Finding a New Macroeconomics: (7) Inflation, “Conflation,” and the “Inequality Trap”

During the Great Depression, to his credit, Keynes bucked his colleagues by claiming that government spending could revive a depressed economy. But, caught in the neoclassical paradigm, he got the mechanism wrong. Keynes argued, as does Krugman today, that the problem is a lack of consumer demand. Consumers want to save instead of spend. Lacking demand, businesses won’t invest. So there’s a “savings glut” or “liquidity trap” — billions in cash sloshing around seeking in vain for investment opportunities. The solution: government should borrow some of that loose cash and spend it, no matter on what: war, high-speed rail, fixing potholes, or education. Deficits be damned.

In my view, we don’t have a “liquidity trap”; we have an “inequality trap.” What’s that? An “inequality trap” happens in a downturn, when the One Percent, big corporations and banks hoard cash, starving small businesses for capital. The greater the inequality and deeper the downturn, the tighter the trap. [1] – Mary (Polly) Cleveland

Robert Reich’s book “Aftershock” reminded me that a market economy is a machine, and that the discipline of “economics” is supposed to explain how the machine works. When the operation of the machine is poorly understood, or completely misunderstood, the translation of economics into coherent government policy becomes confusing and convoluted.

Reich related the story of how Marriner Eccles, a wealthy industrialist and banker, had become Roosevelt’s Secretary of the Treasury and helped to guide the U.S. economy out of the Great Depression. [2] From his career and from the Great Depression, Eccles had gained some valuable insights:

When Eccles’s anxious bank depositors began demanding their money, he called in loans and reduced credit in order to shore up the banks’ reserves. But the reduced lending caused further economic harm. Small businesses couldn’t get the loans they needed to stay alive. In spite of his actions, Eccles had nagging concerns that by tightening credit instead of easing it, he and other bankers were saving their banks at the expense of the community — in “seeking individual salvation we were contributing to collective ruin.”

Economists and the leaders of business and Wall Street — including financier Bernard Baruch; W.W. Atterbury, president of the Pennsylvania Railroad; and Myron Taylor, Chairman of the United States Steel Corporation — sought to reassure the country that the economy would correct itself automatically, and that the government’s only responsibility was to balance the federal budget. Lower prices and interest rates, they said, would inevitably “lure ‘natural new investments’ by men who still had money and credit and whose revived activity would produce an upswing in the economy.” Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so severely disabled. Such investments, he reasoned, “take place in a climate of high prosperity, when the purchasing power of the masses increases their demands for a higher standard of living and enables them to purchase more than their bare wants. . .”

In questioning the standard arguments of the “free market” crowd, which remain the same today despite a different environment for innovation and change, Eccles had anticipated the basis of Keynesian economics.  The truth was, and still is, that government action is needed to lift an economy out of a depression.

The Keynesian Playbook

Keynes’s ideas for how to revive a recessed or depressed economy are pretty straight-forward. Any student emerging from a college course in introductory economics or macroeconomics should have something like this summary of the Keynesian playbook in mind:

1. Monetary policy: Through various measures to control the money supply and the interest charged to private banks, the (private) Federal Reserve System can influence the interest rates charged the public on loans for investment or consumption. High interest rates discourage borrowing and growth, and low interest rates encourage borrowing and growth;

2. Fiscal policy: When monetary policy is insufficient to maintain full employment, the central government can borrow money and inject it directly into the economy through government spending. Such “deficit spending,” called “stimulus,” is a conscious effort by government to increase economic activity and incomes.  “[E]ven if you don’t believe that stimulus is forever,” Paul Krugman recently reminded us, “Keynesian economics says not just that you should run deficits in bad times, but that you should pay down debt in good times.” [3]

The Keynesian playbook envisions a roughly balanced federal budget over time; borrow when you must, and pay it back when you can.  The first thing I noticed when I started earnestly studying the inequality problem, however, was that over nearly the entire period of inequality growth since 1980 our federal government has borrowed tons of money (the national debt now totals nearly $16.8 trillion) without paying it back. [4] That’s nearly one year’s GDP. [5] Shouldn’t that have been considerably more than enough to stimulate the economy back to full employment? In fact, shouldn’t such a huge expansion of the money supply have resulted in a devastating inflationary spiral? Why, instead, has there been no inflationary spiral, and why are we in a depression? When these questions hit home, I set out to answer them: The explanation, logic insisted, had to be related to inequality growth.

