On Income Distribution and Aggregate Demand in the U.S. 4 comments
an article to
-
Font Size:
-
Print
- TweetThis
In response to an earlier article, Dr. Lok Sang Ho, an economist at Lingnan University, observed that not only are jobs in U.S. manufacturing declining, but that such unemployment is occurring worldwide.
Global manufacturing jobs have been declining secularly for a long time. It is really amazing that the U.S. has managed to keep so many manufacturing jobs. Hong Kong had almost 1 million manufacturing workers in mid 1980s, but has kept less than 1/10 of that number now. Even in mainland China, reputed to be the factory of the world, manufacturing jobs have peaked and appear to be on a downward trend...
The reason this is so is that productivity in manufacturing worldwide is very high, mostly due to substantial economies of scale and (formerly) high demand, which permit[ed] capital-intensive production on a large scale. This productivity allows the prices of goods manufactured to be substantially lower than otherwise, but is that enough?
Consider the implications, just in the U.S. Although prices may well be down on manufactured goods relative to what they otherwise would have been, the aggregate demand for those goods is significantly reduced by the substantial unemployment arising from the manufacturing sector that is not fully made up for by new employment in other parts of the economy.
The more useful conceptualization of Say's Law – if any thing approaches being a “law” in economics – is that ‘supply creates its own demand.’ That is, making goods and providing services generates the income needed to buy those goods and services. However, Keynes correctly pointed out this “law” fails if people hoard part of their income and do not spend or invest it. That is, according to Keynes, an important reason aggregate demand can fall. However, now we have another reason Say’s Law fails and a much more serious problem.
Much of the income from manufacturing now goes not to wage earners, but to the owners of the capital which made such high productivity possible, that is, to the wealthy who own much stock in manufacturing companies. The problem is that the wealthy do not spend a big percentage of their income on consumption. They either in effect hoard most of their income, try to invest it in real investment opportunities or park their money in secondary financial markets.
In this manner Say’s Law now fails big time, because of the fact that the distribution of income is massively skewed toward the wealthy and away from wage earners in the U.S who would spend it.
How bad is the distribution problem? Consider this graph of the income of households in the upper 1/10 of one percent:
These very few households (less than 15,000 of them) walked away with six percent of all income! As to the rest of us mere mortals, here is the situation:
Although not the best of graphs, the one above does show that the income of the top one percent of households has almost quadrupled in the last twenty-five years or so, while the income of those in the 20% to 80% percentile range have on average stayed the same at about $50,000 a year. The incomes of the bottom 20th percentiles have also held flat on average, at a level we cannot discern here. That is, the real incomes of the bottom 80th percentiles have stagnated, while the incomes of those earning approximately $85,000 a year and up have risen substantially, immediate conditions excepted, of course.
Finally, as we can see below, incomes in under the 60th percentile range have largely stagnated, while household incomes in the percentiles above that have risen markedly.
Economist Timothy Smeeding explains:
Americans have the highest income inequality in the rich world and over the past 20-30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be . . .the majority of large gains are indeed at the top of the distribution.
The clear implication here of this massive failing of Say’s Law is that aggregate demand is seriously compromised and rendered much lower than it would be if income were not so maldistributed. The net result of this acute maldistribution is that our economy is held fast in a relatively recessionary condition. This is bad enough, but the implications for the future are worse.
Unfortunately, economics has far too little to say about how income should be distributed, except to observe that capital and workers would each be paid the value of their marginal productivity, assuming of course, perfect information and competition. But this does not help much and seems naïve.
Perhaps we need a new distributional rule for the macro economy we are coming to face that basically posits that income shall be redistributed by the tax system and negative income taxes so as to maximize employment and/or aggregate demand. We are going to have to begin thinking along these lines at some point, so perhaps we should get to it.
Absent a substantial redistribution of income, we will stay economically depressed, relative to where we could have been, and will continue to have substantial continuing unemployment and underemployment, unless we can find another way to fully employ those people, which is presently doubtful.
In the future, calls for tax reform and perhaps government ownership or some control over big business -- the S word -- should also be expected, along with social unrest at the same time. Americans will wake up at some point. This problem is also arising worldwide, and not just in the U.S, although it is worse here.
It would be truly ironic if we and other nations began looking more closely at the public policies of more socialist countries like France and perhaps even take up rereading Karl Marx for some guidance, but stranger things have happened.
No disclosures
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
The average household has assumed too much debt. Overleveraged in housing, credit cards, etc. households at less than his magical $85,000 level are spending too much money on debt service. This leads to significantly reduced consumption. The economic growth of the past 10 - 15 years is clearly the result of overuse of credit. The decision by households to "keep up with the Jones' " by use of credit instruments simply mortgaged their future.
Had consumers spent within their means, the likelihood of overheated growth would have been muted. Households would have had savings to continue to provide relatively cheap sources of capital for business as well as to guard against downturns. The normal cycle of income distribution appears to have been significantly disrupted due to the spending habits of households.
Some argue that consumers were required to use credit as their income wasn't growing fast enough. Well, fast enough for what? We are not talking about household basics being out of reach of the average household, we're talking about $100 sneakers, flat screen TVs, cell phones, SUVs, etc. - in other words, discretionary items.
After WWII, women entered the workforce in droves and that trend continued into the 70s and 80s. As households shifted from a single wage earner to a two-income structure, consumption increased as there was more disposable income. Once we reached the saturation point of two-income households, we didn't have another income source in the household. To keep up with the new spending paradigm, consumers turned to credit to prop-up discretionary spending; in essence, adding a third wage earner to the household.
Just as the populace is now outraged about the growing levels of government debt because it "mortgages our childrens future", the same holds true for household debt. Maintaining a lifestyle on credit is unsustainable in almost any scenario. Amassing significant household debt prohibits households from saving and impairs the ability of households to weather economic downturns (either individual or on a macro basis). Draining 12% - 17% of disposable income for non-mortgage debt service prohibits the household from increasing their net worth. Without increasing their net worth, little opportunity arises for generational growth in economic status.
Had consumers lived within their means, business would have grown more slowly - and at a more sustainable pace. Slower growth in the business sector would have meant less income to those deploying the capital necessary to grow business (the top 0.01% of earners according to Corson). Reducing the income of the capital deployers would have resulted in a flatter distribution of income overall.
I find the "solution" of redistribution via the tax code to be repugnant. The very individuals who lived beyond their means would be benefiting from redistribution; talk about moral hazard. At this point, business needs to grow in order to address the employment situation. Business will grow when the consumer has the capacity to spend. Short-term remediation of demand (Cash-for-Clunkers) doesn't lead to sustainable growth. We're in for a period of balance sheet restructuring at the household level. It would appear that consumers are aware of this need and are slowly making progress at deleveraging. Hopefully, this will lead to a secular change in consumer spending/saving habits and the economy will be more sustainable in the future.
I notice that you focus on income. Why income rather than wealth? I don't have the figures to hand but I believe that wealth is even more unequal than income. Countries like the dreaded France have wealth taxes. Arguably this is a more efficient tax in these circumstances because it does not discourage earning and encourages consumption/demand.