Boom, Bust, and Inequality
Over the weekend, Niall Ferguson wrote in The New York Times:
[D]eregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth.
Part of what troubles people about this sort of thing, however, is that it’s not clear how much the intervening growth was really worth. Check this out from the CBO:
For the top one percent, that’s a pretty impressive period. For the next 19 percent, there’s something happening. But for the bottom 80 percent, there’s just very little going on in terms of real income growth. There was, however, pretty robust consumption growth fueled by the credit boom and declining savings rates. The current downturn is now threatening that and calling into question the sustainability and worth of the overall growth throughout the period.
53 Responses to “Boom, Bust, and Inequality”
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May 19th, 2009 at 9:21 am
The rules keep changing to favor the top 1%. The latest is Treasury’s allowing savings & loans and credit unions to be majority owned by private equity underwriters. The Fed restricts PEU ownership to 29%. Obama’s Treasury relaxed the rules further than Bush.
Think Glass-Steagall. America’s shadow bankers imploded Wall Street. The Obama administration wants the same shadow bankers to re-invigorate real banks and thrifts.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aWQza.6tawEY&refer=us
May 19th, 2009 at 9:30 am
Take away pre-approved credit cards getting mailed to every residence in the nation. Take away homes being used as ATMs throughout the housing bubble. What’s left? A lot of stuff that never gets bought. A lot of imports that never get loaded on to ships. A lot of clothes that get mended, appliances that get repaired, cars that get driven another 3-5 years and generally an entire consumer mentality makeover. It’ll be interesting to watch all the jonesing that goes on as people are denied an upgrade from a 40″ plasma TV to a 60″ model. 300 million people in a massive crying jag in the toy aisle as they’re told “Not today, Mommy and Daddy don’t have the money for that right now”.
May 19th, 2009 at 9:35 am
Ferguson’s piece is just really confused. He starts off apparently taking issue with those who blame deregulation in part for the crisis, but then goes on to explain how there are better regulations which work (e.g., Canada’s strict capital requirements).
So, um, why isn’t the conclusion that we need some of those better regulations? And what he doesn’t grapple with is that a lot of the deregulation he claims isn’t to blame was a systematic dismantling of such better regulations.
May 19th, 2009 at 9:37 am
Translation: There is documentation that refutes everything progressives have said, so progressives have to figure out a way to make the numbers appear disingenuous in order to promote our phony and harmful schemes of “economic equality” and “social justice”.
May 19th, 2009 at 9:40 am
1) If a you are a Whore for the Rich, then everything looks fine. Ivy League professors are not all that different from medieval Bishops in the Catholic Church in that regard.
Erudite Sophistry on demand is one of the prices for the sweet life.
2) Hence, Professor Ferguson can write such howlers as
“We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks”
3) That is truly hilarious given that the Wall Street Journal is reporting how average Americans are finding that withdrawals from “their” 401Ks have suddenly been FROZEN.
Evidently, a lot of that money was NOT invested in precisely the vehicles advertised — some of it was loaned out. Guess to whom?
See http://whiskeyandgunpowder.com/401k-investors-cant-get-money/
May 19th, 2009 at 9:42 am
Sorry — here’s the direct link to the Wall Street Journal’s article re 401K withdrawals being frozen:
http://online.wsj.com/article/SB124148012581385199.html
May 19th, 2009 at 9:42 am
Ferguson’s writings are really confused in general. His books are filled with quite good points that contradict what he says elsewhere in the book, or have nothing to do with the argument of the book.
May 19th, 2009 at 9:42 am
Yeah, SteveAR. Pretty sneaky progressive trick Matt pulled posting a non-partisan CBO chart. Darn him!
By the way, as someone who makes a fair number of graphs in my work, that chart positively cries out for some grid lines so you can see how far the curves drift above the baseline.
May 19th, 2009 at 9:42 am
Nial Ferguson’s to be one of the most intellectual dishonest scholars out there. No wonder he teaches at Harvard!
May 19th, 2009 at 9:46 am
Actually, maybe SteveAR’s comment was snark. I honestly can’t tell, and my snark detector is normally fairly well calibrated.
May 19th, 2009 at 9:55 am
Why does someone like Niall Ferguson, who’s not a mere gibbering idiot like an Amity Schlaes or Jonah Goldberg, think he’s got to write this sort of ultra-shallow contrarian bullshit?
May 19th, 2009 at 9:57 am
You would also think that Professor Ferguson would have been suspicious of “growth” that was based upon: 1) Stealing $3 Trillion out of the common citizens’ Social Security/Medicare Trust Fund accounts and pissing it away. 2) Borrowing another $3 Trillion from Asia and pissing that away as well.