The Keynesian Mistake 

With apologies for the redundancy we would not need in a single text, let’s review some key points established in prior posts in this series: Keynes’s General Theory is a “full-employment” model, built around investment and consumption, that failed to take into account the distribution of wealth and incomes. Keynes correctly understood that market economies are inherently unstable, and are not self-correcting, and he established that stimulating demand will counter unemployment, improving income and growth.

He ignored, however, potential changes in income and wealth distribution, and a major factor about which Henry George, during the previous depression, had given a great deal of thought: economic rent. Keynes expressly assumed that income at full employment implied full production, i.e., optimal resource utilization, because he believed that “the volume of employment” and “the quantity of effort currently devoted to production” are “almost the same thing” (post 1, note 6). However, some incomes can increase dramatically with little or no change in production — just ask a successful hedge fund manager — and when they do, income is automatically redistributed up, and inequality grows. 

All such “unearned income” is misleadingly reported as “GDP,” so aggregate GDP, the measure of reported income, is not equivalent to aggregate production as Keynes had assumed.  Apparent income does not equal real income growth. Rather:

Real income  =  Apparent income  –  Redistributed rent

Likewise change (∆) in apparent income, or apparent income growth, is not equivalent to real income growth:

∆ Real income  =  ∆ Apparent income  –  ∆ Redistributed rent

This difference between apparent and real income represents the difference between prosperity and poverty, as Henry George first perceived 135 years ago.

Joseph Stiglitz now argues that such excess earnings pervade the economy, and Mason Gaffney’s core thesis is that “the structural flaw in capitalism is our tolerance of unearned income and wealth” (post 4). Even Keynes himself intuitively endorsed that understanding when he said of the “inequitable” distribution of his day: “Much lower stakes will serve the purpose equally well, as soon as the players are used to them” (post 4, note 7). In other words, economies can function optimally without nearly as much inequality. Missing from that thought, however, is that optimizing growth and prosperity — indeed economic survival — requires much less inequality.

A Two-Economy Perspective

A “two-economy” perspective is needed to grasp this important fact. Again, that growing income inequality causes reduced growth and economic stagnation is something that could not have been understood, and with a few exceptions including Simon Kuznets in the 1950s had not even been suspected, until reliable long-range distributed income data became available. Two separate segments of the economy must be conceptualized along inequality lines, and I have been referring to these two segments as “the top 1%’s economy” and “the bottom 99%’s economy.” An even better conceptual dividing line today appears to be between the “top 0.1%’s economy” and the “bottom 99.9%’s economy.” Either will suffice for conceptual purposes.    

Conceptually, the two segments function differently.  Returns on investments, and profits (economic rents), are in the top portion, and the bottom portion consists of labor incomes and consumption. [6] Of course, in any economy everyone participates in consumption and many individuals receive more than one type of income. The important distinction between the two segments is that individuals near the bottom of the income ladder receive almost entirely labor income, and consume all or nearly all of it, often accumulating debt and establishing negative net worth.

Looking at the economy in this segmented fashion allows an immediate appreciation of the main macroeconomic mechanism of inequality growth.  Keynes’s model led us astray because aggregate consumption is not independent of income distribution: As income concentrates more and more in the top 1%’s economy aggregate consumption, and consequently aggregate income growth, declines sharply. I have found only a handful of studies of the propensity to consume out of very high incomes, and more such study is needed.  At the bottom end of the spectrum, roughly the bottom 90% of income earners on average spend all of their incomes, and then some. The important point is that the aggregate “marginal propensity to consume” is useless, for it masks the decline in aggregate income growth caused by growing income inequality; it hides income redistribution.  

