My Lesson on How Big Government Creates Income Inequality

I teach classes in managerial skills and human resource management.  Both are linked to issues surrounding success, career progression, and wages.  My managerial skills teaching focuses on trying to get students from inner city backgrounds to think about how to modulate cognitive and interpersonal skills in order to achieve career success and how to manage themselves to become sufficiently wealthy to be financially independent. With respect to cognitive skills, I emphasize writing, which is one of several weaknesses of  the New York City schools. I cannot, unfortunately, remedy other weaknesses, such as mathematical and statistical skills. I cannot do everything, nor can I do more than show my students the way to learn to write competently.  In a sense I do what John Dewey claimed to be doing: giving them the tools to learn on their own.   

Understanding the Fed, its economic subsidization of asset owners, and its manipulation of wage earners is important to understanding how to invest and how to balance career effort with investing effort.

Another of the critical issues related to both skills building and human resource management is the effect central banking has had in generating income inequality and malinvestment.  Part of this involves overinvestment in financial and real estate markets and part involves overinvestment in technology and labor-saving and cost-reducing strategies like plant relocations. When capital costs are near zero, it costs little to invest in machinery to save labor costs. In the long run, big-government economics, whether it be monetarist or Keynesian, results in capital substitution for labor.  

I just sent an email to my two real time classes summarizing the class discussion, which of course is not covered in the textbooks.

Take a look at this chart, courtesy of the St. Louis Federal Reserve Bank, of the stock of M2 money supply (the broad definition of money) over time:  https://fred.stlouisfed.org/series/M2

 Also, take a look at this chart of the gross federal debt since 1940, also courtesy of the St Louis Fed: 


https://fred.stlouisfed.org/series/FYGFD

Also, take a look at the chart on this blog. The chart is of real (inflation-adjusted) hourly wages since 1964: 

https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

Also, take a look at this chart, which illustrates the rise of the valuation of the S&P 500: 

https://www.macrotrends.net/2324/sp-500-historical-chart-data

Notice that real wages began stagnating around 1971, which is around when the money supply began increasing at an increasing rate. President Nixon ended the gold standard that year.

Part of the increase in money supply may be offset by the aging of the baby boomers.  An aging population is deflationary because older people spend less. More importantly, the dollar has served as the chief reserve currency since World War II, so the demand for dollars from foreign central banks and businesses absorbs about one-half of the money supply. 

At the same time, the creation of debt and the creation of money are directly in synch because the money-creation process is part of the debt-creation process.  Notice, though, that the debt-and-money-creation pattern parallels wage stagnation.  Asset values escalate, but wage bargains lag. Keynes calls that money illusion.  Income inequality increases as asset owners, who are wealthy in the first place, become more wealthy.  Keynesian monetary stimulation, based on monetary creation, becomes counterproductive as low interest rates encourage substitution of capital and technology for labor.  Plant relocations and overinvestment in labor-saving equipment follows from sustained low interest rates, further encouraging low wages and income inequality.

Moreover, the widespread dollar reserve holdings are under threat from China, Iran, and Russia, which do not want to do business in dollars.  All modern monetary regimes have collapsed.  The first paper money inflation occurred in China after the invention of paper money during the Song dynasty in the 11 and 12th centuries. The Yuan dynasty, headed by Kublai Khan, adopted the paper money not long after and soon created hyperinflation.

The first US hyperinflation occurred during and after the Revolutionary War, and the first US currency, the continental, became worthless by the end of the Revolutionary War.  There was also hyperinflation during the Civil War, when the US Treasury and the Confederate Treasury both printed money and experienced double-digit inflation rates. Again, this occurred after the establishment of the Federal Reserve Bank in 1913 and World War I, after which there was a hyperinflation followed by the 1920-21 depression.

Some people become wealthy during monetary disorder; typically, they are debtors who own assets like real estate and hard assets. The precious metals, art, and similar kinds of assets retain value. Stocks may as well, depending on the particular stock and various circumstances.  Bitcoin and other cryptocurrencies may be additions to the list of hard assets.

Mike Judge's Idiocracy and American Progress

A student in one of my classes commented recently on Mike Judge's Idiocracy. The student wrote:

If you recall in Idiocracy, there's no great resurgence of intellectual enlightenment at the end... only the exponential success of the few educated time-travelers over the rest of the happily stupid. This success doesn't come from educating people or instigating growth but from keeping to themselves and turning their (historical) knowledge into power. So, is that what we're in for? People that bother to read an uncensored history book or a hard-science technical manual when curious about an idea are becoming more and more rare, and their existence is being actively stigmatized. Is the reality to shut up and keep knowledge to oneself and get rich from it? The bulk of society are getting their degrees and entering the workforce having never had to fix a crisis in their lives, neurologically underdeveloped, missing critical-thinking skills that were absolutely normal even just 10 years ago. This is our workforce of tomorrow?

How do you work in this environment? It's like going to work in construction and finding out that the Dept of Labor suddenly designated that shadow-acting construction work should be treated as equivalent payable labor as actual labor. Now all the construction workers are 100 lbs and don't know how to use their tools, pantomiming construction behaviors and getting full pay for it. If you ask one of them to spot you when lifting something heavy, you're on your own. That's how I've felt at most of my jobs for almost five years now. 

My student indeed.  A century ago Ludwig von Mises wrote about how depressed interest rates stimulate malinvestment.  Malinvestment occurs when projects that are not feasible at market interest rates are funded at below-market rates. The rates will generally have been depressed by stimulative Fed policies.

