David Howden on Inequality
David Howden has a Mises CA post talking about the usual stats on income inequality. They typically start in 1973. (In a later post I’ll explain why they choose that date; it’s to goose the numbers.) Here’s Howden:
What happened in the early 1970s to explain the divergence? Maybe it was the end of the Bretton Woods system, and with it any nominal restraint on the Federal Reserve (and other central banks) to inflate at will.
When Austrian economists talk about “non-neutral” money, income inequality is, in a way, illustrative of their point. New money has to enter the economy somewhere. Someone has to spend it. Those who get early access to central- and bank-created money get to spend it first. That has the effect of pushing up prices, and in the process impoverishing everyone else.
Since late 2008, the Federal Reserve increased the monetary base by over $3 trillion dollars (about a 350% increase). That’s almost $10,000 for every man, woman and child in the United States. Do you remember receiving a cheque in the mail signed by Ben Bernanke or Janet Yellen? Don’t worry, I didn’t get one either.
New money has to enter the economy somewhere. Someone has to spend it. Those who get early access to central- and bank-created money get to spend it first.
Yes, *before* prices have risen.
In a free market, the goods purchased with commodity money would result in less for everyone else, just like under paper money; and the marginal value and price would rise, just like under paper money.
The difference is that, since the new paper notes don’t represent anything, it is fraudulent to spend it as if it did.
The rise in paper money prices due to the spending of new paper money that was printed in excess of specie is the manifestation of the theft that occurred when the new money was first spent.
I wouldn’t use the word “fraud” to describe this. It is based on aggression and violation of property rights to be sure. The Fed isn’t lying about the fact that their toilet paper notes are not backed by economic value. They don’t have to lie about it, because the executive branch initiates force and coercion to keep the toilet paper in circulation.
In which case the notes are backed by force and quite evidently violence does have economic value.
Tel, initiations of violence destroys economic value.
Well, for the guy who gets to rob other people it seems like a good deal, very hard to believe that guy is worse off (from any point of view).
For the guy who gets robbed, his other choice was getting clobbered… so paying protection money is good for your health. He might be better off if he wasn’t being robbed, but given the fact that someone will rob him anyhow, seems like good value to go home and not get hurt.
Both parties end up (subjectively) better off than the alternative. That’s the precondition for any trade.
There is more than the one alternative you’re considering. Another alternative is NO initiations of force. Or successful protection against it by way of better security.
It is easy to rest on one’s laurels and be content with one’s best judgment, when you counterfactuals are all conveniently worse than the one you’re considering.
Major_Freedom, are you referring to legal tender laws? Because I don’t think there’s much if any actual enforcement of legal tender laws in the US, but I could be wrong.
Whether or not A actually uses force against B, is insufficient to know whether A is aggressing against B. Threats of initiating force are also included.
Apparently there isn’t even a law In this case: en.wikipedia.org/wiki/Legal_tender#United_States
“There is, however, no federal statute that a private business, a person, or an organization must accept currency or coins as for payment for goods and/or services. “
Keshav:
They get you by demanding you pay taxes in said currency, or through their courts mandating you pay debts in their currency, etc.
Sure, you don’t have to accept dollars in your exchanges. You can trade in gold if you want. But that doesn’t mean you could then pay taxes in gold. The IRS won’t accept gold. They will look at your gold income, and tax you in “effective” dollars. That means you have a dollar liability. That means you are sucked right back into the toilet paper.
That is what I mean by legal tender. Of course the state would not demand you only accept dollars. They would never be able to enforce such a thing anyway. Legal tender in our society is indirect, but no less coercive and “effective” from the state’s perspective.
Wrong on so many levels:
(1) “Maybe it was the end of the Bretton Woods system, and with it any nominal restraint on the Federal Reserve (and other central banks) to inflate at will.
The Bretton Woods posed no significant restraint on Fed creation of base money. The gold standard effectively came to an end in the 1930s. Bretton Woods was just a system where gold could be got for US dollars in the international payments system when foreign central banks wanted to swap US dollars for gold.
That didn’t stop the Fed and central banks all over the world from increasing base fiat money.