By the way, anyone recall any anguished outcries from Professor Ferguson in years past as this little domestic disaster was shaping up. Any robust criticism of those Wall Street guys– any advocacy for “better regulation”??
May 19th, 2009 at 9:58 am
By the way, here is Richard Posner being, in my opinion, much more coherent on this issue:
Posner on banking crisis
May 19th, 2009 at 10:00 am
rayrick:
The CBO chart is non-partisan. Matt’s analysis thereafter:
is highly partisan, and very progressive (in a negative sense). What is “real income growth” and does it matter? Which group provided any income growth for the bottom 80%? If your answer is the top 20% (mostly the top 1%), you got it right. It is the top group, and to a lesser extent the next 19%, that provide the vast majority of the lower 80% with the income that was grown. Income growth is an objective stat. “Real” income growth is subjective, and Matt is making a subjective statement from a highly partisan, and false, progressive point of view.
May 19th, 2009 at 10:06 am
Yes, Mr. Fergusen, imagine if pension funds and other large institutional investors had been putting their money into long-term stock funds, T-bills, and CDs, instead of mortgage-backed securities and collateralized debt obligations.
What a nightmare that would have a been. Phew, we really dodged a bullet there!
I’m about 49/51 against trashing the ATMs and going back to 19th century banking after this crap unfold. I’m 52/48 in favor of keeping checks. Don’t write this crap and push me over the edge.
May 19th, 2009 at 10:07 am
I can’t stop laughing.
Dude, google “real income growth.”
May 19th, 2009 at 10:14 am
Re SteveAR at 14: “Income growth is an objective stat. “Real” income growth is subjective, and Matt is making a subjective statement from a highly partisan, and false, progressive point of view.”
—————–
You stupid fuck. Real income growth is the term for income growth discounted for inflation.
Matt’s point was that the lower income groups have seen no improvement in their living standards after working their asses off for DECADES.
And contrary to your bullshit, it is the hard work of the common citizens which creates our wealth and income. People like you contribute little –because you are either fools, two-faced apple-polishers whoring for your “betters”– or both.
An interesting experiment in economics would be to see the lower 90 percent start shooting the 1 percent richest motherfuckers and see what happens to the resulting income distributions.
To those who argue that this would be coercion and robbery, I respond: How do you think the richest 1 percent got that way?
May 19th, 2009 at 10:17 am
Sorry to repeat your point, Joe. I started typing my post before yours came up but went foaming fit for a few minutes.
May 19th, 2009 at 10:20 am
Correction: Went into a foaming-at-the mouth fit for a few minutes.
May 19th, 2009 at 10:25 am
Don Williams,
I once had the pleasure of watching libertarians who fancied themselves economics experts (and don’t they all?) freak out over teh socialists making up a misleading term – “market failure” – while discussing an economic issue.
Dude, markets don’t fail. That’s just something commies say when Freedom doesn’t spread the wealth the way they want. Sigh…you need to take Econ 101.
May 19th, 2009 at 10:29 am
First, your beliefs about growth are wrong. Technological innovation has always been responsible for the vast majority of growth. Entrepreneurial innovation does little.
Second, what growth? The bottom 80% have seen about 1% per year growth in real income. That’s about a third of the historical average. It looks like we could ream the top 1% and suffer no consequences. Their success is not correlated to the success of the rest of us. They obviously are not investing significant amounts of their disposable income in ways that create general prosperity and growth. Their best returns are coming from investments which only make them rich. To a very large extent, their only contribution to economic growth is the increase of their personal wealth.
May 19th, 2009 at 10:33 am
The last time I checked, the Commies were kicking our asses in economic competition. So much so that our just departed Freedom President had to beg them for loans to keep things afloat until he could bail.
A big reason why we are failing is because our plutocrats think they can load their lucre onto their Gulfstreams and fly off into safe havens when their self-serving mismanagement finally turns the USA into a hopeless Third World shithole.
Look at Argentina circa 2001. Who ever paid for that?
Former Senator Phil Gramm is waving that Swiss bank paycheck and walking around with a big grin on his face.
May 19th, 2009 at 10:35 am
18 years of beer and cigarette money would just about pay to put one of those 80%er’s kids through college and get him into the 20%er bracket.
May 19th, 2009 at 10:41 am
Don Williams, do you, in whatever capacity you are in, employ people? If you do, do you pay them more, regardless of the position you are hiring for, than what your company or the company you work for can afford in order to raise the new employee’s real income growth? If not, why not? Isn’t that’s what progressives are supposed to believe in?