The Fed has pursued stimulative policies for many decades.  At present, for instance, student-loan debt is about $1.5 trillion. The same period has seen the politicization of higher education. In today's universities, ideology and advocacy in the guise of social justice education substitute for learning about culture and science.  Much of this dumbed-down advocacy lacks any legitimate educational content.  It is funded by paper money, artificially created by the Federal Reserve Bank.  Much of the paper money loans will never be repaid because the dumbed-down social activists will not find jobs, and the unpaid loans will be a deadweight loss to society.  

Students educated in the politicized soft social sciences, the humanities, and the studies fields will not produce value beyond the value that high school graduates are capable of producing. They are not literate or numerate; they lack understanding of basic American institutions; their training teaches them to exclaim their oppressed status, making them difficult to employ in all but menial jobs.  A few months ago Ben Shapiro  noticed, with respect to research that I did earlier this year, that the extent of politicization of academic disciplines is inversely related to the earnings of the graduates. Effete graduates of the studies fields and left-ideological fields like sociology do dismally in the job market. 

There is no doubt of the importance of scientific and mathematical education. When the humanities involved education about the basis for American history and culture, it too was important.  The hard social sciences may at times help business decision making, but it is unclear whether the soft social sciences in their current state contribute to the social good.  However, most college students funded by the paper-money-based education bubble do not take science, math, languages, or the hard social sciences. Dumbed-down studies like gender studies are increasingly influential in fields like history.

Hence, as the number of college students has expanded and as the sciences have been downplayed in favor of politicized fields like gender studies, the value contributed by American universities has declined.  It may now be in negative territory: The net costs of higher education may exceed its social benefits.  

The malinvestment in education is linked to the flexible paper money system.   Inefficiencies are hidden by an artificially depressed cost of capital.  American corporations were already inefficient by the 1970s: Books like Patrick J. Wright's On a Clear Day You Can See General Motors

depict an already-inefficient industrial system.  Major firms like GM and GE have been on monetary life support for years.  In turn, the paper-money bubble receives global life support  because the dollar is the international reserve currency.  That double-subsidization of inefficiency  has continued since the end of World War II.

One outcome has been plant relocation to Mexico and China.  With near-zero capital costs, relocation costs were eliminated, and the cost efficiency of relocation to low-wage countries was increased.  Waste is in thousands of fields, including the military,  health care, and finance.  When the waste, especially with respect to federal government debt,  becomes so extreme that inflation is the only way out, the dollar's reserve currency status will end.  There may be a switch to an international basket of currencies such as the IMF's special drawing rights. This may be accompanied by sharp reductions in government spending, public pensions, welfare, and subsidized health care, much as occurred in Greece.  

One of the effects of malinvestment is a workforce increasingly effete and obsessed with supposed injustices.  Such shadow workers, as my student calls them, will be ill equipped to handle an economic depression.  Of course, it is always possible that technology will evolve that will solve these problems, but even during periods of much more rapid technological advance than today's, such as during the laissez-faire period of the late nineteenth century, depressions and wars that posed greater challenges than the recent generations of Americans have experienced required better problem solvers than the current American system of higher education is producing.

Global Food Crisis Caused By Federal Reserve Bank

In a recent American Thinker post (hat tip Larwyn), JR Dunn is right to be concerned about potential United Nations and governmental interference in the food market, but in his capable discussion of causes of today's food shortages Dunn omits the fundamental cause: economic distortion or malinvestment for more than a decade due to the Federal Reserve Bank's monetary expansion. Those of us who remember the 1970s recall that the Nixon administration's monetary expansion's resultant price inflation was blamed on OPEC and oil prices. Dunn commits a similar fallacy and blames current food shortages on a litany of proximate causes,such as ethanol, which while important are not fundamental. Dunn is right that ethanol is a mistake that causes food shortages, but it is not the only mistake. For the past fifteen years, from America to China, economic resources have been diverted away from commodity and food production toward real estate investment and construction. In China, farmers have been uprooted to build dams and cities. In America, farmers have sold land to real estate developers. This amounts to malinvestment of artificially created credit. Now there are food shortages. The beneficiaries of the monetary expansion primarily have not been oil producing governments but Wall Street, hedge fund managers, real estate developers and the commercial banking system. Those who pay are those who cannot afford food now, those in dire poverty. Warren Buffett, George Soros and the new residents of Greenwich, Connecticut have waxed rich at the expense of those starving to death now.

Food shortages occur only if demand exceeds supply and supply cannot adjust. Several things can increase demand. These include the factors that Dunn enumerates in his blog: ethanol and the like. But in a free economy supply will expand to meet the higher demand. Supply shocks can be handled over a few year period. If this does not happen it is because there are blockages. None of the factors that Dunn enumerates explain the failure of farmers to anticipate or respond to shortages. Yet most economic theory suggests that firms are rational enough to at least approximately do this. What would explain farmers' hyper-irrationality? Distortion or malinvestment.

Worse, Dunn's analysis overlooks increasing prices across a range of commodities, not just food and oil. Gold has more than tripled in price in the past four years. Copper and other construction materials, rubber for instance, have increased since the millenium. The factors that Dunn enumerates do not explain an across-the-board increase in commodity prices. Does ethanol explain a three-fold increase in the price of gold?

Moreover, Dunn's discussion of OPEC omits the force of mistrust. OPEC has found it difficult to act in unison because of what game theorists call the prisoner's dilemma: economic actors find it difficult to act in unison in their own self interest when any one member can make side deals to sabotage collusion. That is why OPEC failed in the 1970s. Today, a broader swath of nations produce oil, so trust will be considerably less than it was then. Higher prices would motivate players to go behind the backs of their collaborators.

Dunn is correct to argue that the relationship between politics and food should be severed. But he omits the fundamental cause of the global food shortage: malinvestment away from commodity production toward real estate and stock market investment. This follows directly from Alan Greenspan's and Ben Bernanke's monetary policy, which is necessarily the cause of all general inflation.