Yet the Bretton Woods was the apogee of Keynesian economics and saw unparalleled economic growth, real wage growth and falling income inequality.
(2) “Those who get early access to central- and bank-created money get to spend it first. That has the effect of pushing up prices, and in the process impoverishing everyone else.”
Written by someone who is still bizarrely incapable of understanding the very strong relative price stickiness in the modern world, owing to mark-up pricing. And to the extent that flexprices are raised by new money, the same thing happens in commodity money systems when money comes into a country via the capital account or when new gold discoveries are found. Does this mean both these things are objectionable or immoral? lol.
(3) “Since late 2008, the Federal Reserve increased the monetary base by over $3 trillion dollars (about a 350% increase).”
But we have an endogenous money system. The Fed normally just accommodates the demand for high powered money from the banks. That in turn is caused by the demand for credit money from the public. The growth in base money is a function of demand for loans, so despite what Howden says all members of the public who took out loans did benefit from the base money expansion.
Austrians are still pushing the exogenous money myth.
Wrong on so many levels.
Of course Bretton Woods imposed a constraint. Because US dollars were covertible to foreign central banks in gold, it meant that the Fed could not inflate by more than what foreign central banks demanded in gold, by way of USD conversion.
The whole reason Nixon closed the gold window was because they could not make good on their gold promises to foreign central banks at the promised ezchange rate, given the high rate at which the Fed wanted to inflate USD. By closing the gold window, the Fed could inflate a lot more becauss they no longer had to remit gold to foreign central banks who owned dollars.
You are so wrong it hurts.
“Written by someone who is still bizarrely incapable of understanding the very strong relative price stickiness in the modern world,”
This is not even a counterargument to the point being made. It is ad hominem.
More importantly though, you are confirming his point without even realizing it. What you call “price stickiness” is EXACTLY a consequence of inflation NOT affecting everyone’s incomes at the same rate and quantity. It is precisely inflation benefitting some at the expense of others, that is associated with prices not all rising at exactly the same rate as causes by inflation.
You don’t have the ability to spend more money through increased money ownership as soon as the Fed engages in an OMO. The banks have ownership of that money first. Only once it is spent or lent, and goods and wealth are exchanged the other way, away from you, will you then experience a rise in your income, but by that time, you’ve already experienced a reduction in purchasing power. Prices do indeed rise with inflation, LK. They don’t remain sticky forever. Inb4 “I never said they do.” I never said YOU said ao, it just has to be said in reaponae to your claim that prices are sticky.
Yes, the same process occurs with a free market money, but there is one crucial difference. YOU WOULD NOT BE FORCED TO PAY TAXES IN IT, which is to say you would not be coerced into accepting it.
The fact that we are forced to pay taxes in dollars, means that the wealth rediatribution takes on a coercive form, instead of a voluntary form, similar to how mere physical transfers of wealth between two people can be either theft or trade, depending on consent or lack thereof.
Your claims on endogenous money fall apart because credit expansion levels are ultimately constrained to the quantity of money the Fed creates ex nihilo. If the Fed stopped increasing M1 tomorrow, then the level of credit will be capped at a lower rate, as compared to continuous OMOs and continuous increases in M1.
If you want to preface a poat with “You’re wrong”, then at least try to add better ideas, instead of worse ones. Egads.
(1) “Of course Bretton Woods imposed a constraint.”
Notice how this is a straw man, a typical tactic by M_F.
My statement:
“The Bretton Woods posed no significant restraint on Fed creation of base money.”
(2) “More importantly though, you are confirming his point without even realizing it. What you call “price stickiness” is EXACTLY a consequence of inflation NOT affecting everyone’s incomes”
So on the one hand, there is “price stickiness”, but on the other hand you are so dishonest you cannot admit it exists, and that severely undermines the claims the inflation is major or only result of money supply expansion?
(3) “You don’t have the ability to spend more money through increased money ownership as soon as the Fed engages in an OMO. The banks have ownership of that money first. Only once it is spent or lent, and goods and wealth are exchanged the other way, away from you, will you then experience a rise in your income, but by that time, you’ve already experienced a reduction in purchasing power.”
