Wednesday, October 27, 2010

Income Inequality

More data on income inequality. Make sure you look at the .pdf files.

Income Inequality

Tuesday, October 19, 2010

Political Upheaval

Those of you who know me know that I am not a fan of politics. This is mainly because of two reasons: 1) Politics is full of bitter arguing and personal, ad hominem attacks. 2) Our largely bipartisan system does not adequately represent my opinions or values. I cannot vote for a candidate who does because in order to be elected he must receive funding from the Party who must first be assured of his Partisan support and neither major party fully represents my values.

However, it is our duty to be active in politics and exercise our right to vote to bring about the common good not just for our nation or state, but for all people around the world. So, in spirit of the coming elections (just 2 weeks away), I thought I would write a post on economic issues, which are the focus of these midterm elections.

It is well known that Democrats favor government intervention and Republicans don't. Catholic Social Teaching tells us to adhere to the principle of subsidiarity, which says that larger institutions should only operate in the areas where smaller institutions are unable or unwilling. (The federal government should only take care of what states can't, which should only take care of what counties, cities, and families cannot).

Democrats generally feel that lower institutions don't do their job, the federal government can, and so the federal government should. Republicans feel that the federal government is very inefficient at best and only messes things up for the more efficient individuals and smaller governments. Neither view here is necessarily inconsistent with the principle of subsidiarity.

In the economy, Democrats see the probability of widespread market failure or the failure of capitalism to bring about the optimal social good because markets are imperfect and externalities are more pervasive. They believe unemployment and income inequality to be the worst economic evils. They see the possibility of improvement using government policy to cure these problems. They also see taxes as having smaller deadweight losses.

Republicans believe the government only makes things worse. Markets, in general, work well at allocating efficiently, and governments only distort the process. They see minor externalities and market failures that some government may help, but not cure. Republicans generally believe that unemployment isn't good, but is a part of capitalism. If the government stays out, the economy will soon get back to full employment. Income inequality is more a result of hard work and ingenuity and is a necessary part of capitalism, not an evil. They are more concerned with the ill effects of taxes, government deficits, and inflation.

In economics theories, Democrats are more in-line with Keynes, and Republicans are more in-line with New-Classical approaches. Though, there is a lot of wiggle room here.

For more on how the Left and Right differ in economics

Recently, Republicans and Democrats together attempted to save the economy in Bush's Stimulus Bill of 2008. Obama and the Democrats then furthered this stimulus with a much larger one in 2009 which the Republicans ferociously opposed. Republicans continuously state that the stimulus was unsuccessful and are very concerned with the growing deficit. Left economists argue it wasn't nearly enough and that government stimulus wasn't even really tried. Republicans, in general, weren't concerned with growing spending and deficits while Bush was in office, but are now that Obama and the Democrats are running the show.

Evidence has shown that spending didn't increase at a greater rate than it was already increasing before the recession. The increase in deficits is due mainly to a drop in tax revenue because of lower output and incomes. Monetary policy hasn't been able to do much because the interest rate is as low as it can go.

Looking ahead, we are facing growing and historically large deficits in the midst of high unemployment, threatening deflation, and extremely limited monetary policy effectiveness.

Republicans will almost certainly regain control of Congress and will move toward austerity by decreasing spending. This will certainly retract the economy and could cause higher unemployment, but their hope is that by reducing the deficit, businesses will re-enter the market by increasing their spending again. If they don't, then incomes will decline again, causing government revenues to decline which perpetuates the problem of the deficits, and this process will continue for a long time unless businesses pick up spending. If they also lower taxes and businesses and/or households don't spend it, then this will only exacerbate the problem.

Democrats have mostly conceded that their stimulus failed and see the need to decrease the deficits, but have not really offered an alternative to the Republicans. They are more likely to raise taxes in order to achieve lower deficits than they are to decrease spending.

So who do you vote for? That is not an easy answer. For one, you cannot consider economic policies alone, the common good must be considered as a whole. For two, it may not matter in the realm of economics, because it appears that we are headed for austerity either way. It will be interesting to see the outcome.

In the meantime, it is very important to continue to strive for the common good by first and foremost preaching the Gospel at all times. St. Luke reminds us that our material goods are merely means to a greater end and are potentially a great distraction from this end. No matter our income or material condition, we can always live as faithful disciples. We can and must strive for the material welfare of the common good through charity and political participation, but our priority and focus must always be on the spiritual welfare of the common good.

Income Inequality

To bolster my argument that income inequality is an economic problem even outside of any discussion on justice:

Confronting Income Inequality

Sunday, October 17, 2010

Why so much disagreement about economics?

I've been thinking about posting on this topic for some time now, but this article from the New York Times is probably better than I could have done:

The X Factor of Economics

Wednesday, October 13, 2010


Long ago, in the development of the economy, money emerged as a medium of exchange to facilitate the trading process. Many different currencies were used, but some were more attractive than others. Precious metals were popular currenices because of their properties. They were easily divisible and shaped, could be transported without much hassle, they didn't deteriorate, and were relatively cheap to store. When a central government develops and taxes the people, they demand their taxes to be paid in a particular currency, say gold, and so gold becomes the most widely if not only used good as currency. All other goods' value become expressed in terms of gold. (Today, we use fiat or paper currency because that is what the government demands for taxes).