Here again is the table of Census Bureau data from our discussion of the impact of growing income inequality on overall GDP growth in the third post in this series (here):

U.S. average annual real income growth

                                        1947 to 1979                1979 to 2010

Lowest fifth                     2.5%                                -0.4%

2nd fifth                           2.2%                                  0.1%

Mid fifth                           2.4%                                  0.3%

4th fifth                             2.4%                                  0.6%

Top 5th                             2.2%                                   1.2%

The table shows that the income inequality growth that began during the Reagan administration resulted not only in an unequal distribution of income growth, but also in considerably less total growth for everyone.  There is exponentially more growth, moving up through the top quintile, and as discussed above, much of the growth high in the top fifth was not even real growth, but “profit” (economic rent) instead. The latest data from Piketty and Saez show that no growth has taken place since 2008 below the top 1%, which implies that this trend is not only continuing but accelerating.

One point is now crystal clear: The “supply-side” a.k.a. “trickle-down” notion that making the rich richer boosts the economy as a whole is diametrically the exact opposite of the truth: As the very rich get richer everybody else (not just the poor) get poorer, and the  economy declines significantly overall. These effects of the very rich getting increasingly richer is what we should expect, when we think it through: The active money supply and the bottom 99%’s real economy are increasingly constricted.

Two related points are equally important: Keynes had accurately perceived that any decline in consumption will have a stagnating effect. But, unlike a drop in the propensity to consume out of current income, which was the focus of his General Theory, income redistribution involves longer-term, real structural changes in an economy — jobs, businesses, wage and salary levels, etc., are changed: (1) As these changes get built into the structure of the economy, they become harder to reverse; it’s a far more serious problem than just affecting consumer and investor “confidence;” (2) Unlike the propensity to consume, income inequality is not bounded by the current level of aggregate income; lower consumption out of a given aggregate income results, in the first instance, in increased saving, but income inequality can keep growing and reducing aggregate income indefinitely, until nearly everyone is broke.  (The economy collapses completely, of course, as the Gini coefficient [7] approaches 1.)

Thus, a trend of growing income inequality reduces growth far more substantially than would any change in the propensity to consume, making market economies vastly more unstable than Keynes had thought or than he reflected in his model. Paul Krugman correctly reports: “The disastrous turn toward austerity has destroyed millions of jobs and ruined many lives.” [8] He has yet to account, however, for the underlying reason austerity is so destructive today.

This gets us back to Polly Cleveland’s observation from the opening quotation: “Keynes argued, as does Krugman today, that the problem is a lack of consumer demand. Consumers want to save instead of spend.” But inequality growth requires reduced consumption even when consumers do not want to reduce spending. This is where the “two economy” perspective is needed: Consumers in the top 1% economy want to save most of their rapidly increasing incomes because they neither need nor want to spend very much of it. Correspondingly, the fact that people in the bottom 99%’s economy are losing their jobs and incomes is not because they have collectively decided to spend less, but because they have less money to spend (and are compensating by running up household debt). So demand has fallen and saving has gone up, but not because anyone has made a conscious decision to reduce spending and consumption.  The answer therefore is not to try to stimulate consumption and investment; the answer is to reverse inequality growth. 


Inflation is an increase in prices for goods and services and a decline in the value of money. Arguments about the causes and effects of inflation have dominated economic debates since Keynes started thinking in macroeconomic terms. One thing is certain: higher prices (all else equal) requires an increase in the money supply.  Keynesian monetary and fiscal policies both involve expanding the money supply, and injecting more money into circulation.  The ultimate question is how much of this stimulation an economy can absorb before real growth lags behind increases in the money supply, and prices start rising.

