Celebrating Wealth Destruction

Dean Baker sees the upside of the recession:

You probably didn't see this in the newspapers, but real wages rose at an incredible 14.8% annual rate over the last three months. The basic story is straightforward. While nominal wages have continued to grow at a modest 3.2% annual rate, prices have plummeted, hugely increasing the value of the paycheques of those workers lucky enough to still have a job...
The real lesson that the public should learn from recent experience is how the income of one segment of society is a cost to others. The wealthy understand this point very well...
If they can get low-paid workers to tend their gardens, serve them meals in restaurants, paint their homes and serve as nannies for their children, it raises their standard of living...
In the same vein, when the rich lose wealth it is a gain to everyone else. In short, they have our money.

This doesn't feel right to me. Yes, it's true that the working classes saw their standard of living stagnate during the years when the income and wealth of the rich was soaring. But it's also true that the single event which most soured working-class Americans on Republican pro-rich economic policies was not the rich getting richer but rather the rich getting poorer when the stock market plunged in October.

What's more, it's not easy to come up with examples of any country where the poor have seen a sustained increase in their standard of living as the rich have gotten significantly poorer. And if you're a low-paid waiter or painter or nanny, you're unlikely to feel better off when you're fired by your formerly-rich patron.

Baker's solution to this last problem is simple:

This just points to the urgency of a large government stimulus package. We need to replace the consumption of stockholders and homeowners with some other form of demand. The government has the capacity to spend enough money to replace this demand (as Fed chairman Ben Bernanke said, we can always print more money).

This obviously isn't a permanent solution, and I wonder whether it's feasible even on a temporary basis. Does anybody have a ballpark number for how much the consumption of the rich has declined? I suspect that the drop-off in real-estate consumption alone is greater than any stimulus plan which we're likely to see.

But the real gain of the workers at the expense of the wealthy will come only if rents start declining. I'd love to see some numbers on the average rent paid by non-homeowners: does anybody collect that data?

Comments

[Alex Filonov:]

It's not consumption by rich which is important, it's consumption by middle class. No, there are no easy answers to this problem. About 75% of consumption in our economy is discretionary, customers can stop buying a lot of products without harming themselves. Think of flat screen TVs, game systems, dining out, home improvement and decoration. And this is just a drop in a bucket. Now middle class customer tightened purse strings and reduced consumption of these and lots of other items. Imagine how many people are involved in production and distribution of discretionary items in this country and in the whole world.

Scary...

2008 Dec 23 02:34 PM

[Chubbs:]

Dean Baker is a hard core Marxist economist. It's amazing that anyone listens to him or takes him seriously. PhD from Ann Arbor too; I always wonder about the theme of his dissertation. He'd like us to be the old USSR. He would find paradise in Venezuela. He casually and reliably will distort the facts to suit his arguments, for example his use of the loaded word "The Rich" instead of the Middle Class as Alex just above has discerned. Pretty much everything I've read by him is twisted...

2008 Dec 23 03:20 PM

[jepittman:]

Which is why I wonder why someone as smart as Felix even bothers to give the guy a plug - even a halfhearted one.

The issue with the Fed is not reduced spending by the wealthy. It's creating broad incentives for money to move in desired directions which will reignite economic growth. Banks lending to qualified borrowers, investors moving out the risk spectrum for more yield, prices of loans for consumers declining, more excess reserves in commercial banks' accounts, liquidity provided for temporarily illiquid asets, dollar loans to foreign central banks, are all examples of Federal Reserve actions that will soon have credit flowing freely again. There will be a lag before these actions are felt in the real economy but they are the answer to the problem of economic recession and deflation. The coming fiscal stimulus by the Obama administration and Congress will hasten the recovery even more. IMO bets against this working are ill advised.


On Dec 23 03:20 PM Chubbs wrote:

> Dean Baker is a hard core Marxist economist. It's amazing that anyone
> listens to him or takes him seriously. PhD from Ann Arbor too; I
> always wonder about the theme of his dissertation. He'd like us to
> be the old USSR. He would find paradise in Venezuela. He casually
> and reliably will distort the facts to suit his arguments, for example
> his use of the loaded word "The Rich" instead of the Middle Class
> as Alex just above has discerned. Pretty much everything I've read
> by him is twisted...

