Link, links, links. Inequality then (1920s) and now (now)

"The economists Emmanuel Saez and Thomas Piketty studied the incomes of the top 0.1% of earners in America, Britain and France in 1913-2008. America’s super-rich, they found, were earning about 8% of the country’s total income at the end of the period—the same share as during the Gilded Era of the 1920s and up from around 2% in the 1960s. A study by the Economic Policy Institute, a think-tank in Washington, DC, looked at the ratio of the average incomes of the rich and the “bottom” 90% of the population between 1980 and 2006. It found that the top 1% earned ten times more than the rest at the start of the period and 20 times as much at the end—ie, its “premium” doubled. But for the top 0.1% the gain rose from 20 times the earnings of the lower 90% to almost 80-fold." (In the economist)

It seems like a fairly large coincidence that the two periods of highest income inequality in recorded history preceded the two greatest crashes. And, although a lot of economists might disagree, viewing income inequality as an indicator of potential collapse seems like a pretty sensible idea.

How income inequality would actually contribute to a collapse is not clear but there are some suggestions.

Paul Krugman points to the possibility of underconsumption (the working class borrowing a lot of money because all the money is going to the rich) and overconsumption- Frank: “The wealthy are spending more now simply because they have more money. But their spending has led others to spend more as well, including middle-income families. If the real incomes of middle-class families have grown only slightly, how have they financed this additional consumption?In part by working longer hours, but mainly by saving less and borrowing more.”

This also ties in with the idea of the rich blowing speculative bubbles in search of gain (the returns accruing unevenly and thus exacerbating the problem) which eventually burst.

A presentation by Krugman can be found here  Also, Robert Reich's paper on inequality and the Depression, including an explanation of how the middle-class had to borrow to support their consumption as their real-wages stalled in the run up to both collapses, is here.

But, purely economic reasons aside, is there not also a pretty decent chance that all of that money in a very few hands allows power to become too concentrated? That the tiny percentage of super-wealthy might like the status quo that has enriched them and that they would seek to continue it through deregulation and the trumpeting of the laissez-faire capitalism whose purest form got them to the top?

Seems likely to me.

The paper mentioned in The Economist Article can be found here  with an earlier version found here.

Keynes, credit and a paranoid comparison

The parallels between the Great Depression and our 'Second Great Contraction' are building quickly.

One interesting comparison is between Ireland's need to cut costs due to its inability to tamper with the Euro and England's need to cut its costs when it returned to the gold standard in 1925- England's desire to return to the gold standard at what many saw as an inflated rate meant that it would be unable to compete with America in trade without reducing its costs of production (mainly the cost of labour).

Keynes believed that this reduction in labour costs (wages) would be brought about by a restriction in credit as wages were too 'sticky' to respond automatically to any change in the exchange rate.

He wrote in The Economic Consequences of Mr. Churchill that “The object of credit restriction... is to withdraw from employers the financial means to employ labour at the existing level of prices and wages. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard fact... Deflation does not reduce wages 'automatically'. It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression.”

It's obviously not a perfect parallel as Ireland doesn't have that many choices credit-wise (even though Britain was, essentially, being funded by the Fed in the '20s).

However, the idea that Ireland's on-going credit crunch might not make the government all that unhappy (and that they might be even a little unwilling to let credit flow freely just yet) is an interesting, and paranoid, one.