That issue suffused the famous debate between Keynes and the Austrian economist Friedrich Hayek, back in the 1930s.  Nicholas Wapshott’s 2012 book Keynes Hayek: The Clash That Defined Modern Economics [9] is a fascinating account of the “Great Debate” which, in its early years, was highly contentious as each professed the deep failings of their adversary’s communication and comprehension skills (among other things). Similar exchanges between Hayek and Keynes’s bannerman, the Italian economist Piero Sraffa, even seemed incomprehensible to many of their contemporary economists. [10] When the dust had settled, it appeared the Great Debate was over two ultimately very different approaches to developing economic theories:

Hayek was convinced that the economy as a whole was an elusive subject that could only be understood, and even then only partially, by considering the interaction of individuals in the marketplace. Keynes, however, was in the process of making a breakthrough in thinking that would emerge only on publication of The General Theory. He believed an economy could best be understood by grasping the big picture, looking from the top down at aggregates of such elements of the economy as supply, demand, and interest rates. Hayek was stuck in what came to be known as “microeconomic” thinking, looking at the different elements such as costs and value that made up an economy, while Keynes was making the leap to a new way of considering the working of the economy: macroeconomics, which appraised the economy as a whole. It is little wonder that the arguments between Keynes and Hayek before The General Theory was published settled so little. . . [11]

Some remnants of static microeconomic thinking, such as “equilibrium” concepts and the false idea that economies are self-correcting, survive today in macroeconomics. The question of the inflationary impacts of monetary expansion is relatively easier to resolve. Following in Hayek’s footsteps, Milton Friedman put it this way:

Just as an excessive increase in the quantity of money is the one and only important cause of inflation, so a reduction of the rate of monetary growth is the one and only cure for inflation.  The problem is not one of knowing what to do.  That is easy enough. Government must increase the quantity of money less rapidly. [12]

That seems unexceptionable; but less rapidly than what? Modern Keynesians, like James Tobin, appear to have been more certain of the need for government intervention to counter natural decline than conservative economists like Friedman, whose bias against government participation in the economy led him to oppose fiscal policy altogether, and to insist that economies are self-correcting.  

But here’s the rub:  The debate between the Chicago School and Keynesians today, as was the Great Debate between Keynes and Hayek in the 1930s, is “caught in the Neoclassical paradigm,” as Polly Cleveland puts it.  The entire debate is beside the point, because it overlooks the redistribution of wealth and incomes. Assuming a constant, unchanging distribution of wealth and incomes, both sides assume that a steady, base-level demand will already be in place to naturally support price increases when fiscal or monetary policy expand the money supply. But with growing inequality, the air has already leaked out of that balloon, and any stimulus from deficit spending can, at best, only slightly temper the growing decline.  There is no prospect of inflation.

So the problem is not inflation — it’s conflation:  That is a term that came to me as I was thinking about the intersection of the contraction of the active bottom 99% economy caused by growing income inequality with the inflation created by expansion of the money supply through fiscal or monetary policies.  Here’s my definition:

Conflation” n.  A circumstance in which monetary inflation caused by an expansion of the money supply is offset by a constriction of the active economy through massive income and wealth redistribution.

Coincidentally, “conflation” is already a word, with meanings that are not inapt here: According to on-line Merriam-Webster, it refers to a “bringing together” or “melding,” a “fusion,” or “amalgamation;” and yes, “confusion.” 

Let’s take a for instance. Paul Krugman recently wrote:

Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.  Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become “inflation nation.” * * * And now, sure enough, the Fed really is worried about inflation.

You see, it’s getting too low. * * *

It’s not hard to see where inflation fears were coming from. In its efforts to prop up the economy, the Fed has bought more than $2 trillion of stuff — private debts, housing agency debts, government bonds. It has paid for these purchases by crediting funds to the reserves of private banks, which isn’t exactly printing money, but is close enough for government work. Here comes hyperinflation!

Or, actually, not. From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a “liquidity trap,” a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.

Economists who had studied such traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment. [13]

But we have to ask: How could inflation be getting too low while the Fed and Ben Bernanke are, well, spending like a fleet of drunken sailors? Are “the usual rules of economics” suddenly in abeyance, or have they been trumped by the impact of redistribution?  Isn’t all that money, somehow, getting hung up in the top 1%’s economy, not finding its way into active circulation?  And these questions as well: Doesn’t the data really mean that conflation is shrinking the active money supply faster than actions by the Fed can grow it? Isn’t Paul Krugman’s “liquidity trap” really an “inequality trap”?