2008 Dec 23 10:29 PM

[Sonia:]

The economy is going to be flat because everybody but the very poor has already bought just about everything they (we) need. Our homes are full of stuff. We have a big screen TV - is it important that it's not the latest model? - and smaller ones in other rooms. Our computers are fast enough, so why rush to buy when engineers bring out a laptop that runs milliseconds faster? Our closets are full, and styles have not changed so drastically that we are forced to buy the new. Whether what we have was paid for cash or credit, there is bound to be a slowdown. There are not enough young people entering the work force to create demand for "everything" to keep the boom going. Until the "stuff" wears out and has to be replaced, we're going to have a few lean years.

2008 Dec 24 09:38 AM

[Jason Rines...:]

The social-economic theory (class warfare) on the article is less important to what occured and will now occur. Inflation over a 30 year period outstripped wages. Debt was issued the consumer to conceal what was occuring. Larger corporate animals will also borrow to the max to expand business. Deflation has and is occuring. The massive stimulus will lift all boats, no doubt about it. Will it be enough to spark America into doing what is does best, innovation? I don't know but probably. Investors will need to begin paying attention to geopolitcal risks over the medium term. Another set of risks to manage one's investments for another time. Merry Christmas to all of you! Thank you SA for this service! Thank you fellow investors and patriots for so much for your time to educate others here and begin helping educate the public! God bless you all and our efforts in 2009!

2008 Dec 24 11:15 AM

[antiquary:]

"the single event which most soured working-class Americans on Republican pro-rich economic policies was not the rich getting richer but rather the rich getting poorer when the stock market plunged in October"

Working-class Americans disapprove of the rich getting poorer? It's difficult to express the depth of my astonishment at how crazy that idea is.

I also was surprised at the implication that "the income of one segment of society is a cost to others" is wrong. It's not. Rich and poor are relative terms. If everyone's income goes up, prices go up for them relative to each other, and the numbers we use to denote what's rich and what's poor changes.

2008 Dec 24 01:04 PM

[antiquary:]

"the single event which most soured working-class Americans on Republican pro-rich economic policies was not the rich getting richer but rather the rich getting poorer when the stock market plunged in October"

Working-class Americans disapprove of the rich getting poorer? It's difficult to express the depth of my astonishment at how crazy that idea is.

I also was surprised at the implication that "the income of one segment of society is a cost to others" is wrong. It's not. Rich and poor are relative terms. If everyone's income goes up, prices go up for them relative to each other, and the numbers we use to denote what's rich and what's poor changes.

2008 Dec 24 01:04 PM

[Brahm:]

In some ways, it will work!! I agree that the consumption of the rich will not be affected much, but the excesses (rather I would like to use the words boorishness and foolish behaviour as their indulgences in motor-boats, private corporate jets, Riviera, etc) will be somewhat curbed as their bank accounts or weallth funds get siphoned off and look puny.

There will be innovation and saviing. I am sure of that, because when balances get smaller these people need further incentives to make the next million. What could be more incentive than relative poverty to their former balances! And, there will be lots of collateral benefits and windfalls for others on the lower rung of the economic ladder.

It is just like what I say about CEO and management pay. If shareholders are empowered (by the grace of the SEC!) to determine what the pay should be for them, then there will be incentives for CEO's and others on their team to perform the way they should. That is because the majority of sophisticated shareholders have the wisdom to understand that the greatest incentive for CEOs, boards and management to perform is if they realize that their job and pay depend on shareholder approval, and not on crony board members.

2008 Dec 24 01:06 PM

[Chubbs:]

The rich getting poorer is crushing the small mountain town where I live, where "the rich" come to play. I know a lot of these "rich." My God, they are humans like me, smart, funny, educated, and hard working, driven even. Sort of like me, except I'm not rich and definitely not driven.

2008 Dec 24 02:02 PM

[Kunst:]

"Don't be too hard on the rich. When was the last time a poor person offered you a job?" (origin unknown, but not me)

2008 Dec 24 05:04 PM

[speculari:]

Dear Felix,
Where in England did you live? Presumably not in a shoe, I trust! May God bless you & tiny Tim too! Merry Christmas to all & to all, a good night! Insh Allah!

2008 Dec 24 05:30 PM