Another Take on Inequality From Nick Hanauer and the Restoration Roundtable

I would add that the source of the payment for the consumption is a major factor.

If it comes from a growing median wage that permits consumption and savings by the broader public, then the virtuous cycle is engaged.

However, if the consumption comes from borrowing and credit expansion with the benefits flowing overseas or to the wealthy, there is no virtuous cycle, or the amelioration of misery.  Debt in this case is a narcotic.

In the end it is all about balance, and reform. Stimulus, taxing the rich, and austerity by themselves will only further distort the distortions. Although it should be noted that large imbalances in wealth go hand in hand in imbalances of power, which tend to erode the happy moderation of a functioning democracy with a vibrant middle class.   And the 15% tax on capital gains and the other tax loopholes used by the wealthy is an exorbitant privilege, repugnant to a government by the people.

Imbalances in wealth and distorted domestic economies are often the impetus to war and empire, as nations ruled by the superwealthy seek overseas markets in colonies.  Such economies only maintain themselves by continual expansion and domination. 

The recovery, in whatever form it takes, will be sustainble when the median wage improves.

It is astounding how significantly one idea can shape a society and its policies. Consider this one.

If taxes on the rich go up, job creation will go down.

This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today's economic landscape.

But sometimes the ideas that we know to be true are dead wrong. For thousands of years people were sure that earth was at the center of the universe. It's not, and an astronomer who still believed that it was, would do some lousy astronomy.

In the same way, a policy maker who believed that the rich and businesses are "job creators" and therefore should not be taxed, would make equally bad policy.

I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.

That's why I can say with confidence that rich people don't create jobs, nor do businesses, large or small. What does lead to more employment is a "circle of life" like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

So when businesspeople take credit for creating jobs, it's a little like squirrels taking credit for creating evolution. In fact, it's the other way around.

Anyone who's ever run a business knows that hiring more people is a capitalists course of last resort, something we do only when increasing customer demand requires it. In this sense, calling ourselves job creators isn't just inaccurate, it's disingenuous.

That's why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.

Since 1980 the share of income for the richest Americans has more than tripled while effective tax rates have declined by close to 50%.

If it were true that lower tax rates and more wealth for the wealthy would lead to more job creation, then today we would be drowning in jobs. And yet unemployment and under-employment is at record highs.

Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.

I can't buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can't buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
Here's an incredible fact. If the typical American family still got today the same share of income they earned in 1980, they would earn about 25% more and have an astounding $13,000 more a year. Where would the economy be if that were the case?

Significant privileges have come to capitalists like me for being perceived as "job creators" at the center of the economic universe, and the language and metaphors we use to defend the fairness of the current social and economic arrangements is telling. For instance, it is a small step from "job creator" to "The Creator". We did not accidentally choose this language. It is only honest to admit that calling oneself a "job creator" is both an assertion about how economics works and the a claim on status and privileges.

The extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists, and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification.

We've had it backward for the last 30 years. Rich businesspeople like me don't create jobs. Rather they are a consequence of an eco-systemic feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That's why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So here's an idea worth spreading.

In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich.

Thank You.
Nick Hanauer

Prepare to meet Nick Hanauer. He's a venture capitalist from Seattle who was the first non-family investor in Amazon.com. Today he's a very rich man. And, somewhat jarringly, he's screaming to anyone who will listen that he, and other wealthy innovators like him, doesn't create jobs. The middle class does - and its decline threatens everyone in America, from the innovators on down.

From The Inequality Speech That TED Won't Show You at National Journal.

M3 Hysteria and a Look M2, MZM, GDP and PPI

Ambrose Evans-Pritchard has a bold headline US Money Supply Plunges at 1930s Pace that is sure to provide much referential action for the UK Telegraph.

I like to read AEP, but have to admit that he is given to sensational headlines on rare occasion. That is because it sells papers, and also draws blog clicks, as posters on the web are sometimes wont to emulate. Fear sells. The financial sectors also thrives on rumours and panic selling. It clears the decks for new Ponzi rallies. And it seems as though fear has become an inseparable partner and helpmate to central governments these days.

But there were some mildly disappointing elements to this particular piece in addition to its somewhat overstated headline. The US stopped publishing M3 several years ago. At the time I was not happy about this, and complained quite a bit.

Several enterprising fellows, including my friend Bart over at Now and Futures, as well as John Williams at Shadowstats, have been attempting to extrapolate the M3 figures, and doing a fine job given what they have to work with. In an added footnote, AEP says he is using John Williams' service. He also incorrectly states that the still Fed publishes all the components. They do not disclose eurodollars. The basis for discontinuing M3 was to eliminate the 'inordinate expense.' Obviously if they still published all the components, that could not be a credible case. This is not just being picky. Eurodollars are a remarkably volatile component these days, and also a method of buying Treasuries via London if one were so inclined to monetize US sovereign debt that way. Could the BoE and the Fed be scratching each other's backs as they say? The BoJ has already paid for one false US recovery, so they deserve a break.