The same thing happens when new commodity money enters a country and its banking system or when new gold discoveries are found. If what you are describing is immoral per se, then so would both the latter things.
(4) “Yes, the same process occurs with a free market money, but there is one crucial difference. YOU WOULD NOT BE FORCED TO PAY TAXES IN IT, which is to say you would not be coerced into accepting it.”
lol. And your claim is (3) is refuted.
(5) on endogenous money, you clearly have no idea what that concept even means. If it means that (1) central bank creation of base money is done in response to private sector demand for it, (2) the money multiplier is a myth and (3) the central bank simply doe snot have direct control over the quantity of the broad money supply.
These are facts.
LK, you’re being deliberately dense.
I believe in the face of his bankrupt theory he has to be, if he refuses to accept its bankruptcy.
Clear thinking makes it impossible to think like LK.
The same thing happens when new commodity money enters a country and its banking system or when new gold discoveries are found. If what you are describing is immoral per se, then so would both the latter things.
It’s the misrepresentation of the value of that which the paper is claimed to represent, that is immoral.
(No, the Fed doesn’t claim that FRNs represent anything anymore; but most people believe to the contrary.)
An increase in the supply of commodity money is an increase in the supply of a good, which means that the marginal value (from which all prices derive) of that good will go down (all other things equal).
So, when prices rise in response to an increase in the supply of commodity money, those prices correctly communicate the information that the value of that money has gone down, relative to the goods that are bought with it.
(Or, in other words, rising commodity-money prices correctly communicate the information that the value of those goods which are bought with it have risen, relative to the commodities in which they are priced.)
An increase in FRNs, however, doesn’t increase the supply of anything else, and so the prices in terms of them do not communicate the correct marginal value of those goods which are bought with it.
(Note: Prices in commodity money always communicate the correct marginal value, since “marginal” refers, in part, to the supply of a good [the other part being the next lower ranked subjective preference which an additional unit of a good would satisfy].)
Further, FRNs not representing anything in particular (anymore), they cannot serve the purpose of money, which is to communicate information about the marginal value of a good to the individual.
LK:
“(1) “Of course Bretton Woods imposed a constraint.”
” Notice how this is a straw man, a typical tactic by M_F.
My statement:”
“The Bretton Woods posed no significant restraint on Fed creation of base money.”
Are you kidding me? The word “significant” is totally subjective when left by itself. You could always appear to be right no matter what the response is, by simply leaving undefined the word “significant” and then claiming that any response to that, which of course would have to make an assumption of exactly what is meant by the term, to be a “straw man.”
That isn’t debating or making a good argument. That is just twaddle and rhetoric masquerading as a specific argument.
Ok LK, just assume that I included “significant” in my response to you, and I also left it undefined.
I say the constraints were “significant.”
You say the constraints were “not significant.”
And where does that leave us? No better off than before, that’s what.
If you want to get more specific, then why can’t you just explicitlg admit that Bretton Woods did impose “a” constraint? Who gives a care what your subjective belief is as to the “significance” of it? Let us just agree that yes, it imposed a constraint.
If you can admit it did pose a constraint, then would it matter if we call this positive difference “significant” or otherwise? The point that should be focused on is whether it did pose a constraint or not.
Then we can talk about counter-factuals about just how fast a central bank can print M1 with and without gold covertibility to foreign central banks.
I don’t care about your opinion on how “significant” this was.
“(2) “More importantly though, you are confirming his point without even realizing it. What you call “price stickiness” is EXACTLY a consequence of inflation NOT affecting everyone’s incomes”
“So on the one hand, there is “price stickiness”, but on the other hand you are so dishonest you cannot admit it exists, and that severely undermines the claims the inflation is major or only result of money supply expansion?”
I never claimed prices instantly adjust to changes in demand. I have always accepted that prices take time to adjust, or what you call “price stickiness.”
YOU aee being dishonest for attributing to me a position I do not even hold!
