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Lost decade?

from David Ruccio

decade

Narayana Kocherlakota, professor of economics at the University of Rochester and past president of the Federal Reserve Bank of Minneapolis, is right: in some ways, the 2007-08 was worse than the Great Depression.  

It certainly has been worse for average households in the United States. Real median household income (the red line in the chart above) is still below what it was in 2007—and lower still from what it was even earlier, in 1999.

But it hasn’t been a lost decade for the members of the top 1 percent. Their share of income (the blue line in the chart above), which was already an obscene 19 percent in 2007, is today even higher, at 19.6 percent.*

Still, Kocherlakota’s warning is appropriate:

financial crises and the responses to them can have highly persistent adverse effects on economic potential. The risk of such large costs means that policy makers must have better safeguards in place, and be willing to respond vigorously through monetary and fiscal stimulus when crises nonetheless happen.

So what’s happening along these lines? The Trump administration’s nominee to be vice chair of supervision and regulation at the Federal Reserve wants to make the big banks’ stress tests less stringent — and that’ll make a financial crisis more, not less, likely. . .

In short, I see little evidence that policymakers have learned the lessons of the last decade. I hope that situation will change before another crisis occurs.

 

*Both of the data series represented in the chart above end in 2014. That’s because the series on the share of income captured by the top 1 percent ends in that year. Median household income in 2015, the last year for which those data are available, was still below what it was in 2007.

We don’t have comparable data series for the first Great Depression.

GD

What we do know is that the share of income of the bottom 90 percent, which was 52.4 percent in 1928, hovered at roughly the same level throughout the 1930s, ending the decade at 52.5 percent, and then rose dramatically beginning in 1940. Meanwhile, the share of income captured by the top 1 percent, which stood at 21.2 percent in 1928, never managed to rise to that level during the 1930s and, by 1948, it had fallen to 15.6 percent.

  1. August 7, 2017 at 3:47 am

    Re: Kocherlakota’s warning, “The risk…means that policy makers must have better safeguards in place, and be willing to respond vigorously through monetary and fiscal stimulus when crises nonetheless happen.”

    The “better safeguards” that society requires could be instituted if Congress were willing to embrace a contingency plan to transform the finance/banking sector of the economy into a “mixed” industry featuring an unimpeded/unregulated private sector built on top of a socialist “plain vanilla” banking foundation.

    Such an arrangement would allow Main Street to not only survive the next financial crisis, but to actually prosper at the same time that FIRE sector gamblers are allowed to crash and burn utterly. Moral hazard would finally be restored.

    This could easily have been done in 2009 if Congress had decided to create a “Taxpayers’ Bank” on the fly that would have been able to fully provide for Main Street’s banking needs while the private banks were struggling to survive the crisis they had created.

    It could have achieved this goal by authorizing the Treasury Department to buy up the assets of failed banks (like WAMU) for pennies on the dollar, write off all the nonperforming toxic assets, and then fully capitalize them with taxpayer dollars, replace the top management with academic financial economists, and provide them with new lending guidelines (no lending to privately-owned financial firms).

    This would most definitely have been the least costly alternative for Congress to embrace, far less costly than the bailout plan it ultimately decided to finance with taxpayer dollars.

    Combined with a trillion-dollar outlay for investments in infrastructure + human capital, the result would have been a decade of economic prosperity occurring on Main Street at the same time that the privately-owned FIRE sector was enduring a financial holocaust of its own making. Economic justice achieved, finally.

    The survivors would continue to fill a niche within the financial sector, promising higher yields to their customers, but at higher risks (no government protection, they’d have to privately insure the risks they’d be taking).

    This is one industry in a markets-driven economy that society needs to protect itself from with a fundamentally socialist arrangement. If private sector banks want to compete with the government for the deposits of Main Street customers, let them, but it is doubtful that they would be able to compete re: the provision of plain vanilla banking services.

