On October 4th I was interviewed by Talk Radio One host Steven Spierer. We discussed a number of topics though he led off with the issue of labor and wealth inequality. This past spring, I penned an article on the topic of income inequality. In that article I suggested a close relationship between income inequality and the movement of the U.S. stock market. When evaluating the top 10%'s income share in the U.S. the period from 1942 to 1982 saw their income share below 35%. Since the stock market top of 2007 the top 10%'s share is closer to 50%. This is not unexpected since the greatest credit boom in history took off after 1982 and culminated in 2007.
Moreover, being in the top 10% can be transient for many. As Professor Mark Rank of Washington University suggested,
12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year of their lives, while 39 percent of Americans will spend time in the top 5 percent. They also found that 56 percent of Americans will at one some point be in the top 10 percent and 73 percent will spend time in the top 20 percent...Only 0.6 percent of Americans who found themselves in the 1 percent would be there for 10 consecutive years.
To set the interview, Mr. Spierer referenced an article from The Economist, To Those That Shall Be Given. The crux of the article is how labor is losing out to capital. More specifically, the article suggests labor is being disintermediated by the infusion of capital, which subsequently leads to automation. The result of this disintermediation is the carving out of low skill and high skill jobs with a hollowed out middle. Labor's share of the national income in the U.S. is roughly 55% and is down only slightly since 1980. Wealth as a share of national income is roughly 400% and 182% of this is in housing. Thomas Piketty suggested an amelioration of the inequality through a wealth distribution (taxation) scheme.
What follows is an excerpt of the interview.
Spierer - Jim what do you think about the article and the use of automation?
Jim - It would be difficult as a society to place restrictions on technology, we might not enjoy some of the things we have today. With respect to the charts referenced by Thomas Piketty, wealth as a percent of national income fell for Great Britain, France and Germany after WWI and then again after WWII. For the U.S., however, the line falls somewhat after the 1929 crash, goes up again and then declines after WWII. Wealth as a share of national income in the U.S. is actually lower now than it was before WWII.
Spierer - What is income inequality, why are we hearing it and are there people besides Thomas Piketty who thinks that everyone's income should be equal?
Jim - He is the one who is getting the most press right now. One of the problems with these broad economic pronouncements, when he talks about redistribution typically that means taxation. There are pretty significant fiscal problems in the U.S. and Europe. There is not enough taxation power available to correct the fiscal deficit ills. Ideally you need a growing economy. How should the income redistribution occur? What should the taxation levels be? Is he advocating an upper tier 90% tax rate? While that level did exist in the past, I don't know how many people actually paid it. If Congress did authorize such a high rate, an army of lobbyists would descend on Washington to create loopholes. Look at our tax code. It is incredibly complex. There are ways the upper tier can avoid paying those higher rates. What he wants to do is difficult in practice.
Spierer - Is it fair to say that most that talk about income inequality have no imagination about how it is going to happen but instead it's a good way to get elected?
Jim - The subject of income inequality makes for great election year discussion. Redistribution of income, and I don't want to use the term pejoratively, but you are sending money in one direction (Washington DC or your state capital) and then you have a bureaucracy which then is involved with figuring out how to redistribute that income. Those people of course need to be paid to do that redistribution. Also, is the government a better arbiter of how to spend money compared to the market? That is a question people really need to consider.
Spierer - Is there a place for people who are not highly educated or highly skilled? Can they live in the middle class?
Jim - Let's talk about that definition of highly educated/highly skilled. When I worked in the telecommunications industry, the colleges did not necessarily prepare people for a telecommunications job. There were people with data or network engineering titles that did not have an engineering degree. Some did not have college education. Locally I have seen the former trade schools that taught how to be a plumber or electrician now teach software development or provide certification in network engineering. As I mentioned earlier in the interview, technology obsolescence can spawn other industries. The telecom positions I saw did not necessarily require a college degree. Now it becomes a very specialized skill with a requirement of cognitive ability that looks different than it did before though it does not necessarily require college.
Spierer - What should the government be doing now? Ploughing more money into Quantitative Easing?
Jim - If you think about how markets evolve, if they evolve organically. The business cycle gets started with credit expansion. Depending on the length and breadth of the credit expansion, you have a period of growth, then the tail end or winter side of the cycle takes effect. Maybe some of the businesses are no longer relevant in the economy. Maybe there was overinvestment or worse, malinvestment. Then there is a natural catharsis in the economy and you start anew.
We did not get a chance to experience that catharsis. In the absence of the catharsis, the Wizards intervened in a massive way to forestall deflation. Deflation would be a natural outcome of the end of the business cycle. The deflation we would have faced would have been significant since we had the greatest credit expansion in history. The Wizards are trying to forestall this. The market, however, reacted differently to the economic crisis than governments and central banks.
You can listen to the complete interview at The Sentinel.