Wednesday, May 23, 2007

How the Left Supports the Rich and Starves the Poor

Howard S. Katz has written an interesting blog today about how the New Deal of the 1930s created the pattern of a consistently increasing stock market which in turn has led to the increasing income disparities concerning which Princeton economist Paul Krugman likes to comment.

Katz's argument is unique. First of all, the stock market did not increase from 1880 to 1930. There were bubbles in between, but the market did not increase for 50 years. Following the complete elimination of the gold standard in the 1930s, which facilitated the Federal Reserve Bank's unlimited expansion of the money supply from the 1930s onward, the stock market has followed a pattern of fairly consistent increases. Notably, it has increased faster than inflation. In the 1930s and 1940s the returns were lower and were largely due to dividends, I believe, but the increasing pattern started post World War II and then has continued for the last 60 years, with a few declines.

An interesting question is whether the American economy has seen more productivity growth as a percentage of the base or less in the past 60 years than it did in the 50 years leading up to 1933. If it has seen more productivity growth, perhaps we could argue that (1) firms have been good at securing profit margins through strategic advantages that keep competitors out (inhibiting entry of competitors through capital requirements, developing products that are not imitable, etc.) and (2) expansion of markets and globalization have led to higher returns that are protected by the competitive advantages.

I think the answer is that the economy has not seen more productivity growth than in the late 19th century. The late 19th century was the period of the greatest invention and expansion of wealth in the history of the world. The telephone, the automobile, mass production, electricity, electric lights, phonographs and many other fundamental inventions were created in that period. It is true that the post Reagan years have seen an up-tick in innovation, but nothing like the 19th century. Hence, if the post-war stock market increases have been due to new markets, better productivity and better management leading to strategic advantage, it would seem that the markets in the late 19th century should have matched the current increases. This has not occurred. Rather, the stock market increases in the post World War II era are greater than in any prior era.

Howard argues that the reason that (a) the stock market has increased since the 1930s; and (b) that income inequality has grown to a greater degree than ever before are the same. By making credit easily available to Wall Street via creating new monetary reserves and expanding the money supply, (a) investment in the stock market has been spurred and the stock market has risen and (b) those with most access to credit and ability to buy stocks, the ultra-wealthy, have enjoyed the greatest increases in wealth.

In other words, the increase in income inequality has been supported by several government policies advocated by liberals, the left and by liberal economics. First, the Fed's ability to manage the money supply has given it the power to inflate, causing inflation since the 1930s. Second, by giving the wealthy best access to credit, they have become wealthier at the expense of the common person.

I also would add two additional points to Howard's analysis. Third, the income tax established around the same time as the Fed, limits capital accumulation by the poor, limiting the new ideas and competition that can be introduced into the economy and protecting wealthy Princeton grads, incompetently educated by quacks like Paul Krugman, from competition. Fourth, by adding regulation and government intrusion in fields like education (yes, I benefit), health care, and other public sector programs the New Deal policies have limited entrepreneurs' abilities to compete even when they do accumulate capital for start-ups.

The policies of central management of the money supply, income taxation, and economic regulation all lead to exclude the poor from economic progress, limit entrepreneurship and innovation and transfer wealth (via the creation of new monetary reserves and subsequent inflation) from poor to rich.

One additional point of Howard's that I would mention is that the emphasis on monetary expansion and credit coupled with the income tax and expansion of the money supply has changed the nature of the rich and the nature of New York City. When I was a lad, it was still expected that the way to become rich was by starting a successful manufacturing firm, such as through an invention, development of better processes or better marketing. That is no longer true. The chief wealthy of today are Wall Street investment experts and hedge fund operators. The 19th century pattern of John D. Rockefeller's saving his salary to start a store and then using the profits from the store to buy an oil company hardly exists any more. The mega-wealthy are all in areas with access to fast credit and financial manipulation, not manufacturing. They are mostly from wealthy backgrounds (unlike Rockefeller), educated by the left-wing academics who claim to favor the poor. None of them contribute much to the economy. Some might quibble and say that investors make the economy more efficient. But can anyone say with a straight face that the folks on Wall Street contribute anything to the economy in the same league as Tesla or Edison? What a laugh. Yet, the hedge fund managers of today are earning $250 million a year, more than any of the "robber barons" of the 19th century.

Where are today's Teslas and Edisons? They have been forced out by Wall Street and its few favored industries, with the left and acdemia cheering them on.

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