May 19th, 2009 at 10:43 am
Heh, Reagan was a lie.
May 19th, 2009 at 10:43 am
The latest is Treasury’s allowing savings & loans and credit unions to be majority owned by private equity underwriters
I think the definition of ‘credit union’ precludes any sort of buyout (they are ‘owned’ by the depositors). The only mention in that article of credit unions is that OTS supervises them, and some OTS supervised orgs are being approved for buyouts.
May 19th, 2009 at 10:46 am
I’m about 49/51 against trashing the ATMs and going back to 19th century banking after this crap unfold
This is possibly the oddest thing I’ve ever seen you write. Has someone been googling Ron Paul?
May 19th, 2009 at 10:49 am
The 19th Century is indeed too far . . . that actually gets us back to another era of poor regulations and frequent financial crises.
But something like the 1950s/60s banking system would be just fine.
May 19th, 2009 at 10:51 am
“Don Williams, do you, in whatever capacity you are in, employ people? If you do, do you pay them more, regardless of the position you are hiring for, than what your company or the company you work for can afford in order to raise the new employee’s real income growth? If not, why not? Isn’t that’s what progressives are supposed to believe in?”
And here we get a glimpse of the New Feudalist mindset. A complete disregard for the complex nature of the capitalist economy in favor of a simplistic view of employers as the benevolent philosopher-kings of the age.
Mike
May 19th, 2009 at 10:52 am
Lmao, look at the out of touch jack-ass who thinks you can pay for college with beer money. What the fuck does he drink? Gold-infused Corona served in emerald chalices?
Arguing that what America real needs is a class of lords is a losing proposition.
Seriously, if you wingnuts think these kind of arguments will fly, be prepared to be a permanent minority.
May 19th, 2009 at 11:02 am
[...] as Yglesias points out, there actually really wasn’t much real growth for most people during that time. Second, the [...]
May 19th, 2009 at 11:13 am
The thing is that in our consumer-driven economy, the capitalists need labor to be doing well at least as much as the other way around. In other words, to put our economy on a sustainable growth path, we need more real income growth going to the bulk of the distribution.
May 19th, 2009 at 11:19 am
Mike:
How so? Let me ask you something. Do you have a job? Did you earn that job and what you get paid? Are you a business owner? If you are, did you earn the money you make from that business? Or does the government pay you for not working, from tax money paid out of the incomes other people earned?
May 19th, 2009 at 11:25 am
Real income growth is an oxymoron. That’s fake income growth!
May 19th, 2009 at 11:36 am
Once upon a time there was a more convincing argument that the ‘lords of capitalism’ made money for everybody, or in its more extreme form, the entrepreneur/owner/managerial classes made it possible for the rest of us (or the rest of the people in their company or industry) to make any real income at all.
it was never a correct argument in the right-wing form it was usually advanced (that is, as a complete antithesis to the Marxist notion that labor created all wealth). But it had the modest merit of reminding us that a CEO or owner or Board of Directors could indeed make significant contributions to a company’s success or failure, and that this counted for something, after all.
well, yes, although never as much as Ms. Rand et al would allow.
But in the last two decades, as the figures show, such a HUGE proportion of the ‘wealth created’ or at least of the income taken home was a fictional. that is, the financial ‘industries’ grew from 20 to 40 pct of our gdp, yet as we’ve learned, these numbers were simply not true. the ‘wealth’ was, let’s call it, fragile, or as it turned out for much of it, ephemeral.
if a new house is built and is priced at a million dollars, has a million dollars in wealth been created? well, if it got that price because of an unrealistically-cased and ‘arranged’ mortgage, and if the mortgage is called or fails, and if the next buyer can’t borrow more than a quarter million to buy the same house six months later, how much ‘wealth’ was actually created? and if the answer is any number greater than zero, why are all these families being thrown into misery by it? a strange kind of ‘wealth.’
and these are the deals that produced the enormous incomes of that top 1pct. and don’t kid yourself that it was only so at Citicorp or similar. GE, the car companies, virtually all real estate and development and construction industry wealth ‘creation’ in this period was fictionally inflated by these factors.
so WHAT, exactly, did the top one percent do for the rest of us that deserved such fabulous plunder? and please be assured that even if the spigot has been turned way back in some industries lately, no one is going to give back what they took…no one. even the Lehman and Bear Stearns partners and the like are going on to the rest of their lives with next eggs greater than most of us would see in a lifetime of wages.
not a pretty sight.
this chart is, like, wow! brilliant! so, the need for grid lines or better demarcation of relationship to absolute values is even more pointed.
