Getting Radical Might Be the Most Practical Way to Fix Inequality
If you look back at the story of advanced economies over the 20 years before 2007, you see an interesting pattern. During that period, the total value of national income — what economists call “nominal GDP,” meaning income unadjusted for inflation —grew at about 5 percent per year in a reasonably steady fashion. The central banks patted themselves on the back and said: This is great! Things are running smoothly. We’ve got the “Great Moderation.” Why we need more radical policies so that we don’t just repeat the debt-fueled booms all over again
Yet during all of that time, the value of all credit, unadjusted for inflation, grew at about 10 to15 percent per year. At the time, it seemed like we needed that pace of credit growth, but when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem. This isn’t a stable system. In my view, one of the reasons that it seemed that credit had to grow faster than total income was rising inequality.
.. The richer people, when they get another $100,000, or another million, or 10 million, don’t tend to spend it as much as the poorer people would if they got another $100 or $1,000 or $5,000. All the empirical evidence suggests that the rich tend to consume a lower proportion of income than middle and lower-income people. So rising inequality can lead to a major problem with the demand for goods and services. The rich aren’t spending their additional money, so overall, more money gets taken out of the economy. Unless the richer people decide to invest their money, there would be a slowdown in the economy.
.. If you look at the bottom 20 or 25 percent of the population, their real wages haven’t gone up for about 35 years! Meanwhile, the incomes of the top 1 percent have gone up 200 percent. This is a dramatic increase.
.. We need more radical policies so that we don’t just repeat the debt-fueled booms all over again and do another blow-up in 2025 or 2035.
.. Now if you print that, many people in Germany will just sort of explode over their morning coffee! But I have argued this in Germany and I have very good relationships with many German economists. Lots of them share my analysis of how we got it into this mess but they are very wary of agreeing to my proposal for how we get out.
.. the Eurozone will have to progress to a much greater degree of federalization with an element of a federal budget, federal taxation, and federal expenditure. If it can’t agree to that, it would be better to break up.
.. Then something very odd happens in the 1960s and 70s — economists stopped talking about the banking system and the credit system. We then develop a set of modern monetary economics—whether New Keynesian Economics or New Classical Economics — where we imagine that we can think about the dynamics of the macroeconomy without a rich understanding of the banking system and without understanding that the banking system creates credit, money and purchasing power.
.. Piketty describes very significant increases in the ratio of wealth to national income, rising in many advanced economies from about 2 to 3 in 1950 to about 4 to 6 today, and he develops a theory of why that occurred. But what is striking, when you look at Piketty’s own figures, is that in countries like the U.K. and France and in several others, though not quite to the same extent, the majority of all wealth resides in the value of urban real estate. And the vast majority of the increase in the wealth-to-income ratio, which Piketty describes, comes from the increase in the value of urban real estate. The majority of that increase derives, in turn, not from new construction investment but from the increase in the value of land.
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Instability mostly comes from the interface between the fact that the banks (or shadow banks) can create credit, money, and purchasing power in infinite quantities if we don’t constrain them, and the fact that credit is primarily created to fund the purchase of urban real estate and land, which is somewhat fixed in supply. In economics, when you put together a highly elastic thing and a highly inelastic thing, you create extraordinary potential for turbulence, volatility, and for unstable prices. Both of those issues are largely absent from the way we have taught economics over the last 50 years.