Back to the point however, which you always always try to wiggle out of through straw man attacks and red herrings:
It is precisely the nature of inflation that Fed OMOs do not raise everyone’s bank balances equally nor at the same time. Inflation raises the cash balances of only a portion of the population first, the primary dealers officially, and likely many others “unofficially”.
Do you deny this?
It is only after the initial recievers spend that money and acquire real wealth, or claims to real wealth (e.g. stocks), that other people then experience an increased bank balance, and along the way, prices do not remain perfectly flat and rigid, but they increase to a definite positive degree, which we observe over time as rising price indexes such as CPI, PCE, and PPI.
Do you deny this?
“You don’t have the ability to spend more money through increased money ownership as soon as the Fed engages in an OMO. The banks have ownership of that money first. Only once it is spent or lent, and goods and wealth are exchanged the other way, away from you, will you then experience a rise in your income, but by that time, you’ve already experienced a reduction in purchasing power.”
” The same thing happens when new commodity money”
So you admit it. Thank you. We’re done.
Commodity money has the same process, yes, BUT, in a free market you can produce your own gold or silver. You are not LEGALLY banned from it, and you would not need a government LICENSE to do it either. ANYONE could be the first receiver of new commodity money. As a result, no, there is no coercive wealth transfer, as there is in our present statist money system.
“(4) “Yes, the same process occurs with a free market money, but there is one crucial difference. YOU WOULD NOT BE FORCED TO PAY TAXES IN IT, which is to say you would not be coerced into accepting it.”
lol. And your claim is (3) is refuted.”
Lol, no, it is only reconfirmed for the millionth time.
“(5) on endogenous money, you clearly have no idea what that concept even means.”
I do, and it is precisely because I know that I know you’re wrong.
“If it means that (1) central bank creation of base money is done in response to private sector demand for it, (2) the money multiplier is a myth and (3) the central bank simply doe snot have direct control over the quantity of the broad money supply.”
You can interpret the central bank as “responding” to economic statistics all you want. It doesn’t mean the central bank is not exogenously adding to the money supply.
If a counterfeiter only hits CTRL-P when he observes certain statistics, like you making fallacious claims, then (aside from the fact that he would be hitting print more than Bernanke did) that doesn’t make the counterfeit dollars “endogenous”. They would still be exogenous, as they are exogneous to the market process which of course precludes such fraud.
” These are facts.”
No, those are your false opinions.
What is “very strong relative price stickiness” anyway?
Relative to what? Strong means what?
It means prices don’t adjust as quickly to changes in demand to satisfy LK’s arbitrary standard of self-righteousness.
Can I measure against that standard? Does anyone publish unit conversion tables?
If the price of software changes faster than the price of tins of beans, does that mean the software is changing price too quickly, or the beans are changing price too slowly?
Which item is “strong” in this case, the beans or the software?
Depends on how unequal the incomes of the corporate executives are. The ones with higher incomes are not changing their prices quickly enough.
This is the MMT-flavored analysis to which LK refers. This just says to me that the current funny money system is an even bigger monstrousity than was previously believed:
Firstly, the underlying concept of the money multiplier is that in order to make loans banks first require people to deposit money. However, this is simply not true. In actual fact when banks lend they create deposits:
This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to. Piti Distayat and Claudio Bori, Bank for International Settlements (2009)
Nor do banks need reserves in order to make loans. As Alan Holmes, who was senior Vice President of the Federal Reserve Bank of New York at the time remarked:
In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)
https://www.positivemoney.org/how-money-works/advanced/the-money-multiplier-and-other-myths-about-banking/
An “adequately capitalized” banking system can always fulfill any demand, under any regulatory system, for suitable definition of “adequate”. That doesn’t tell us much, other than that the Bank of International Settlements obviously thinks that there must be some difference between “adequately capitalized” and
and a “less that adequately capitalized” system. Thus, implicitly they do understand that a constraint exists.
In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.
Ponzi scheme.
Yet the Bretton Woods was the apogee of Keynesian economics and saw unparalleled economic growth, real wage growth and falling income inequality.