  2. August 7, 2017 at 5:34 am

    Nick Hanauer is an American entrepreneur and venture capitalist living in Shoreline, Washington. He has been involved with Amazon and other large start-up activities. Hanauer published an article in Politico on July 18, 2017 entitled “To My Fellow Plutocrats: You Can Cure Trumpism.” In that article Hanauer repeats a warning he issued three years ago. “I cautioned that any society which allows itself to become radically and indefensibly unequal eventually faces either an uprising or a police state—or both.”

    He says, “I don’t claim to have the all the answers on how to fix our economy, but I do guarantee that if we don’t raise wages and reverse inequality, the social cohesion that makes for a stable democracy and thriving economy is impossible. So, if you are wealthy, and you rightly fear for the future of your country (not to mention your own personal safety), then I ask you to consider the possibility that the best way to defend your own interests is to improve the economic interests of others. Just do that. I think you’ll be surprised by how fast things get better. But you better act quick. The pitchforks are coming, my friends, and whether they come in the angry hands of a desperate mob or the tiny hands of an angry dictator, they’re coming for us.”

    I believe plutocrats today are simply not equipped to accept, let along act on Hanauer’s warnings. They are embedded in and subservient to capitalism. And capitalism is per its supporters and defenders the perfect economic system. And the only system that genuinely guarantees human freedom. Inequality cannot exist with capitalism, since capitalism ensures that each of us “gets what s/he deserves and no more. The wealthy deserve to be wealthy; the poor deserve to be poor. Difficult to solve the problems of inequality when everything you believe and work for says the problems don’t exist.

    • August 7, 2017 at 9:25 am

      Re: Hanauer’s statement, “So, if you are wealthy…I ask you to consider the possibility that the best way to defend your own interests is to improve the economic interests of others.”

      Hanauer is taking on a rather prodigious challenge, isn’t he?

      To optimize his chances of ultimate success, I think he would do well to familiarize himself with much of the content of an article I finished last month, entitled Why Rich People Should Insist On A Full Employment Economy.

      In it, I present a new analytical perspective for consideration, one which germinates a dramatically new understanding of purchasing power in market economies, which I then use to show why there is actually no rational basis for the concerns rich people have always had re: taxes and inflation.

      Hanauer may find these arguments useful in his efforts to persuade the many of his educated peers who have long invested their intellects in certain fallacy-of-composition notions that tend to make rich people feel victimized.

      If some of them can be persuaded to think things through a bit, they just might come around.

      Here’s hoping his efforts will begin to bear some substantial fruit down the road…

      • August 8, 2017 at 12:28 pm

        James, why would you assume that rich people are or should be rational? They are humans, after all! History shows that rich people are greedy, selfish, and uncaring. Even more so than the general population. But some of them are also good spouses, love their kids, and are generally law abiding. They are much more and much less than rational.

        But that aside, I totally disagree with the position you describe in the paper. You offer as a first principle “the central importance of the marketplace’s dynamic price-setting process.” I absolutely disagree. Markets don’t set prices or do much else for that matter. Money, markets, prices, etc. are cultural artefacts. Created like all other artefacts through the relationships of humans with one another and with nonhumans. Artefacts separate the world into inside and outside. What’s inside the artefact, and what’s outside. Artefacts are created to solve the basic problem of homo Sapiens – stability and durability in encountering the uncertainties of existence. Artefacts fail in this effort, because to put it simply uncertainties are uncertain and unpredictable. But artefacts also succeed in this effort, at least for a time and partially.