The Inequality Trap

It’s no surprise that monetary policy won’t work in these circumstances. Polly Cleveland has it right: There just is not enough prospective return for corporations to invest in more production, or for banks to lend money for such investments — so they hoard cash, just as Eccles said the banks did during the Great Depression:

The multinationals are indeed awash in cash. In an article appropriately titled, “Dead Money,” The Economist reports how major corporations trim real investment — such as new technology — while piling up cash. For example, firms in the S&P 500 held about $900 billion in cash at the end of June, up 40 percent from 2008. The Economist dismisses the conservative claim that “meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment.” Why? All big multinational firms have been hoarding cash, not just U.S. – based ones; it’s been a growing trend since the 1970s.

The big banks are also awash in cash. For example, JP Morgan’s September 2012 balance sheet shows that out of $2,321 billion in assets, JP Morgan holds $887 billion in “Cash and Short-Term Investments” — over a third! [14]

Cleveland posits that Keynes got the mechanism wrong: “Keynes argued, as does Krugman today, that the problem is a lack of consumer demand. Consumers want to save instead of spend.” I have no wish to quibble over semantics, but Keynes was correct that reduced “demand” causes the problem of decay and instability; we might even say that declining consumption is the instability problem; being in a depression means that most people just don’t have enough money any more. But Cleveland is absolutely correct that the mechanism for recovery from an inequality trap is not to try to stimulate more demand; the real “demand” never left the bottom 99%’s economy, only the money did. Hence the cure requires reducing inequality itself: That is the point Keynes overlooked, and Krugman has yet to recognize; and that is the salient point here.  

After all, what Cleveland has described is exactly the description of a liquidity trap; but it’s a question of degree. Think of the “inequality trap” as a monster liquidity trap: When the bottom 99%’s economy is rapidly shrinking from inequality growth, there is far less reason for capitalists to invest in producing things for consumers to buy — they’ve already taken too much money, and what they’ve left behind for the bottom 99% to function with can’t even support the current prices. Conflation is deflationary, but instead of prices falling, inequality grows.

Put most simply and directly, the top 0.1% is systematically removing the money supply from the bottom 99.9%’s economy, and the result is hundreds of billions of excess dollars “sloshing around” at the top with no apparent place to go.  

I’m running out of polite ways to say this: Growing inequality depresses growth. Because, as Krugman does point out, liquidity traps only occur in a depression, and because depressions are the natural result of the concentration of income and wealth at the top, any liquidity trap is an inequality trap.  So I’d like to stop mincing words from here on out: Cleveland’s term “inequality trap” is such an exquisitely accurate term for what is really going on, I suggest we use it, and drop the term “liquidity trap” entirely.

Cleveland has reached the same major conclusions I have reached, among them: “An ‘inequality trap’ requires different measures from a ‘liquidity trap.’ It requires raising taxes on the One Percent and the big corporations — instead of borrowing from them and running up the deficit.” And, moreover: “Today’s depression is a small business depression.” In a more recent post, she emphasizes that inequality growth is responsible for the decline of middle class investment:

Joseph Stiglitz says that “Inequality is Holding Back the Recovery“. He’s right, but he gives the wrong reason, that “our middle class is too weak to support the consumer spending that has historically driven our economic growth.” * * * The real reason inequality stalls the economy is that natural resources and capital are monopolized at the top, kept away from the middle class that could invest them far more productively. * * * In my view, it is not the loss of middle class spending that holds back the economy; it is the loss of middle class investment. [15]

The CBO income inequality analysis confirms that small businesses are being absorbed by the top 1% at an alarming rate.  I would not put it the way Cleveland has, however: The loss of middle class spending does hold back the economy; declining consumption is the engine underlying the spiral of declining income and growing inequality. The argument we must press with mainstream Keynesians is that the middle class has not decided to spend less, it has simply been left with less money to spend — and less money to invest as well. I believe that is essentially what Joseph Stiglitz is saying, and what separates his perspective from Paul Krugman’s.

Conflation and the National Debt

What I have been arguing for some time is that income and wealth distribution is the most important factor determining growth and prosperity. The instability created by income redistribution is far more substantial than that caused by mere shifts in demand. We can see that in the history of the last thirty years.