Here is a quick review of the components of the Monetary Supply figures including M3 for your review. You may also wish to refresh your knowledge here: Money Supply a Primer.

The chief component that is 'missing' these days which must be estimated is "eurodollars," which as you may recall are US dollars being held overseas. You know, those dollars that Bernanke has been sending over to Europe en masse lately through the swaplines.

The fellows can estimate this, but the reporting of eurodollars lags by a quarter or more, the only reliable source of information being the forex commercial banking reports from BIS.

I would very much like to have M3 back, but in particular I would like the Fed to be releasing a more accurate and contemporary measure of Eurodollars, the dollar overhang overseas, particularly in light of the huge swings in the DX index, and its almost undeniable relationship to the recent dollar short squeezes on the European banks. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks.

But alas, we do not have this, so we can only estimate M3, particularly the eurodollar component. But the good news is that we still have both M2 and MZM.

Here are the most recent figures for MZM and M2 from the St. Louis Fed, expressed as a percent of change YoY, not adjusted for seasonality. For good measure I have added GDP and PPI Finished Consumer Goods in the mix.



It might also be wise also to keep in mind that after a period of sharp growth in response to a developing recession that flattens out afterward, the year over year percentage growth can fall precipitously and look quite impressive on a growth chart without necessarily providing a meaningful decline in the nominal values. This can be seen in the M2 chart below.

And it is also true that during a period of slack growth in GDP the demand for money is lessened such that normal or even flat money supply growth would seem to the Fed monetarists to be 'inflationary.' This does not mean that they have forgotten where the 'ON' button to printing press is located. Of all the things that might concern us about the Bernanke Fed, the least of them is that they will be too stringent in supplying liquidity when and where it might be needed, in substantial volumes, at least to the banking system.



MZM is the broadest measure of liquidity, and is very much a creature of the Adjusted Monetary Base. As one can see from the chart, the Fed, using their various policy tools, jams the short term money supply higher in response to a lagging economy, and the broader measures like M2 tend to follow with a lag.

The Fed then backs off, and waits to see the effect of their actions, as well as any accompanying fiscal programs, on the real economy as measured by GDP, with an eye on inflation. In this case I am using PPI, but I greatly prefer John Williams' unadulterated CPI measure. Unfortunately I do not have it in the proper format for this study. But PPI finished goods will do.

Now, looking at this chart, it appears that the Fed is following their usual gameplan. The excess reserves that the banks are holding, at least indirectly in response to the balance sheet expansion and interest rate payments on their own deposits by the Fed, are enormous and unprecedented. If the Fed were to start pulling some levers to motivate those reserves into the real economy through loans, the impact could be dramatic. The Fed will do this if their fear of inflation begins to be overcome by their fear of deflation.

For the moment, the great bulk of liquidity is being used by the banks to bolster their reserves, and their unresolved bad debt, as if the bad debt itself was the cause of the problem. The problem is that a credit bubble left consumers with the inability to pay their debts, and while nothing is done for the median wage, and the bad debt is not written off, the problem continues. This was the story of the zombie economy of Japan's lost decade, because their kereitsu corporate combines would not take the 'hit' for their land bubble.

Right now it appears to me that they are overly preoccupied with the status of the biggest of the banks and their asset quality problems an under stimulating the real economy. I think this will be regarded as a policy error as were the actions of the Federal Reserve in 1932 wherein the Fed overreacted to a spike in CPI and tightened prematurely. The Fed may be engaged now in a policy error of a different sort.



I am not saying what MUST or WILL happen. I am not arguing from theory. I am just attempting to demonstrate what is happening now based on the data. And right now Ben is indeed printing money, and figuratively dropping it from helicopters. The problem is that the helicopters are hovering over Wall and Broad Streets, and not Main Street. And so we obtain asset bubbles in paper favored by the denizens of the Street.

If you want to know the theory, in a perfectly fiat system (no external standard constraint) deflation and inflation are always the outcome of policy decisions amongst a number of variables and competing interests. Period. That is how it is, and that is why central banks prefer it to the discipline of an external standard like gold.

Once the US relaxed its adherence to the gold standard and devalued the dollar, deflation became a moot point. What was not handled well was the continuing lack of organic aggregate demand, and velocity of money, because of the resistance of the Republican minority in Congress to jobs creation, and the overturning the New Deal minimum wage initiatives and labor reforms by the US Supreme Court. Consumers cannot generate healthy demand when they are unemployed, or being paid near starvation wages. But if you are in a well-to-do minority, things couldn't seem better, unless of course you were living in Germany, Italy, or perhaps even Japan.





I am not saying what the 'right thing' to do is. But what I am attempting to get across is that one way or the other, excess financial sector debt is going to be liquidated, either through default, or through inflation, or through a mixture of higher taxes and sluggish growth with a disparity of income that increasingly resembles 19th century serfdom and political instabilty, the rise of demagogues, and some vicious ghosts from the past.

