880s, "The highest decadal rate [of growth of real reproducible, tangible wealth per head from 1805 to 1950] for periods of about ten years was apparently reached in the eighties with approximately 3.8 percent."


(emphasis added)

Not so terrible a time after all! As an aside, it appears the evil 'robber barons' have stood falsely accused. Not only did they serve their fellowmen by offering them the goods and services they demanded at great prices, many then proceeded to give away a large part of their fortunes as well. The main points we wish to make are however: 1. 'deflation' (declining prices) is not inimical to economic growth, as the Federal Reserve and its apologists maintain (the opposite appears to be the case), and 2. the less central economic planning there is and the sounder the money employed, the more economic growth and economic advancement of the poor and middle class strata of society can be expected.



US-GNP-per-capita-1869-1918The Gilded Age, real GNP per capita – click to enlarge.



If the president wants to contribute to solving the problems he complains about, he may want to look toward this historical period as an example of what is possible and can be done. Incidentally, by the early 1900ds, government spending amounted to no more than 4 or 5% of GDP.



Charts by: WSJ, Wikipedia



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10 Responses to “Presidential Musings About Inequality”

  • rodney:

    A good article. Nonetheless, I beg to disagree with the idea that Obama might know that inflation creates inequality. To suggest that his 100% socialist heart suddenly knows anything about Cantillon effects, Austrian Business Cycle Theory, or the fairness of sound money is a bit näive. He is clueless about it.

    He is not being advised that stuff either: The adviser would find himself looking for another job rather quickly.

  • SavvyGuy:


    Excellent analysis overall, and a very credible diagnosis.

    In addition, I believe there is a psychological angle at play, that is preventing the majority of the population from increasing their net worth. The true culprit here is the widespread obsession with instant gratification via taking on the yoke of debt, which, not surprisingly, is often ridiculously easy to obtain.

    No disrespect, but I often see burger-flippers yakking away on their iPhones and driving shiny new cars (with 0% financing, yay!). Nobody wants to do the math and figure out that the iPhone contract will probably cost them $2,400 plus tax over two years. Nobody wants to hear that the interest cost on their shiny new car has already been rolled into its purchase price, and that’s how they’re getting 0% financing. Their attitude is “Hey, I have a great lifestyle, what’s not to like about that?”

    In a nutshell…the un-anchoring of money from anything tangible allowed debt to be offered on unnaturally easy terms, which allowed vast swathes of the population to succumb to the temptations of instant gratification by increasing their debts, not realizing that they will be impoverished as a result. This is where we are now, and this game will likely not end well.

  • Kreditanstalt:

    I have to take issue with your chart showing “productivity” to have climbed since 1971.

    First, is this supposed productivity measured in dollars? That would indicate that REAL output of cost-efficient and competitively-priced goods, measured in widgets sold or numbers produced profitably, might actually be far lower than this line would indicate. As a highly-simplified example, can it be said that a (highly, highly paid, benefitted and pensioned) American worker producing 100 units at $30/hour is more productive than a Chinese producing 10 units at $2/hour? Dollars being equal of course…a big IF.

    Secondly, how much of this alleged productivity is a function of monetary inflation? Impossible to tell…but I suspect it’s A LOT, perhaps most of it.

    • JasonEmery:

      Kredit-I think a lot of the recent ‘gains’ in productivity are a function of hiring part time workers, hiring contractors in place of benefited employees, and eliminating overtime, not to mention offshoring. This jives with a lot of the analysis showing there are a millions of part time workers that would prefer to be full time.

    • I agree, such statistics must be taken with more than a grain of salt and I should have explicitly mentioned it in the article. I actually tend to usually do that, in this case it simply slipped my mind. Still, there is some evidence that productivity has risen, both in the data and from an anecdotal perspective (we know the output per worker has risen strongly in manufacturing, distorted as the monetary expression thereof undoubtedly is).
      This is of course quite different from saying that it can actually be ‘measured’. A precise ‘aggregate’ measurement is simply impossible in a complex world full of heterogeneous goods and services. Similarly, the ‘real’ median family income measurement is also incorporating government data on price indexes, and as such is also imprecise. In all likelihood productivity growth and the median income are both overstated, as the official measurements of ‘inflation’ understate the actual decline in the purchasing power of money.

  • zerobs:

    I’d argue there is more poverty in the US now, certainly there are more people (percentage-wise) of working age who are not supporting themselves financially. I suppose one could cheat and call “housewives” as not supporting themselves so that could heavily skew the poverty of the Gilded Age.

    The problem of course is that since we paper over the poverty today with social programs, we tend to not count these people where they should be counted (labor statistics) and only trot them out when the desire escalates to EXPAND the papering-over programs. As long as we herd the poorest into a remote section of town (public housing subsidies), and send them benefits via mail so they don’t stand in line downtown we can forget about how much poverty there is. Even when the media TRIES to show poverty, they never actually show any of those dirty, rotten poor people; at best you get pictures of abandoned buildings in Detroit – which may be an eyesore but if they’re abandoned then there’s no actual poor people in them.

    But one cannot say that these social programs have done ANYTHING to REDUCE poverty – all they’ve done is move it out of daily sight.

    • jimmyjames:

      I worry that we’re not moving faster to seize the moment-When we know that families are getting killed by college costs, for us not to take bold action — which means that young people are graduating with massive debt, they can’t buy a home as soon as they want,


      This is horrible- how will they ever blow another credit bubble with these kids who are already so deep in debt they’ll never get out- how will they hold house prices up- which underpins almost the entire economy when there are no new buyers stepping up to the plate-
      Building bridges and paving roads with tax payer money is always seen as taking bold action by a politician- same old game-

  • JasonEmery:

    “…there has been a kind of reverse wealth redistribution from the poor to the rich.
    How is this possible…?”

    You correctly stated why the rich are getting richer, i.e. their assets are rising with inflation. In other words, they really are NOT getting richer, it only seems so, since they are underestimating inflation.

    Why are the poor getting poorer? Because they don’t produce anything of value. At least not very many of us [Americans]. So you see, there is no solution within the current global economic framework. We could all start buying ‘American’ either by force of law (tariff legislation, trade wars), or voluntarily. The problem with either of these ‘solutions’ is that goods are now produced, and services rendered, by the world’s low cost leaders. To move these activities to the USA would involve a massive increase in cost of production. That would bankrupt most businesses.

    This will be resolved via the printing press, or in Bernanke’s immortal words, ‘the electronic equivalent’. Eventually, the dollar will be worthless, and wages here will match the rest of the world.

    • zerobs:

      Unless the cost of regulatory compliance also matches the low cost leaders, reducing real wages will not be enough.

      • JasonEmery:

        That’s a good point. However, some regulatory compliance features might net each other out. For example, a requirement that workers wear safety glasses could reduce the required workers’ comp or health insurance expenditures.

        In any event, you are correct. The ENTIRE employee compensation package must be competitive, or it will be difficult to stay in business.

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