May 19th, 2009 at 11:42 am
Re SteveAR at 24: “Don Williams, do you, in whatever capacity you are in, employ people? If you do, do you pay them more, regardless of the position you are hiring for, than what your company or the company you work for can afford in order to raise the new employee’s real income growth? ”
—————–
By “employees” do you include the lobbyists and Members of Congress? Because, yeah, I agree the fuckers are overpaid but what are you gonna do?
You need them to send you the federal contracts, fuck the competition with well-crafted legislature, and write the favorable tax loopholes. Oh, and keep those inspecters away.
But yeah, I agree they are over-compensated assholes. Especially the Republicans. Can’t pour piss out of a boot unless you give them detailed instructions.
May 19th, 2009 at 11:45 am
SteveAR, if you want to convince people to support a free market economy and the rising costs and rents associated with a growing economy, you have to give people an incentive to “buy into” that myth in the form of an improving lifestyle and salary over time. If you want to sell the glories of the freemarket with maxims like “a rising tide lifts all boats,” then you have to lift their boats. Otherwise you’re just demanding that people continue to vote for a system that makes their lives worse over time.
May 19th, 2009 at 11:46 am
Of course, I left out the real gravy: federal financing and loans. $10 Trillion Bailouts. Plus Marines to twist the arms of those little brown foreign fuckers whenever I need it.
And “intellectual property rights”. For products developed with federally-funded research.
heh heh
May 19th, 2009 at 11:50 am
Re Tyro at 37: “If you want to sell the glories of the freemarket with maxims like “a rising tide lifts all boats,” ”
————-
Yeah –it’s kinda witty to tell that to a bunch of exhausted slaves rowing a sinking galley.
http://www.modelshipmaster.com/products/ancient/Venetian.htm
May 19th, 2009 at 12:07 pm
This graph is, of course, misleading. For a start, real income inequality doesn’t matter – if anything does, it’s consumption inequality. Funnily enough, that isn’t mentioned – probably because it has stayed relatively constant over this time period, meaning that although the real incomes of the top 1% have increased, that extra income doesn’t translate into disproportionately more consumption.
May 19th, 2009 at 12:10 pm
“How so? Let me ask you something. Do you have a job? Did you earn that job and what you get paid? Are you a business owner? If you are, did you earn the money you make from that business? Or does the government pay you for not working, from tax money paid out of the incomes other people earned?”
Thanks for re-emphasizing your complete disregard for the complex nature of actual capitalism, but I think everyone got the point the first time. You restating your simplistic thinking loses its humor value fairly quickly.
Mike
May 19th, 2009 at 12:12 pm
Bang on. I can’t believe more people aren’t talking about this aspect of the current economic crisis.
May 19th, 2009 at 12:13 pm
Don Williams:
Other than members of Congress (whom we all hire so to speak when we elect them), my questions are in regards to what you do personally, not something that can you can try to deflect from. So I ask again, do you, in whatever capacity you are in, employ people? If you do, do you pay them more, regardless of the position you are hiring for, than what your company or the company you work for can afford in order to raise the new employee’s real income growth?
Tyro:
Agreed.
Unfortunately, the poorer people in this country, especially in the cities, do continue to vote for a system that makes their lives worse over time. And those people vote overwhelmingly for Democrats, because they believe in the lies the Democrats, and the progressives, tell them.
May 19th, 2009 at 12:19 pm
Mike:
Thanks for not answering my questions, as is typical with the left (progressives</em), and re-emphasizing a non sequiter that has nothing to do with my point.
May 19th, 2009 at 12:50 pm
SteveAR, you’re being defensive and dodging the issue. Let me get you back on track: once again, we gave into the neoliberal, deregulatory consensus over the past 30 years. Did it help median wages? No, it did not. If the better economy doesn’t improve the wages of the average person, then people aren’t going to support your waxing poetic about the glories of capitalism unless the rising tide really does lift all boats. If companies are depending on ever-decreasing-wages to support their business models, then I can’t say you’re going to get much support for a free-market economy if it’s going to be run under those conditions, and there’s no reason why they should.
May 19th, 2009 at 12:58 pm
I’m capable of coming up with weird shit on my own.
Harrumph.
May 19th, 2009 at 1:25 pm
>>Deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980).
I was practicing regulatory law for the then 4th largest bank in the US then.
It was a great name for an act, but the actual amount of deregulation for commercial banks was minute.
Basically, one minor reg was dropped. Reg Q, if memory serves.
The serious cutbacks in regs started in the 90’s.
BTW: the repeal of Glass-Stegall was needed because the money making credit based products of commercial banks were being invaded big time by other industries: insurance, investment banking etc, and commercial banks were facing real problems because of their loss of credit-based business.