At some point this dynamic is going to become less 'economic' and more political and the equilibrium will be reached. A good leading example of this is found in Iceland.

See also The Case for Deflation, Stagflation, and Implosion

For those relying on the Output Gap and slack Aggregate Demand please see Price, Demand, and Money Supply as They Relate to Inflation and Deflation

People tend to become very emotional over this sort of topic. There are many who are afraid that what they have will be taken, and there is even a vocal minority of the self-identified elite who wishes to obtain greater power and riches by leveling the middle class and the poor to improve their own supreme vistas. The funny thing is that to the genuinely powerful these 'elites' are about as significant as a bug on the wall, and their turn will come if that is the way it goes.

The most touching example of delusion that I have witnessed recently was an unwavering prediction about what will happen in the future because 'the majority of the people on the this chatboard have agreed on it.' Well, perhaps history gives a hoot. But I suspect that we are in His hands now more than ever. And you might do well to prepare yourself accordingly.

By the way, and this is just a stab at my own theory, a strawman as opposed to an examination of the data, I think the US is hammering the ECB to devalue the Euro, because they wish to further devalue the US dollar. If the major fiat currencies can be devalued in a relatively uniform manner, and some other statistics and prices controlled, the people can be subtly relieved of their savings and wealth, and be none the wiser. But those stubborn Germans had to be brought to heel first. And so it is.

Here is something from an old trading acquaintance of ours. Stage Set For Another Bernanke Adventure - Brady Willett of FallStreet

Wealth Dispersion and General Thoughts on the Future of Economics on a Saturday Afternoon

Here is an interesting graph of wealth distribution, or dispersion, as I call it from Cherchez La Verite.

I am not sure I agree with his conclusions or even his premise, not because I disagree but because it requires some thinking and leisure to digest it. But the data is most interesting.

I wonder if any of the quant economists have performed simulations on virtual populations, and then examined the results of varying different tax rates, and concentrations of wealth because of fiscal policy and regulatory structure, among other things.

I have an hypothesis that great concentrations of wealth lead to economic stagnation, but I am afraid that I have not the means or the talent anymore to conduct that type of research.

The difficulty in a study like this is that the assumptions are greatly magnified into the results. If you assume certain buying, spending, and savings behaviours, the downstream impact can greatly alter, and even distort, the outcomes.

And when people reason through this verbally, rather than perform a structured simulation based on transactions, the distortions increase by an order of magnitude or more based on their own biases.

I used to create simulations like this all the time, for industrial and commercial purposes, and also did a decent amount of econometric modeling. So I am sure someone is doing it somewhere. But I suspect they are doing it in think tanks and places where the outcome is predetermined by the basis of their grant.

Concentrated wealth magnifies the needs and predispositions of the holder. Since the amount they require for basic necessities can only consume so much, one would think that the amount spend on the aggregate of necessities will eventually be reduced. And what they do with their excess of necessity wealth is going to be greatly influenced by their character. Are they a gambler, who inherited the wealth? Are they productive and beneficent? Are they dissolute and venal?

And what about government? Taxation can concentrate enormous wealth in the government. What sort of government does one have, or does one assume? Are they warlike, productive, redistributive, and how corrupt? What about corporations? They can be like small governments, and levy taxes through monopoly and persistent frauds. How are they managed? Corporations are not rational machines, as the efficient market hypothesis would probably presume. Indeed, corporations are often much worse than governments in terms of sheer blockheadedness, greed, and short-termism.

Hard to say. But there is a related field of study in decision making theory, which looks not at wealth but the distribution of decision making power in organizations. It is concerned with the validity and effectiveness of decisions made across a range of broader consensus to a narrow oligopoly and even a great man dictatorship.

The general observation I came to in this study was that decisions tend to be more valid depending on the quality of the information, the facility of the evaluation of it, or intelligence/learning/experience, less the biases and distortions.

A decision becomes a little better if the information is more widely dispersed and a variety of actors can exchange freely in increasing and refining it. There is a point of decision dispersion where the returns not only diminish, but become counterproductive because of the noise and inability of new actors to add value, and actually detract from the process. But finally what I found interesting is that in the aggregate personal error, bias and distortions tends to diminish quickly as a detractor from the result, assuming a non-homogeneous population with some independence of thought.

So too this same sort of study can be applied to the concentration of wealth, since wealth is power. But it is even more interesting because spending habits will vary since the percentage of spending on essentials changes much more slowly than wealth can increase.

And how one assesses the outcomes is also essential. What is thought to be a 'good outcome?' Not necessarily in a rough measure like aggregate GDP, but perhaps GDP with modifiers like the median wage, and a poverty level of essential spending. This is important because so often economic policy arguments are presented with the goal of optimizing short term GDP.

Alas, I have little hope that this will be done now, for the US has had a leadership role in quantitative economic studies, and their work has been twisted generally into the service of whores, robber barons, and gamblers as the speculative society reaches a crescendo. But some day this too will change.