Sunday, February 28, 2010

Income distribution and the employment problem

I have pointed out previously that unemployment in a recession is primarily a demand issue. The demand for goods and services has declined, thus since employers are not charities and are in business to make as much profit as possible, employers lay off workers no longer needed to meet demand. What has confused some people, such as economist Bob Murphy, is this: How can demand decline when GDP is relatively stable compared to prior recessions? That is, why are we getting a doubling of unemployment in this recession, but not in prior post-WW2 recessions?

I think I may have a clue. One thing which economists have been shying away from like cats from a water sprinkler is the question of income distribution. You can literally hear the yowls of terror as you start leading them anywhere towards that question, because the reality that we have two classes of Americans -- the consumer class and the investor class -- is a truth that None Dare Speak Its Name. The investor class profited greatly during the past ten years, to the point where the top 10% of taxpayers make 50% of the income and the top 1% own 70% of all financial assets of America. This inflation of the income of the investor class has resulted in a large overhang of investment money that was malinvested in a bubble (see, the Austrians aren't wrong about *everything* ;-). The consumer class, on the other hand, had their incomes actually *decline* over the past 10 years, thereby drastically impacting their ability to consume -- a decline that was masked by overleveraging for eight of those years, but then it all came crashing down. Any solution that will actually increase consumption and thereby cause an increase in demand that will lead to businesses hiring again will by necessity require placing more money into the hands of the consumer class -- which current quantitative easing programs have *not* done, instead placing yet more money into the hands of an investor class which already has more money than it knows how to profitably invest, thereby driving the interest rates on short-term Treasuries to 0%.

In short, to get demand -- and thus employment -- back on track, we need to either transfer wealth from the investor class to the consumer class, or we need to otherwise put more money into the hands of the consumer class. Current quantitative easing programs do neither. But if we do think quantitative easing could solve unemployment in this recession, perhaps we should go wake up the ghost of Milton Friedman and create a new $1,000 bill, print up a few thousand bales of the things, and drop the loose bills from helicopters over working class neighborhoods in major cities. Hey, it couldn't work any worse than the current quantitative easing program, could it? ;-).

-- Badtux the Economics Penguin


  1. THIS JUST HAPPENED TO SOME GOOD FRIENDS OF MINE I worked out there for them for about three years.

  2. i don't think Milton Friedman would actually do that. he was a very mean old man.

  3. Milton Friedman actually did propose helicopter drops of actual cash money. He did it as a theoretical teaching example in 1969, and "Helicopter Ben" Bernanke gained his monicker by discussing this theory in a paper in 2002. But you are correct that Friedman was a nasty work, he spent much of his career, for example, attempting to destroy public education in the United States -- he was absolutely convinced that vouchers would result in better quality and lower cost education, despite the fact that all our international competitors who outperform us with higher quality education at a lower cost do so with... err... public education. Which just goes to show that even a nasty piece of work can occasionally be right.

    - Badtux the Economics Penguin


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