As we noted at the top, the National debt now totals nearly $16.8 trillion. Paul Krugman discusses demand stimulation as if it’s just a question of more federal borrowing, as if there is a separate category of debt the proceeds from which can be used make the economy grow, instead of continuing to decline.  [16]  But there is only one kind of debt, and despite borrowing more than $16 trillion over the last three decades, the U.S. economy is gradually sinking into Great Depression II.

It’s important to remember that the interest burden on the national debt is rapidly growing. In November of 2012, the Congressional Budget Office (CBO) reported that taxpayers currently spend $220 billion per year for interest on the debt, and that amount is expected to rise to over $1 trillion a year by 2020. [17] Servicing the debt in these circumstances is such a significant problem that before long, with the continuing decline in its tax base, the federal government will be able to afford to pay for little else.  As we’ve discussed, cutting back government spending on other things in a manic push for “austerity” is such a suicidal idea that there is no workable alternative to substantially increasing tax progressiveness and significantly increasing taxes on top incomes.   

It’s also important to remember that to the extent the debt is owned by wealthy Americans and their corporations, the national debt effectively functions as an inequality machine.  It used to be said that the national debt is “money we owe ourselves.”  However, the top 1% of U.S. income earners hold about 70% of the financial wealth, so the lion’s share of national debt interest paid to Americans goes to the top 1%.  Much of the increasing interest obligation also, problematically, accrues to overseas investors and foreign governments.  Thus, even if more deficit spending could be added to try to stimulate jobs and growth, these problems would be exacerbated.  

As we have been discussing, wealth transfers to the top 1%’s economy constitute  economic rent, in the form of “unearned income”; that is, money collected via monopolistic market power in excess of the expenses and capital costs necessary to produce the required return on the capital investment.  By definition, the money required to pay these costs has already been spent out of gross receipts, so all that is left is economic rent.  Future posts in this series will refine the concept of economic rent.

For now, recall that taxation at the top controls the amount of economic rent that is retained in the top 1% and effectively removed from the bottom 99%’s economy, retired from active circulation. After thirty years of accumulation, this idle wealth  measures in the trillions. And it’s much more than financial wealth looking for investment opportunities. Much of it has been converted into idle forms of net worth, such as real estate, yachts, collections of fine art, or extra mansions.  The portion that is retained as financial wealth constitutes, essentially, the “billions in cash sloshing around and looking for investment opportunities” that Polly Cleveland referred to above. We can be reasonably certain that very little of this financial wealth is actively looking for investment opportunities; it’s locked in the inequality trap.  

Importantly, as Piketty and Saez and others have established, the top 1% greatly increased its income over the past thirty years by reducing their own federal tax obligations.  How much they saved cannot be directly computed, because the tax reductions changed income. As related in post #4, my own conservative estimate of the amount of increased wealth accumulated between 1982 and 2010 by the top 1% (using reported net worth data in 2010 dollars), was $11.8 trillion, which amounts to over $38,000 per capita for the 2010 U.S. population.  

Future posts will discuss evidence that the amount of wealth hoarded at the top has been highly underestimated.  The important points here are that wealth transfers to the top have been greatly increased via tax reductions, and that those tax reductions were offset by deficit spending.  In effect, the increased federal debt financed wealth transfers to the top — a huge increment of growing inequality.  

Using the $11.8 trillion figure as a conservative proxy for the amount of such wealth transfers, on average about $420 billion of wealth has transferred up annually.  It has not been a linear progression, however: the top tax rate has been near its lowest level for years, only recently increasing from 35% to nearly 40%, well below the 70% rate in effect when there was relatively constant income inequality in the 1970s (and capital gains have been taxed pretty much at the level of ordinary income taxes on poverty-level incomes); and the top 1%’s economy has been growing, both in number of households and income per household. So, for now, it’s not unreasonable to assume that annual wealth transfers to the top are, conservatively, at least in the $600-700 billion range. 