        Economic artefacts succeed for a time and in part, and then fail. Markets never work as expected and always fail. Economies organized around markets fail. Even when the markets are monitored and repaired regularly. Much more quickly and with larger impacts when they are not. What’s the solution? One I like is the “Nordic model” created by the Norwegians, Swedes, Danes, and Icelanders. The primary attraction of this model is, for me at least that its first principle is democracy and equality. They are its core. Practically, this model relies on this vision and focuses on solidarity and teamwork. This is not to say the road to this model for the Nordics was always smooth. It was not. The most recent upset on that road was the decision of Iceland, Norway, and then Denmark to adopt the neoliberal mantras exported by the USA and UK. As one Nordic scholar noted, it’s difficult for small nations to resist the pressure from larger nations on economics. Plus, some Nordics became frustrated with the red tape and bureaucracy associated with living in a society focused on democracy and equality. This crisis was a valuable lesson for them. They learned once again how unreliable and dangerous markets are, particularly unregulated ones. The Nordic model returned to full force after the financial crisis of 2007-2008. Creating guided markets, limited in scope, while focusing on full employment, free and universal health care, free higher education, and affordable public transportation and housing is not easy. But per Martin Luther King, Jr., “Freedom is not free.” Taxes weren’t really an issue. The people knew they had to pay high taxes to get abundant services. The invention of this model has gone on for more than one hundred years. But today the most dynamic, democratic, and equal economies in the world are in Sweden, Norway, Denmark, and Iceland. The USA needs to learn from this model. And copy as much of it as possible.

  3. August 8, 2017 at 2:18 pm

    Just a naive question : is there any difference if you include benefits in the median income ?

  4. August 8, 2017 at 6:27 pm

    Replying to Ken Zimmerman:

    “Money, markets, prices, etc. are cultural artefacts. Created like all other artefacts through the relationships of humans with one another and with nonhumans…”

    Markets ultimately exist because humans—whether in a “natural” state or bred to accept our established economic customs—are willing to trade some of what they have for something that they don’t have.

    Humans don’t need to have any material possessions at all under their control in order to begin making these trades. This is because one of the things ALL humans have, that they can offer to others, is their TIME and their basic ability to perform useful tasks.

    This is why markets work even when the vast majority of material possessions are “owned” by very few individuals, relative to the entire population. Most humans who reach maturity who are “able-bodied” or “able-minded” are able to trade some of their time everyday for something they want, but do not currently possess: money.

    They trade their commitments of time for some of the otherwise scarce money that certain wealthy/resourceful individuals have (or are able to obtain, e.g., through sales).

    This “money”—due to certain “agreements” our tribe has long embraced—gives us a claim on the productive efforts of others. We accept this money in payment for our services because we know it will be accepted by others “in the marketplace” in exchange for certain items/services/experiences we do not possess, ourselves, but they are willing to give to us in exchange for certain amounts of this “money” stuff.

    Money is an artifact that quite wonderfully enables us to trade fractions of our productive efforts every day for the opportunity to experience some of the productive output of others that we would otherwise not be able to experience.

    Again, markets exist because humans are always willing to trade some of what they have for something other humans “possess”, but are willing to trade to us in exchange for what we offer.

    This artifact of our creation long ago provided us with an alternative to constant endless warfare, where I take from you what I desire against your resistance and you do the same with respect to me.

    The strongest and most powerful/influential members of the tribe (those who’ve secured the support of the warrior class) have ultimately found that it is better for them to be willing to trade some of their ‘possessions’ to those who have no possessions for that which they do have to offer: their time/labor.

    For those who have few possessions, it is much better for them to trade some of their time every day for some of the desirable stuff that the wealthy maintain in their possession rather than spend their time trying to figure out how to seize some of those desirable things that the wealthy are able to maintain possession of through force.

    Markets exist for a reason: they work. They provide all parties with a means to improve their material well-being + security through methods which avoid violence. Even when there is a great difference in the power/wealth of the trading parties, each is able to obtain something they find desirable in exchange for that which they have given to the other.

    Both money and markets are great achievement in the history of humanity in that they have enabled us to peacefully improve our material situations without resorting to violence. In this sense, they have been very helpful innovations, arising from human ingenuity.

    Ken: “Markets never work as expected and always fail. Economies organized around markets fail.”

    The fact that rich people have been able to manipulate markets in ways that enrich them >on paper< at the expense—real human suffering—of others does not logically lead us to the necessary conclusion that “markets never work as expected and always fail.”

    It simply leads us to the conclusion that markets can be manipulated in ways that produce outcomes that are undesirable for very large numbers of people.

    What you would have discovered if you had read beyond the “first principles” section of my article is that the “Big Idea” I am advancing is a strategy that can be employed which would basically force the marketplace to optimally serve those who currently struggle to get by on the bottom half of the economic ladder.

