The Great Divergence

[kandrathe]

However, you missed my point.

Ah, yes, I thought you meant it took him 30 minutes to derail it from income inequality to wealth inequality.

We have now reviewed all possible causes of the Great Divergence—all, at least, that have thus far attracted most experts' attention. What are their relative contributions? Here is a back-of-the-envelope calculation, an admittedly crude composite of my discussions with and reading of the various economists and political scientists cited thus far:
Race and gender are responsible for none of it, and single parenthood is responsible for virtually none of it.
Immigration is responsible for 5 percent.
The imagined uniqueness of computers as a transformative technology is responsible for none of it.
Tax policy is responsible for 5 percent.
The decline of labor is responsible for 20 percent.
Trade is responsible for 10 percent.
Wall Street and corporate boards' pampering of the Stinking Rich is responsible for 30 percent.
Various failures in our education system are responsible for 30 percent.

A failure common to this kind of attribution is that it does not address causes so much as correlations. For example, "the decline of labour" is not a sui generis event. It is the result of the weakening power of workers relative to employers, which is itself the result of other causes. When Bretton Woods collapsed, international capital flows resumed, and trade barriers started to fall, the modern multinational corporation gained an enormous quantity of bargaining power against labour. No longer tied to the labour pool of their home country, they now held the implicit threat of moving their production operations. This eviscerated the Unions' bargaining power, not only in collective negotiations, but also at the political level.

Once Unions were not strong enough to resist, they could be broken (see: Reagan, Ronald, Lady, The Iron, and Pinochet, Augusto.) The strongest unions today are the ones that are functionally immune to this process: public sector unions, who definitionally negotiate only with their home government, whose jobs can't be moved elsewhere.

I would point out a few things here. As much as corporations broke labor, it was also labor that broke corporations. I was at Soo Line RR when they attempted to get all the unions to renegotiate to enable it to survive. Where is Soo Line today? My father was a Teamster for his entire long haul career, but where are the companies with in-house fleets now? And, before you try to pin that on Reagan too, deregulation was passed prior to Reagan.

"After Nixon left office, the Gerald Ford presidency, with the allied interests, secured passage of the first significant change in regulatory policy in a pro-competitive direction, in the Railroad Revitalization and Regulatory Reform Act of 1976. President Jimmy Carter devoted substantial effort to transportation deregulation, and worked with Congressional and civil society leaders to pass the Airline Deregulation Act (October 24, 1978), Staggers Rail Act (signed October 14, 1980), and the Motor Carrier Act of 1980 (signed July 1, 1980)." Wikipedia

How about the competitiveness of the American automobile industry?

So, what's responsible for that gain in inequality, then? The decline of unions? Or the causes that stand behind that decline?

More importantly, did globalization destroy the competitiveness of American goods? In fact, this is caused in part due to the disparity between American living and working conditions and those of the workers where the products are built now. The workers lose, and the owners move their investments into Toyota (growing foreign markets where the exploitation of labor, and the environment is higher).

Similarly, we can say that the pampering of Wall Street caused inequality, but why was Wall Street suddenly pampered? Was it a spontaneous political decision, the whims of Ronnie Raygun? Or were the political forces favouring that kind of pampering getting stronger, and the countervailing forces getting weaker, due to deeper changes in the relationship between workers, corporations, and the state?

How did Reagan have anything to do with the 1999 GLBA? Can you point to any deregulation bills during Reagan's two terms?

Between those two causes, you have 50% of their attribution of the whole phenomenon, and yet, true though they may be, they don't seem to get at root causes.

I think they swung at the shadow anyway. Consider that 80% of the growth in the Stock Market over the past 60 years is due to inflation, and the value of a dollar has declined steadily over the past 100 years.



The Fed just increased M3 by > 20% and this inflation has yet to work its way through the system. As we've discussed in earlier posts, I believe the Feds printing of money has kept the (bogus) CPI fairly flat rather than allowing deflation (although we've seen a mix of deflation and inflation across the spectrum of consumer goods). As a result the bubble has shifted into US Treasuries. Just as with the other numbers the government publishes, the CPI, the unemployment rate, and the GDP are all fudged to make things look better than reality. We live in a world of rose colored scenarios.

"Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981. "

The people in the lower 90% of incomes tend to do their working, spending, and saving in dollars. While the people who earn incomes which are converted into dollars will not suffer from the devaluations. It doesn't shock me that 1 in 10 people don't understand or care about the complications of wealth in a global economy, and that of that upper 10% another 1 in 10 (like Gates, or Buffet) do exceptionally well. Heck, even Greenspan, Paulsen, Bernanke, Geitner, et. al. can be horribly wrong, and cause untold devastation all in the name of trying to fix today's crisis.