Income inequality – what PK doesn’t want to tell you

June 2, 2009

Krugman and many leading left wing economists are decrying the great income disparity over the last few decades.  Brad DeLong reviewed NYU professor Edward N. Wolff’s  Top Heavy.  Professor Wolff described a trend that was already well underway over a decade ago, and has perhaps become even more acute.

Now, is there some concern about this?  Perhaps.  The problem lays in how we examine it.

Wealth and income inequality are not causes of, but are actually results of, policy.  Those on the left will of course argue that lower and less progressive taxes, less redistributive programs, and other socialistic and Keynesian rubbish caused this.  Thus, higher taxes, more spending, etc., is the cure.

Wrong on both counts.  The truth is actually rather simple, and it is a double edged sword.  Austrians are well armed when it comes to this debate.

What is the cause:


Notice how perfectly monetary expansion and general inflation go hand in hand.

(Austrian theory is clear: true inflation is expansion of the money supply.  So, this graph is maybe redundant.  Except, it is the inflation of the money supply that debases the currency, which results in higher prices.  So, higher prices are the effect of inflation.  Although you can’t measure true inflation through prices. However, suffice to say, higher prices are certainly a result of printing money.  That much is proven historically.)

So, what does this have to do with income inequality?  In a word: debt.

m2_debtLike prices and monetary expansion, debt and monetary expansion go hand in hand.  Inflation reduces the value of money over time, reducing real payments over time.  This “rewards” borrowing and debt, punishes savings and lending.  

Printing money (inflation) causes prices to rise.  This eats into incomes and purchasing power. It punishes saving.  Over time, it impoverishes society.  Thus, if nothing else, the income inequality is due in large part to the federal reserve printing money since 1971 (a most fateful year in US economic history) and eroding real incomes and real living standards.

General price inflation (what is at least commonly called such) should hurt all, but in truth it doesn’t.  Prices do not rises universally and uniformly.  New monetary injections benefit those who receive it first, and end up hurting those who receive it later.  Guess who gets first dibs on new money?  Well, it isn’t the working man.

To the Keynesian, inflation is not a problem.  Sadly, it is even being encouraged by many, even some Nobel prize laureates.  

The second part of the problem is debt.  Debt requires the government to borrow.  To the Keynesian, this is not a problem either as government borrowing doesn’t crowd out private borrowing.  Even if it did, print more money until it doesn’t.

What does debt do?  Debt is purchased by the public, which displaces private, productive investment.  This debt needs to be serviced, at least with interest payments.  Taxes must be collected from the income earners (lower incomes) and transferred to the bond holders (higher incomes).  

And here is where the disparity is exacerbated.  Bondholders typically are wealthier, as they have the funds available to lend.  These funds should have been invested into wealth generating ventures, but instead they are diverted into government consumption/wealth destruction activities.  

Debt and inflation, the Keynesian cake and ice cream, create income inequality, destroy wealth, and impoverish society.  These are the awful truths that the leading Keynesians don’t want you to know.  Their beloved monetary printing, debt driven, inflation creating fairy tale has created the exact situation they so condemn.  

But, according to the same Keynesians, if we’d only do more of it…

Shocking: Economic stupidity at the Times

June 2, 2009

Shocking indeed.  The NY Times is perhaps too easy a target.  Their editorial today opens up with this gem of economic lunacy:

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.

First, home prices have absolutely nothing to do with foreclosures.  Let’s take a really, really, really simple example (after all, it is the Times!!).  You go to the car dealership, see the car of your dreams (though this wouldn’t be at a GM dealership I suppose), and decide to buy.  You work with the salesman, negotiate the final price, do the financing paperwork dance, and several hours later, get into the driver’s seat of in a brand new car.  The smell, the shiny paint, the whole thing, you feel great.  Then, the tires hit the asphalt and almost instantaneously the “price” of the car has plummeted.  In fact, the next few years, the “price” of the car is well below what is owed. 

And in response, new car owners refuse to make their payments.

But that never happens.  The reason is simple, but simple escapes the editors (and perhaps their entire editorial staff) of the old gray lady.  The price has nothing to do at all with car payments, nor house payments.  In the most basic sense, the only thing that affects wheteher you make the payment is ability to pay.  Period.

Now, of course there are a few other things as well.  Even if the car owner is upside down (as most are) the marginal cost of the car is far less than the marginal utility of the car.  In other words, the cost, the $500 per month, gas, maintenance, etc., plus the goods and services they could have bought otherwise is far less than the utility, i.e. the gains, they get from the car.  

Or, another way to look at it would be that the cost of not having a car, i.e. all the things that one would not be able to do with a car, is far greater than the cost of ownership.  Either way, it is basic economics.  

We could stop right there and just laugh off the Times’ piece.  However, this sort of idiocy not only permeates much of journalism and the economic classes, but this administration is imbued with this nonsense.  

But they didn’t stop there:

This page has long argued that a robust anti-foreclosure plan should directly address the plight of underwater homeowners by reducing the loans’ principal balance. That would restore some equity to borrowers — and give them a further incentive to hold on to their homes — in addition to lowering monthly payments. The mortgage industry has resisted this approach, and the Obama plan does not emphasize it.

With joblessness rising, lower monthly payments could quickly become unaffordable for many Americans. In a recent report, researchers at the Federal Reserve Bank of Boston argued that unemployment is driving foreclosures and to make a difference, anti-foreclosure policy should focus on helping unemployed homeowners. The report suggests a temporary program of loans or grants to help them pay their mortgages while they look for another job.

The government will also have to make far more aggressive efforts to create jobs. The federal stimulus plan will preserve and generate a few million jobs, but that will barely make a dent — in the overall economic crisis or the foreclosure disaster. Since the recession began in December 2007, nearly six million jobs have been lost, and millions more are bound to go missing before this downturn is over.

I thought the only underwater homeowners were in New Orleans.  As for reducing principal, another trillion or some from Uncle Ben should do the trick.  But the solution is simply to force (yes, force is the key word) responsible homeowners to subsidize those who bought more home than they could afford.  And this also penalizes potential homeowners who could, and very well would, buy the homes at reduced prices.  So much for “affordable housing”.  Worse, we’re going to force more capital into bad investments, at the cost of the better, new investment.  That would be a broken window, no?

Can someone please stop this Keynesian madness!!!

But ultimately, the Times reveals its true hand:

President Obama needs to put more effort and political capital into promoting the middle-class agenda that he outlined during the campaign, including a push for new jobs in new industries, expanded union membership and a fairer distribution of profits among shareholders, executives and employees.

Socialism.  And why not, it’s worked everywhere it’s been tried.

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