    Yes, I do also point out that if a significant number of rich people were to make it possible for this strategy to become an extant reality, they would discover that THEY also would be optimally served by this alternative market-manipulation strategy.

    I do rather suspect that if you were to read on, Ken, you’d discover that my analysis is nothing at all like what you are currently thinking it is…

    • August 9, 2017 at 12:01 pm

      James, this response reminds me of the conclusions social scientists reached when they studied money. “Economists regurgitate the standard theory of the origin and use of money. Mostly because in some spontaneous and simple sense it seems right. The drawback, the conventional theory of money is entirely false.” Money is not a thing. It is a social technology (cultural artefact): a set of ideas and practices which organize what we produce and consume, and the way we live together. Barter, often identified as the source of both money and markets has, according to evidence (e.g., George Dalton) never been a quantitatively important or dominant mode of transaction in any past or present economic arrangements about which we have solid information. Markets and money organize our lives, they give direction and purpose. They deal with the basic problems or human existence – stability and durability. But since both are social processes, artefacts, they suffer all the limitations of human collective life. They change as human relationships change, they fail because they don’t (can’t) anticipate the future accurately, and never consider all the events, things, or people that might be part of or impact them. So, no, markets don’t exist because they work. They exist because they sometimes help humans organize their ways of life to cope with (but not always solve) the basic problems of existence. But, often do not, cannot deal with these problems, or provide reasonable guidance. But more than this, markets don’t operate independently because they cannot. They are always under construction or re-construction. Work by humans inside and outside markets. Humans, along with nonhumans are always re-making markets, always reinterpreting them. Some textbooks present the conditions for a perfect market,
      • existence of a perfectly qualified product;
      • existence of a clearly constituted supply (seller) and demand (buyer);
      • organization of transactions allowing for the establishment of an equilibrium price.

      Experiments examined such markets. None, though supposedly perfect lasted more than a few months. People changed the markets, to suit their desires and expectations. Markets are what people say they are and make them to be. And, of course people disagree sometimes violently on what they are. Sometimes the violence can be avoided or cured. But that has nothing to do with markets, but with negotiations among the people involved. More to do with how open or closed the processes of creation and innovation are than with any sort of economic market. The study of history shows that one important dispute about what a market is and is not is between “the rich” and everyone else. The rich, as they do with most social processes (social tools) prefer and seek a market structure that keeps them rich and/or makes them richer. The non-rich have other priorities, which they attempt to include within markets, or whatever economic arrangements are being considered. Conclusion: markets as social processes evolve and adapt. Social scientists examine this evolution and adaptation. Economists generally do not. Call this manipulation if you prefer. But it’s how social processes (culture) work.

      I admire the goal of your paper, but that admiration evaporates when you add the word “optimal.” Optimal like money and markets is a social process. Its meaning and practice must be understood and studied within specific historical and cultural settings. Outside this it’s just a word. A meaningless word. Serving the needs of the “bottom half of the economic ladder” (the poor and near poor) means something very different in a revolutionary Marxist process vs. an American republican democracy process. Optimizing (seeking the best) in one is very different from optimizing in the other. The approach you offer might be effective in capitalist economic arrangements. I say might because some of your suggestions require changes in ways of life that have strong emotional and ideological support in the USA. Such changes make many people feel unstable and adrift. And angry. Add to this that you offer a top-down process. You might want to consider going bottom-up and focus more on direct public support for the changes you suggest. The bigger question for me is this, what if you don’t want capitalism. The Mayor of Reykjavik said to me that Iceland was no longer interested in capitalist experiments. The Nordic model, of which Iceland is a part, is not a capitalist process. But neither is it a centrally planned process. It’s a mix of these and other elements. For me, this is the better way forward for the USA.

  5. robert locke
    August 9, 2017 at 7:27 am

    Property is theft.

    • August 9, 2017 at 12:03 pm

      Robert, I assume you’re referring to private property. If so, I agree.

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