Still, at that time, money was mostly used as a medium of exchange, or put in another way, as a means to an end. The ends were consumption goods. People and eventually businesses produced goods in order to obtain other goods. The purpose of producing shoes, was to obtain food and other necessities. Once necessities were met, production could go towards obtaining luxury items. This is where the problem of distirbution really becomes perplexing as I noted in a previous post.

Once people and businesses were no longer concerned about obtaining necessity goods, they could focus on accumulation, but what good to accumulate? Accumulating the good of their production would be real wealth for they could be traded for other goods, but holding goods as wealth is a risky prospect. Eventually they'll have to pay taxes, and will need to acquire the mandated currency. This currency is also the most liquid good to hold, that is, it can most easily be traded for any other good on the market. So people and businesses desire to accumulate the mandated currency. Now, money is no longer sought as a means to an end, but as an end in itself.

In the field of economics we describe this as the M-C-M' process. The original process was C-M-C', or produce a commodity (C) and sell it for money (M) in order to buy another commodity (C'). As money became sought as an end, the process became inverted. Money (M) was used to invest in producing a commodity (C) in order to obtain more money (M').

This distorted desire for money as an end, I argue, is not only a moral problem (the worship of a false god), but an economic one. Production is now an incentive of obtaining more money and not of meeting man's needs. Work is no longer providing for one's family, but for the obtaining of wealth. Some of the purchasing power is taken out of the economic system and not put back in because of this sordid love of money. It is used for dangerous speculative gain of more money, rather than for the obtaining of food for the hungry or shelter for the homeless. Overproduction occurs chasing after this wealth, and unemployment occurs because businesses are afraid to part with their wealth. They are no longer concerned and perhaps were never concerned with the good of the people and providing for their needs, but rather they are concerned with procuring more money and this distortion is partly a result of the competitive capitalistic process. Because in this process one either makes a profit or goes out of business, grows or dies, eats or gets eaten.

Our final end is to be face to face with God in heaven, and all ends sought for on earth should help us to obtain this end. Money is not one of these ends; it does not satisfy our hunger, or provide us with shelter, it does not exercise our intellect or help build relationships, and it does not bring us closer to God. It is only good as a means for obtaining those things that do.

Further commentary from the Michael Journal

Tuesday, October 5, 2010

Monday, October 4, 2010

Cause of the Recession?

Income inequality growth is a controversial economic indicator and one that I think is overlooked too frequently. The gini coefficient which measures income inequality has reached its highest point since the measurement began in 1967.

The following graph shows how incomes in the bottom percentiles have stagnated, while the incomes at the top continue to grow. GDP growth without income growth in the bottom precentiles means that the top are getting all the gains and the bottom are getting none. The bottom percentiles make up the majority of consumer spending which is the largest component of GDP.

Without income growth, increases in spending had to be paid for by decreasing savings and increasing debt. Now, in response to the recession, consumers are borrowing much less and saving more, which further decreases spending, which further hurts the economy and prolongs the recession. As seen on this pdf on pages 1 and 3:

Household Debt and Savings Rate

Consumers shouldn't continue their spending increases by decreasing their savings and increasing their debt when their incomes don't increase. These practices help cause bubbles because the increases aren't based on real income growth, but on temporary movements of portfolios. Consumers did this banking on income growth that never came and the bubble popped causing our current recession.

And I argue that these same factors were a probable cause of the Great Depression. Household debt roughly doubled from 1920 to 1930 and savings rate was low throughout the decade. Yet, growth in income inequality due to a flat tax rate and booming growth in the 1920s may have been the biggest contributing factor:

People with lower incomes have a higher marginal propensity to consume, that is, with every dollar they earn, they are more likely to spend a higher portion of it (as you can see by the savings rate, generally over 90 cents on the dollar). Wealthier people, on the other hand, usually save more of it in a form that earns interest. They also invest a large portion of their money to make more money, but investment responds to consumer spending, which can't increase if the top has all the income growth and a large share of the total income. So wealthier people stop investing their money when spending stops. Consumers can't spend without the income, and businesses, owned by the top quintile who have the money, won't spend. Businesses are currently having no trouble obtaining really cheap loans to invest, they are simply choosing not to because they are waiting for consumers to start spending again.

This is also why I think tax breaks to small business owners won't jumpstart the economy. They won't hire and invest without assurance that consumers will increase spending again.

Increasing incomes of the bottom percentiles must occur if we want spending to increase. Higher marginal tax rates would redistribute the income, and this is the current debate between Democrats and Republicans that has been postponed due to the November elections. It would be better if the government didn't have to intervene, but if the market fails and inequality continues to grow then there will be greater problems than simple income inequality.