The point is, our conflation estimates must recognize that a continuing reduction of the bottom 99%’s economy on this order of magnitude will have to be stopped to stop inequality growth. Government cannot possibly borrow that kind of additional money, given the currently excessive level of national debt and the urgent need to start reducing it [18], but it is equally important that, given the ineffectiveness of the last four years of record “stimulus” from deficit spending, there is no basis for imagining that more of the same would help at all; and what’s worse, it would do nothing to stop, or even slow, the rate of inequality growth.           

The magnitude of the income and wealth redistribution problem is virtually unimaginable, and future posts will discuss indications that the inequality data we have been using greatly understate the severity of the problem. Hopefully this post gives some indication of how dangerous inequality growth really is for the U.S. economy. If we cannot escape from the “neoclassical paradigm,” however, the extreme danger will remain hidden — until it’s too late. 

JMH – 5/27/2013 (ed. 5/28/2013) 


[1] “Is Paul Krugman’s Liquidity Trap Really an Inequality Trap?” by Mary Manning (Polly) Cleveland, The Blog, Huff Post Business, January 13, 2013 (here) . Polly Cleveland is an active member of the Association for Georgist Studies (here).   

[2] Robert B. Reich, Aftershock: The Next Economy and America’s Future, New York, Alfred A. Knopf (2010), “Eccles’s Insight,” pp. 11-18, quoted at 12-13.

[3] “The Chutzpah Caucus,” by Paul Krugman, The New York Times, May 5, 2013 (here).

[4] “The Debt to the Penny, and Who Holds It,” Treasury Direct, May 23, 2013 (here).

[5] The debt is not a serious problem, Krugman argues: “the ratio of debt to G.D.P. . . measures the government’s fiscal position better than a simple dollar number,” and except for the two George Bushes, in every president since WW II left office with a lower “debt ratio” than when they came in: “So debt increases that didn’t arise either from war or from extraordinary financial crisis are entirely associated with hard-line conservative governments.” Ibid.  I’m still worried: We’ll take a close look at the “debt ratio” concept in the next post, when we discuss the the Reinhart/Rogoff debacle.

[6] Henry George identified a third factor of production, and used a traditional, less expansive definition of economic rent in his analysis: “Land, labor, and capital are the factors of production. * * * In returns to these three factors is the whole produce distributed. That part which goes to land owners as payment for the use of natural opportunities is called rent.” Progress and Poverty, Evergreen Books. Kindle Edition, July 29, 2011, p. 131.

[7] “Gini coefficient,” Wikipedia (here).

[8] “The Chutzpah Caucus,”supra (here).

[9] Nicholas Wapshott, Keynes Hayek: The Clash That Defined Modern Economics, W.W. Norton & Company, NY and London, Kindle Edition (2012).

[10] Id. at Chs. 6-8, pp. 81-122.

[11] Id. at 120-121.

[12] Milton & Rose Friedman, Free to Choose, Harcourt Brace Jovanovich, NY, 1980, p. 270.

[13] “Not Enough Inflation,” by Paul Krugman, The New York Times, May 2, 2013 (here).

[14] “Is Paul Krugman’s Liquidity Trap Really an Inequality Trap?”, supra (here).

[15] “Joseph Stiglitz Is Right About Inequality, but for the Wrong Reason,” by Mary Manning (Polly) Cleveland, The Blog, Huff Post Business, March 4, 2013 (here).

[16] Paul Krugman, End This Depression Now!,  W.W. Norton & Company, NY (2012), pp. 208-230.

[17] “National Debt Interest Payments Dwarf Other Government Spending,” by Danielle Kurtzleben, U.S. News, November 19, 2012 (here).

[18] Here is a decent federal spending pie chart for FY 2011, showing total spending of $3.64 trillion, debt interest of $247 billion and a military/defense budget of $728 billion (here). As shown on white house historical budget records (Table 1.1, here), deficits have mushroomed to historical levels already, exceeding $1 trillion all four years since the Crash and the start of the depression (2009-2012). This record-breaking fiscal “stimulus” hasn’t improved the bottom 99%’s economy, and as we have seen, the top 1%’s economy has grabbed 121% of all income growth over this period. We’ll look at these facts again at the beginning of the next post. 

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