We’ve been talking about the phenomenon of “secular stagnation.” I didn’t think much of the provenance of the idea (post #1) and I pointed out (post #2) that there are far simpler explanations for the slow recovery from the Financial Crisis. In this post, however, I take a look at the rationale for the secular stagnation idea.
Although the secular stagnationists have put forward a variety of arguments for their thesis, the main ones are these: economic inequality, demographics, what we might call central banker exhaustion, and poor productivity growth.
Let’s start with an easy one first: inequality. As everybody knows, inequality is the problem-du-jour, the condition that explains everything that is wrong with America and the world. Bad cup of coffee at Starbucks this morning? Blame inequality. (In a just world a young woman who can make a good latte would be paid the same as a heart surgeon.) Stub your toe on the curb? Inequality. (In a just world we would soak the rich and launch a massive infrastructure improvement project that would transfer wealth from the rich to the poor and improve our curbs at the same time.)
In the secular stagnation context, the inequality argument goes something like this: All the fruits of the American economy have gone to the top 1% for many years, and so inequality has risen dramatically. Everybody knows that the rich save their money, while the middle classes and the poor spend theirs. So as more wealth has gone to the rich, a “savings glut” has occurred (thanks to the rich saving all that money) and at the same time a demand deficit has resulted (from the middle class and poor not having any money to spend).
There is so much wrong here that I hardy know where to start. But, first, let’s dispense with the notion that evil rich are hogging all the wealth. This idea was popularized by Thomas Piketty, but his book hadn’t been out in the US for more than a few weeks before his data were thoroughly debunked.(1) Moreover, even if you believed the data (Piketty himself tried to change it post-publication), the man himself allowed as how people on the left were drawing the wrong conclusions from it.(2)
Still, there is no doubt that, by many measures, the gap between the rich and everyone else has grown somewhat. But this is quite clearly less because the rich are hogging all the wealth than because the bottom half of the middle class has started getting poorer. This unfortunate phenomenon has resulted in part from globalization – as unskilled workers joined the global labor force, low-skilled workers in advanced economies suffered disproportionately. It has also been the case – as it always is – that lower skilled workers were hurt the worst by the Financial Crisis and the slow recovery from it.
Eventually, lower skilled workers – or their children – will get themselves retrained or re-educated and they will do fine.(3) In any event, the biggest generator of inequality over the last decade has been government policy – specifically, central banker policy. By driving up the price of the very assets the affluent own the most of and lower-middle-income people own the least of – stocks – the US Fed has singlehandedly converted inequality from a temporary to a nearly-permanent problem.
But even if we somehow believed that inequality had grown so much that it was affecting economic growth, we would then have to look at the assumption that the rich are savers and everybody else are spenders. And we would find that the opposite is more likely to be true.
Those of us who have worked with wealthy families for many decades know that the rich aren’t savers in any useful sense of the word – they are investors. If people with capital hope to maintain their wealth, much less grow it, they can’t engage in saving. If they did, inflation would eat them alive. No, they have to engage in investing, in putting their capital at risk in productive enterprises. And, in fact, if you look at the prescriptions most economists suggest to improve growth, they all begin with the need for more investment. So should we encourage more inequality so we can get more investment? Weird as it sounds, that’s the view of the Federal Reserve, which, by supercharging stock prices, has made the rich much richer.
And where, by the way, are all these middle class people who are doing all the spending? In China, for example, middle income people are notorious savers. Economists explain that inconvenient fact by pointing to China’s lack of a social safety net – people have to save for their old age. But if so, how do we explain those notorious savers in Japan and Germany, which have huge safety nets?
And even in the US, middle class folks are savers because they have to be: they will need money to buy a home, put the kids through college, and retire. In 2009, when the Fed reduced rates to almost zero, did the middle class spend? No, they saved, so the Fed had to move to Plan B: QE. Recently, gas prices plummeted, which was the economic equivalent of dropping billions of dollars down on the heads of the American middle class. But did they spend it? No, they saved it, resulting in no boost to the economy. In fact, a principal characteristic of the quality of middle-classness is the ability to plan ahead, to defer gratification, to save for the future.
Finally, if we’re worried that inequality might be harming economic growth in the US, perhaps we ought to look around the world and see what’s happening elsewhere. What we would find is that in every part of the world where economies are growing rapidly – China, India, the rest of Asia, Brazil – inequality is extremely high. In parts of the world where inequality is very low – Western Europe, e.g. – growth is stagnant. If we wanted to argue based on facts, then, we might conclude that what America fervently needs is a lot more inequality.
In short, inequality has nothing whatever to do with slowed economic growth, and in fact it might work the other way around. We’ll take a look at the demographic argument in my next post.
(1) See, e.g., Gramm and Solon, How to Distort Income Inequality, Wall Street Journal, 11/12/14; Reynolds, The Mumbo-Jumbo of ‘Middle Class Economics’, Wall Street Journal, 3/3/15; Giles and Giugliano, Thomas Piketty’s Exhaustive Inequality Data Turn Out to be Flawed, Financial Times, 5/23/14. By the way, “data” is usually a plural noun in scientific, economic and financial writing (and in erudite blogs), even though it’s usually a singular noun in common usage.
(2) Piketty himself believes that his data have little to say about inequality the past century or the current one: “I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century or for forecasting the path of inequality in the 21st century.” About Capital in the 21st Century, American Economic Review, 12/31/14.
(3) Economists Claudia Goldin and Lawrence Katz at Harvard found that 60% to 70% of the rise in wage inequality between 1980 and 2005 was explained by the growing divergence between earnings of high school graduates and college graduates. See Goldin and Katz, The Race between Education and Technology, Harvard University Press, 2010.
Next up: Slow Recovery or Secular Stagnation? (Part 4)
[To subscribe or unsubscribe, drop me a note at GregoryCurtisBlog@gmail.com.]
Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
