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Income inequality as source of financial chaos

Building on a Matt Yglesias post, Kevin Drum sketches an interesting case for income inequality being at the heart of the current financial chaos.

We usually argue about rising income inequality in moral terms, but there's a practical side to it too: when all the economic growth a country produces goes to a very small class of rich people, stupid things happen. The rich can't possibly consume enough to spend all this money, so they start casting around for something, anything, to do with all the cash they have sloshing around. And since, in an ever more unequal economy that nonetheless preaches ever rising living standards, the poor need payday loans to keep up and the stagnating middle class needs HELOCs, that's where their money goes. It still gets spent, eventually, on things like cars and food and new furniture, because that's what middle class people mostly spend their money on, but instead of being spent directly by people who are earning it, it gets funneled downward to them via increased debt and financial legerdemain that extracts more and more money upward from poor to rich with each cycle.

That's not sustainable. Median income growth produces not just growth, but stable growth for everyone, the rich included. Top end growth, almost by definition, produces unstable, unsustainable growth. Modern economies are driven by consumer spending, and if you want consumer spending to increase consistently you have to increase consumer income. All the financial wizardry in the world will never change that.

Social justice aside, that's why the single most important financial statistic for any modern economy is real median income growth. If you have it, you're in pretty good shape no matter what else is going on. If you don't, you're a banana republic. Guess which one we've become?

Slavoj Žižek makes a similar case in this LRB essay:

If the bailout plan really is a ‘socialist’ measure, it is a very peculiar one: a ‘socialist’ measure whose aim is to help not the poor but the rich, not those who borrow but those who lend. ‘Socialism’ is OK, it seems, when it serves to save capitalism. But what if ‘moral hazard’ is inscribed in the fundamental structure of capitalism? The problem is that there is no way to separate the welfare of Main Street from that of Wall Street. Their relationship is non-transitive: what is good for Wall Street isn’t necessarily good for Main Street, but Main Street can’t thrive if Wall Street isn’t doing well – and this asymmetry gives an a priori advantage to Wall Street.

The standard ‘trickle-down’ argument against redistribution (through progressive taxation etc) is that instead of making the poor richer, it makes the rich poorer. However, this apparently anti-interventionist attitude actually contains an argument for the current state intervention: although we all want the poor to get better, it is counter-productive to help them directly, since they are not the dynamic and productive element; the only intervention needed is to help the rich get richer, and then the profits will automatically spread down to the poor. Throw enough money at Wall Street, and it will eventually trickle down to Main Street. If you want people to have money to build, don’t give it to them directly, help those who are lending it to them. This is the only way to create genuine prosperity – otherwise, the state is merely distributing money to the needy at the expense of those who create wealth.

It is all too easy to dismiss this line of reasoning as a hypocritical defence of the rich. The problem is that as long as we are stuck with capitalism, there is a truth in it: the collapse of Wall Street really will hit ordinary workers.

Instead of making more money in the wage-stagnant Bush era, most people were merely gaining the opportunity to borrow more from the people and institutions that really were making money, and lots of it. Instead of getting a fair share of general prosperity, we got to pay interest on a simulacrum of it. Now the financial magic tricks don't seem to be working anymore, and no one has any place to turn for the funds to maintain the facade. So things could get pretty scary for "ordinary workers". The brownshirt rallies McCain and his disgraceful running mate are leading may only worsen as the effects of the global financial apocalypse pass through to the "real economy." That may be in the form of layoffs or dramatic drop-offs in production or the disappearance of goods from retail shelves as international shipping, which runs on credit, breaks down. Already it is manifesting as an unwillingness of consumers to spend. Under different circumstances, that might have struck me as good news, but there's nothing like a Depression to remind us how glorious the world of goods is by snatching it away from us, just as we start to take plenitude for granted. Am I too pessimistic or humanistic in thinking that a lasting change in our consumerism can only come if we volunteer for it, not when it is forced on us by events? Maybe I need to become more materialist in my thinking.

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