For example, a big problem with growing income inequality and stagnant income growth is the increase in the poverty rate and all that comes with it. The increases in revolts (as seen in Europe) may also lead to a revolution if it gets bad enough. Those at the top can easily survive a recession, those on the bottom have much fewer options.

Friday, October 1, 2010

Who gets the surplus?

A question that all societies face is: who gets the output of our production?

In ancient times, societies started out as small communal hunter-gatherer tribes that were mainly only able to produce their subsistence. They could only kill enough and gather enough to maintain their existence and keep the human race from going extinct. They most likely distributed their product to everyone evenly, maybe giving extra to those who needed more food such as growing children or the men who hunted. Advances in technology helped hunter-gatherer tribes to settle down into agricultural-nomadic pastoral civilizations. These societies were in most cases able to produce a surplus or some amount of output above their basic subsistence.

Here I must define subsistence. There is material subsistence which would most closely be defined as bodily nourishment, shelter, and clothing; and there is also social subsistence, which has a rather large range of possibilities. (In the United States today, this might mean owning a car, computer, cell phone, etc. Note: material subsistence is necessary to all societies; social subsistence is arbitrary and differs across societies)

These civilizations faced a perplexing problem of how to divide the surplus. By definition, this is the job of the economic system, allocating the limited output of the labor to the members of society.

The surplus could be distributed evenly with no private property--communism, mostly evenly with maybe some or no private property--socialism, to one or a small group of individuals--feudalism or monarchism, or roughly to the contribution of the individual with private property capitalism. (These options are not the only possibilities).

Those in power, get to decide. Early on, this power may have simply been by brute force or coercion, but later history gives control to those with political power or those who already have the surplus--the wealthy. In democratic societies, power is distributed more evenly across the population, but the coercive power of the wealthy remains a significant factor. This decision isn't always a conscious decision; it may develop out of specific circumstances.

The decision is completely arbitrary, but may have very adverse consequences. No controlling elite can suppress the poor for very long without attempts at a revolution. The elite also face the decision of serving self or serving the community. Most likely the decision will fall somewhere in between, but history has shown that there is a tendency toward serving self (which the Church recognizes as the doctrine of original sin). The elite, in most cases, attempts to extract as much surplus from the output of the society as they can without disrupting the societal balance or their control over society.

Those with little surplus act in much the same way often battling the elite for a larger piece of the surplus pie.

So the question is: In an ideal world, who gets the surplus? Justice would say that it goes to those who produce it. Unfortunately, this is hard to determine with certainty in more advanced civilizations because of the division of labor. The Catholic Social Teaching principle "universal destination of goods" says that God gave "the earth and its resources to the common stewardship of mankind to take care of them, master them by labor, and enjoy their fruits."

However, the Church also says the ownership of private property is "legitimate for guaranteeing the freedom and dignity of persons and for helping each of them to meet his basic needs and the needs of those in his charge."

So should everyone enjoy the fruits of everyone's labor? or should they enjoy only the fruit that they produce? This question is far less difficult or troubling when everyone is able to meet their material subsistence or perhaps even their social subsistence (which is often or always above the material subsistence). But in a world where some are enjoying much fruit, while there are others who aren't meeting their material subsistence, how can we say that our economic system is working?

If we choose capitalism, which, from experience, best allocates the value of the product to those who produce it, then we have to address why there are people in the world without food, clothing, and shelter who want to work and produce enough to share in those fruits but are unable to because the system is broken or incomplete.

Capitalism doesn't allocate surplus according to who works the hardest, or the longest, or who wants it the most, but allocates to those who produce the most value as the society defines (or demands in an economic sense) it. This is helped by many deep rooted circumstances that are inherent in any society, not just capitalism. Those who start poor are very unlikely to leave that situation, while those who start wealthy are very likely to stay in that position. Is that just? Is that fair? Is it okay to enjoy surplus beyond surplus while there are others dying from lack of material subsistence?

"In his use of things man should regard the external goods he legitimately owns not merely as exclusive to himself but common to others also, in the sense that they can benefit others as well as himself."

"Goods of production - material or immaterial - such as land, factories, practical or artistic skills, oblige their possessors to employ them in ways that will benefit the greatest number. Those who hold goods for use and consumption should use them with moderation, reserving the better part for guests, for the sick and the poor."

Ideally, everyone would be able to work and would work for the common good, sharing the output of his labor for the good of first, his family and those nearest him, and ending with those furthest away with the preferential option always going to those in greatest need. The surplus would go to the person who earned it, and that person would share it willingly. The receiver would humbly accept, and do what he could to produce so as not to be a burden on his fellow men.

Capitalism doesn't do this. It falls short. It fails. This is what many economists and politicians are trying to fix and there is much disagreement over what the solution is, but the solution seems simple to me: charity, justice, temperance, and a commitment to the common good. The hard part is carrying it out.

Quotes taken from the Catechism of the Catholic Church found here.