Inequality ramped up starting in the early 80's; GDP growth has dropped since then. Coincidence or cause?
Please consider the topic of "poverty traps" in future issues related to economic inequality. Poverty traps are real, and some could easily be eliminated. For example, even if just 1% of spending became part of an individual retirement plan, wealth creation would be greatly accelerated.
Also see https://www.bbc.com/future/article/20220803-citizen-future-why-we-need-a-new-story-of-self-and-society
The US GDP is 70% consumer spending, and the rest about evenly divided by government, company internal investment in capital, and exports. The ultra rich, which are are tens of thousands of families, will be spending more, while the middle class and poor will be spending less, obviously changing the demand for for products. The poor will look for a smaller apartment for lower rent, and cut food costs, probably resulting in a less healthy eating and later medical problems. Buy companies that sell low cost food, with lots of sugar and carbs. The middle class will wait longer to buy a first house, and cut corners, and will spend less on leisure travel to accumulate the house down payment, and pay the mortgage. Sell short cruise lines, and the housing industry. The top end of the wealthy, like Paul Allen, will commission the building of half billion dollar yachts. Now that he he has died, is kids cannot affort the upkeep and sold it off to a company that how leases it, to the filthy rich, that cannot affort a half billion dollar yacht, but can afford to lease one for a month. It is hard to know what to invest in to take advantage of the greater spending power of these people. They own multiple luxury homes, dominating the corner condo market in tall buildings, selling for 8 figures, that are only used a few weeks a year, instead of a luxury hotel suite, and digital one of a kind art.
The marginal extra disposable income of the poor and middle class, often go toward saving for owning housing, or paying the mortgage on it, or educating their children. These two things increase the intellectual capital and housing stock, as well as the savings as cash help finance industrial growth a bit. Whether Paul Allen's yacht is in his hands used for a few weeks a year, or leased out to 12 people a month at a time, it is of no value to the economic activity. There is simply a one time diversion of materials and workers to building the yacht, that could have gone to building another 1000 average houses that year.
This shifting of purchasing basic essentials, housing, and low end leisure and entertainment for large markets, drives lots of innovation, to give effective products at an affordable price. This results in permanent additions to the intellectual capital, knowledge, patents that go beyond the semiconductor lines that cost billions. The yacht was probably filled with electronics, that only a major navy can afford or needs, but the yacht market is thin, and there is no incentive to develop better technology for building them.
I think it pretty clear that shifting income to the high end will shift consumer purchases in a way that will lower growth. Of course it would take lots of input numbers and a good model to really make the case.
Milton Friedman, the University of Chicago economist, for decades was selling the idea that the stock holder was the only stake holder, and should get the primary reward. It really took hold around the Reagan administration, where labor was weakened in other ways, lowering their income. The result was the Jack Welsh GE CEO, who returns all of the value of a large corporation, in the form of dividends and stock buybacks. It has impoverished innovative companies R&D, like GE (now going through liquidation), Kodak and Xerox through bankruptcy, and IBM and HP revenue declines. This is an economic religious philosophy that has both lowered productivity improvements directly and exacerbated income disparity.
Reagan, Friedman, and Welsh both put more income into the hands of the wealthy, but also sold off, or let their productive capacity rust away. They contributed to both slower growth and inequality at the same time.
I believe that the term "trickle down" goes back to an Eisenhower Cabinet member, and former GM executive, who said "what is good for GM is good for the country."
Finally, the discussion reminds me of a secton of Alexis de Tocqueville in his book Democracy in America. He talked about the effect of the difference in income in France, which he knew well, where the Aristocrats had all the spending power, and having more money than god, were insensitive to price, and the United States, where 200 years ago, the big market was farmers, and few people had a large fortune, and likely it was not that huge. (the largest clump of capital was actually the market value of the slaves, but he did not write about that.)
