Monday, January 6, 2014

Inequality and debt (2): Clonal: Debt drives Inequality

In comments near a year ago, Clonal said the growth of debt drives inequality:

The implication of the curve is that it drives inequality. For the 90%, real wages stagnated. Their debt load increased. The interest on this increased debt load went to the top 1%

The growth of debt drives inequality. I didn't appreciate it when Clonal said it. My thoughts were elsewhere. But if inequality increases, there must be a mechanism by which that increase is effectuated. Debt is the mechanism.

"The net worth of the bottom 99% stagnated while the top 1% reaped all the benefits," Clonal added. "In my way of thinking, the growth in debt is the path through which it happened."

The growth of debt is the path we followed on our way to greater inequality: Debt is the mechanism.

Then, as if to emphasize that by "debt" he mostly means private debt, Clonal adds: "The interest on the Government debt also disproportionately goes to the top 1%".

If your focus is inequality of wealth and income, I would ask you to pause for a moment and consider how the inequality came about. What drives inequality? What is the mechanism that effectuates inequality? Is this mechanism not the cause of the inequality upon which you focus? Is the cause of the problem not worthy of your attention?

If inequality is the problem, and excessive private debt is the cause of inequality, then excessive private debt is the problem.

Thanks, Clonal.

1 comment:

Jazzbumpa said...

If your focus is inequality of wealth and income, I would ask you to pause for a moment and consider how the inequality came about. What drives inequality?

Let's pause for a moment and consider wealth, which at any time t is a resultant of initial wealth [at t = 0] + accumulated unspent income + investment returns.

Each of these components provides an opportunity for inequality. My grandparents started with nothing, my parents with a little, me with a little more, and my kids with a little less. Thus endeth the American dream.

Unspent income, at least potentially, is greatest if income is the greatest. It can be negative if debt is accumulated. Debt is accumulated if one either does not make enough to cover basic needs, or if life-style spending exceeds income.

Investment returns quite naturally are concentrated among those having the greatest initial wealth, the highest incomes, or both. --> More inequality.

What is the mechanism that effectuates inequality?

A big part of it is initial inequality. The next biggest part is income inequality, which I just read yesterday is going largely to the finance sector. I've ranted before about this cadre of leaching rentiers. The third component is of two parts, A: investment returns, and B: debt, which can be conceived as negative investment.

A goes to those with the most, while B takes away from those with the least. It's especially virulent because B involves astronomically high credit card and pay day loan interest rates. So debt is a further driver of inequality, but more importantly, inequality drives debt.

And, of course, the whole thing is cyclical: the rich get richer [in some cases by anti-capitalism and the destruction of jobs, a la Mitt Romney] and the poor get laid off.

So - debt is a contributor to inequality, but far from the ultimate root cause.

Which is why I recommend going back to the conditions that led to and promoted the golden age of the American dream: strict financial regulation, steeply progressive marginal tax rates, and high inheritance taxes on great wealth.

Further, current policies are hostile to, not conducive to full employment. Unemployment = zero income, also driving inequality.

As further corrective measures, I'd also throw in single-payer universal health care, since medical costs are a main driver of personal bankruptcies, and free university level education, since the current system front loads adulthood with huge debt burdens [wealth <0 at t=0.]

Executive salaries are insane, and there is zero accountability for lousy performance among the elite. I have no idea how to correct that.

Debt is not the root cause. It's a symptom, an enabler and a secondary cause in the vicious cycle. There are policy solutions for much of this, but no political will to implement them, since the elite own the political system. [Note in particular the unraveling of the voting rights act of 1965 and the ongoing wave of Rethug voter suppression efforts.]

It's no accident that most relevant graphs have an inflection point or direction change ca. 1980. Around that time is when policy changed, to the detriment of us all.