There was no way in that environment that those other industries could be subjected to the kinds of safety and soundness regs that commercial banks were under.
This was a significant contributing factor in the the financial meltdown of the financial industry.
May 19th, 2009 at 1:34 pm
Tyro:
Sure it did. Look at that chart. Every single line trends upward consistently. In fact, the only line that skews at all is the top one (although it does trend upward as well). Who makes up the top 1%? The successful risk-takers who are the ones creating jobs. In fact, the incomes for that top 1% go down during a recession or when taxes on them are raised, while the remainder continues trending up. When government spending is decreased or when taxes are cut, this same 1% engages in more risk (sometimes the risk turns out to be folly), so why shouldn’t they be rewarded for their success? I for one am not jealous about their success, but work to be that successful.
Prior to the bailouts, and with the exception of public service employers, companies with these business models would be gone or restructured, with the successful parts (including employees) going somewhere else. The bad companies get pushed out of the system and making room for new companies to replace them. However, government is working to impose its own failed business model to companies like GM, Chrysler, and various banks in order to maintain the failed companies (and reward political contributors instead of guaranteed investors). In a market economy, this is insane; yet, that is exactly what an extremely progressive Obama administration is doing. All this will do is lower median wages for everyone, except for those willing pay the correct “fees” (bribes, campaign contributions) and the government. This has been seen everywhere it’s been tried. This is the lie that is progressive policies.
May 19th, 2009 at 1:57 pm
You’re just asserting a causal connection without the slightest bit of evidence it exists.
Matt Y: Look, there has been a huge jump in income for the top 1% while the rest of the country has had a low increase in their real income.
SteveAR: Aha! The huge jump in income for the top 1% CAUSED that small increase in income for everyone else.
Sure it did. That’s why incomes for the bottom 99% of society didn’t budge between 1945 and 1980, when income for the top 1% more closely tracked the rest of society’s. Oh, wait, that’s completely false.
May 19th, 2009 at 2:29 pm
[...] Matt Y and Kevin Drum dissent with the idea that deregulation is responsible for growth. The chart is from Matt Y’s blog. Kevin Drum: This is a kissing cousin to the question everyone is raising these days about financial innovation. It goes like this: the basic benefit of all the financial innovation we’ve seen over the past few decades has been to make credit more easily available, and that clearly had something to do with the credit boom and subsequent bust. This in turn begs the obvious question: was it really a good idea to make credit so easily available? If the answer is no — if the only result was to mask stagnant wages and produce a fake consumption boom — then maybe all that innovation wasn’t such a hot idea in the first place. [...]
May 19th, 2009 at 4:10 pm
I’m curious what we would see if you posted a similar income graph tracing the incomes of Americans from 1959 to 1979. Would we see the same spike in income in the top tier and stagnation for most?
Or is this graph a beautiful representation of how the “trickle down” theory translated into reality in the years since Reagan?
May 19th, 2009 at 4:43 pm
Matt,
You say:
That’s not really correct, or at the very least, that’s not what the chart shows. If you click through to the source, you’ll see that data is for HOUSEHOLD income. To assume that the bottom 80 percent haven’t had income growth, you have to assume that the average household composition hasn’t changed in the last 30 years. That’s not true.
Economic prosperity has allowed more elderly people to live independently, more young people to live on their own, people to delay their first marriages, and to have fewer children. All these factors have driven down the average household size by at least half a person over the period above.
It’s possible that you have a valid point, but to show it, you need to have a chart that shows per capita income by household income group. That’s not what your chart shows. In fact, if you assume the smaller households are clustered near the bottom of the income distribution (not at all unlikely with pensioners or students living on their own), then you have an individual today earning what a family did 30 years ago. If that’s not what you intend to show, you need to find better data.
May 19th, 2009 at 10:08 pm
Matthew Yglesias makes the common mistake of treating the top 1% as if they are the same group of people year after year. The reality is that the individuals who make up the top 1% turnover much more rapidly than the individuals any of those other groupings.
Second, the credit bubble (which really started in the 1990s before accelerating in the 1990s) helped enrich high income earners like CEOs who’s management talents are bid up and financiers who profit off the mere existence of credit bubbles. Perhaps the credit bubble is the fault of deregulation. I think it’s more likely the Fed’s low interest rate policies are the culprit.
Third, increasing globalization also favors executives of companies and talented entertainers with global reach and low costs of distribution. It creates a winner-take-all competition in which the stakes are so high that the salaries marginally better managers are bid up sky high (or as high as the bubbly consumption environment will allow it).