The argument is whether this all occurred because of or in spite of the Bretton Woods system. Further, the more that system resembled a free system vs. the post 1971 system, the better it will look. It is no evidence that Keynesianism is anything but a scam and a hoax.
Re: Alleged “price stickiness”: If firms are profitable maintaining prices in bad times, who cares? This does not change the fact that bad times are caused by violent intervention.
Suppose it is true that it was more a factor of regulatory restrictions as opposed to structural restrictions that prevented ridiculous levels of funny money emissions 1945-1971. Having a funny money system solves nothing and it is always available to create ridiculous levels of funny money emissions. I suppose it is good to know that certain regulatory schemes mimic freedom more than others. Other than that, who cares?
This again does not change the fact that bad times are caused by violent intervention. Further, the continuing dispute is about how the world works and none of LK’s anecdotes change the nature of action, the nature of voluntary exchange, the necessity to economize in order to live and the nature of economic calculation.
Yet more proof that you do not know the meaning of the word “anecdote”.
Where are all the previous “proofs” of this?
It’s interesting that LK disputes the fact that the monetary system changed significantly in the early 70s, but he doesn’t seem to dispute the fact that this is also when the inequality stats really took off.
Does he have an alternate explanation? What happened in that timeframe other than Nixon ending Bretton Woods that may have caused this?
I do not dispute that there was a change in the monetary regime after 1971. I just dispute **how significant it was.**
Far more significant was the abandonment of Keynesian macro-policy, grossly unfair tax reforms, and new and incompetent systems of financial regulation
Ok, now it makes sense.
LK is only trying to minimize the “significance” of the abandonment of Bretton Woods so as to peddle his Keynesian ideology as the “significant” event. We can’t call anything “significant” at the time, lest we steal the spotlight from his nonsense.
Smoke and mirrors, look over here! Don’t look over there!
Income and wealth inequality started increasing in the 1980s, not the 1970s
No, it started prior to the 1980s, “Mr. I am trying to blame it on Reagan for political ideology reasons.”
No it started in the 1980s:
http://piketty.pse.ens.fr/files/capital21c/en/pdf/F0.I.1.pdf
The Reagan boom was pretty much a Keynesian boom. If it started in the 80s, it started in the 80s. That doesn’t help the Keynesians or funny money advocates.
The rising income inequality under Reagan was caused by his changes to tax rates for income groups, not his stimulus
What is your explanation for the steep rise during the Clinton years? He raised taxes in 1993.
No, your chart shows it started in 1970. That was the low.
“your chart shows it started in 1970”
wow, you genuinely have no interest in the truth at all do you.
Not your version of “the truth.” BTW, how do you explain the steep climb during Slick Willie’s reign? Since you’re so interested in “the truth…”
Wow, you must be totally blind Philippe.
This is amazing, isn’t? Two different people looking at the exact same chart, and two different interpretations.
Philippe, do you not see the low at 1970?
The graph looks pretty flat between 1970 and 1980.
“Pretty flat” means there is maybe one or two brain cells, metaphorically speaking of course, that are telling you that 1970 was lower than 1980, but you just can’t get yourself to say it and thus nullify your anti-Reagan ideology.
No, Philippe, even Piketty and people relying on his stats will often say things like “From 1973-2005, the top 1% saw its share of income rise by x%…” If you start it in the 1980s you miss out on the decent rise from 1973-1980.
” decent rise from 1973-1980.”
WTF are you talking about? That rise is a minor one, no more significant than the ones in the mid-1960s or mid-1950s.
WTF are you talking about?
LK, you’re starting to get pretty annoying again. Be civil, or leave, thanks.
No problems.
But just to clarify, are you referring to this graph?:
http://piketty.pse.ens.fr/files/capital21c/en/pdf/F0.I.1.pdf
You conveniently ignore the years Bill Clinton was president.
LK,
Glad you admit inequality started increasing earlier than 1980.
There’s an easy way to resolve this dispute, wages definitely stagnated in 1973, when compared to the previous decades. So something *significant* happened. Thanks to Reagan and Volcker (or because of those idiots) wages started increasing again but unequally than before.
Sound reasonable to everybody?
Anybody?