He said that in France, the wealthy could afford exquisitely perfect products from the artisans, where as in the USA "just good enough" was the sweet spot, where you could make good money with a large market. I recall his mentioning shovels., where there was no point in making it any nicer than meeting a farmers needs. The dies, forms, and skills to build a good shovel for manure represent an accumulation of capital within society, but making hand made beautiful shovels, do not.
All of these things suggest to me that the income shift upward is bad for economic growth.
Lack of education (skills) can be a poverty trap. To me, the most pernicious poverty trap, is a system that encourages consumption that does not lead to wealth creation. Buy2invest policies are one way out of this trap. Great societies should not have a system that encourages consumption, without coupling to investments and wealth creation for individuals IMHO.
This may, or may not, be off topic. It comes from the AXIOS news letter that I get.
We heavily depend upon inventing new processes, and equipment, to make people more productive, to improve our standard of living, and grow our economy. Doing more with the same people is the goal. Sometimes it means doing the same amount with fewer people (think coal mining or making steel).
The labor department has the better part of a century of data on productivity. It is nearly always in positive territory, with the only question how far. It occasionally goes negative, usually it only goes negative at the beginning of a period of distress, when companies have too many workers, and have not adjusted to a slowdown yet.
It is a little startling to see an all time record breaking negative 2.5% just announced. It could be anything from the beginning of something really bad, some kind of redistribution, or temporary low productivity of new workers who are on the payroll but not productive yet, a general loss of productivity as workers changed industries, in response to COVID and supply chain effects, and are not yet very productive, or perhaps workers insisting on the benefits of working at home, and forcing the employer to accept lower productivity. In any case, watch this spot.
By Neil Irwin and Courtenay Brown · Aug 09, 2022
Hello from your Macro crew, now under new ownership.
Today, we look at the curious case of the (terrible) new readings on productivity, and gear up for a big inflation release due out tomorrow that should show cooling price pressures — at least, for the moment. ☃️
Today's newsletter, edited by Javier E. David, is 673 words, a 2½-minute read.
1 big thing: Productivity's big plunge
Data: Bureau of Labor Statistics; Chart: Axios Visuals
In the first half of the year, a lot more Americans were working a lot more hours. In the first half of the year, U.S. economic output declined.
That means productivity plunged, creating one of the weirdest economic phenomena we're seeing in a year full of them.
Driving the news: The Labor Department said today that labor productivity fell at a 4.6% annual rate in Q2, which followed a 7.7% drop in Q1.
Over the last year, productivity is down 2.5%, which is the lowest it has ever been in data that goes back to 1948!
Why it matters: The pathway to higher incomes, and a richer society, runs through generating more economic output for every hour of work put in. It is an alarming sign that the U.S. has been heading in the other direction so far this year.
It's likely worsening the inflation problem, in the sense that prices wouldn't be soaring as much if the supply of goods and services were rising as quickly as you might expect, given all that hiring.
From quarter to quarter, the productivity numbers can be volatile to the point of meaninglessness. They are a residual of two different data sets, with economic output (as measured in GDP) divided by hours worked (compiled as part of the employment data).
One distinct possibility is that the weak productivity numbers over the last year are a mirage, caused by measurement error.
If, as both the Biden administration and some private economists have argued, GDP is currently understating economic output, it would make the reported productivity numbers look worse than they are.
Yes, but: It would be surprising for data errors to be so big and so persistent as to cause the kinds of big drops seen over the last year. And there are plausible theories of some real shifts happening.
Employers have added 6.1 million jobs to their payrolls over the last year — about double the rate of hiring seen in even the best 12-month periods during the 2010s. Moreover, the nature of those jobs has shifted relative to before the pandemic, as industries retool themselves.
Just maybe, this breakneck hiring means that more workers are needing more time to get fully trained and up to speed. During that time, they are not contributing as much to productive output as they will eventually.
In this theory, there are simply some inherent limits in how quickly companies can onboard new workers while continuing to improve how efficiently they turn person-power into products.
The paradox: The booming labor market and falling labor productivity might be two sides of the same coin.