No Good Ending

Googlin "concentration of wealth over time" brought me to Skewed Wealth Distribution and the Roots of the Economic Crisis by David Barber, who writes:

Recently, Robert Shiller, a professor of economics at Yale University, penned a New York Times article warning that the fear of a double dip recession might actually bring on the dreaded event. “Ultimately,” Professor Shiller warned, “the risk resides largely in social psychology.”

As someone who is not a professional economist I do not know whether Professor Shiller’s views are typical of his field. What I do know is that while “social psychology” may have had some small role as a causal factor in the Crash of ’08, it was the actual structure of the American and world economies which brought on the crisis. And if in fact we enter a second round of this Crash, it will not stem from what Dr. Shiller calls a “weakness and vulnerability of confidence,” but will result from the same structural elements of our economy as those that brought on the “first dip.”


Agreed. The problem with the economy is not that confidence is low. Rather, confidence is low because of problems with the economy.

Part of the problem with the economy is that policymakers misunderstand policy, and therefore cannot fix the problem. And the longer the problem remains unresolved, the worse confidence gets. This problem has lasted so long now that economists like Shiller are losing confidence in monetary and fiscal policy. The great irony is that they point to the falling confidence of others as the source of the problem.

Confidence remained good for a long time after the economy went bad. It's easy to see which came first. The one that came later cannot be the cause. Barber is right; Shiller is wrong.

That said, let's look at David Barber's very next sentence:

American society’s fantastically skewed distribution of wealth stands as one of the main structural fault lines underpinning the Crash.


I wouldn't argue the point. But like the decline of confidence, the skewing of the distribution of wealth arose after the economic problem arose. And the skewing was no accident. It was part of a policy created to improve the economy. At least, it was if the skewing of wealth is anything like the skewing of income.

Mr. Barber, while he uses the word wealth, is actually talking of income in his post. He goes on to say that, because of the skewing, people started using more debt as a substitute for income:

And so debt has had to sustain our market economy: the more skewed the distribution of wealth has grown over time, the more frantically has the economy been forced to create a growing array of consumer debt mechanisms—subprime mortgages, payday loans, more and more intricately structured credit card debt—in order simply to maintain its functioning.


Again, I wouldn't argue the point. We have increased our use of credit largely to prevent a decline in our living standards. "Simply to maintain," as Barber says.

But again, which came first? The growth of debt came first. We called it credit-use then, and we grew it because it grew the economy. But we let private-sector debt accumulate until it overpowered all the benefit of credit-use. That was when the economy went into decline. That was 1974.

After the economy went into decline, policymakers began doing more to encourage the growth of credit-use. They mis-read the warnings our economy was giving us. They thought using even more credit -- and accumulating even more debt -- would fix the problem.

Following that line of reasoning, they ultimately encouraged the rise of "a growing array of consumer debt mechanisms—subprime mortgages, payday loans, more and more intricately structured credit card debt." In hindsight, we can see this was the wrong policy.

We must also observe that debt came first. Accumulating debt was the problem that caused our economy to falter, which led to a new spate of policies encouraging the use of credit, which made the accumulation of debt even bigger. It was insanity. It was a policy that could have no good ending.