Okay, I'm coming around. A few months ago (too lazy to link) I mockingly reported on a study that proved something that was totally obvious to any thinking person. I was subsequently contacted by the author of the report, and I am more and more persuaded that he was right. It's important to prove the obvious. The depressing thing is that it does no good when you do it. Krugman has often bemoaned the fact that while austerity has been proven wrong both theoretically and in practice, its advocates have not been humbled, and governments have not backed away from their obsession. In the case of austerity it's understandable, since the real agency of the austerians is to get rid of the welfare state.
This is by way of a long introduction to a reference at Wall Street on Parade to a couple of economists who have apparently proven another obvious fact: that in a consumer based economy (which, when you think of it, means all economies), there is inevitably a tipping point at which growing inequality brings the whole thing crashing down. This is embedded in a review of Robert Reich's new film, Inequality for All.
The first stunner comes with the chart we have posted below showing that in 1928 and 2007 – the year before the two greatest financial crashes in U.S. history, income inequality peaked. In the film, Reich says about the graph: “The parallels are breathtaking if you look at them carefully.” Indeed they are.
Reich brilliantly animates this graph into a suspension bridge, demonstrating that there is a finite equilibrium of income distribution at which the U.S. economy can function. Since 70 percent of U.S. Gross Domestic Product is consumption, when workers are stripped of an adequate share of the nation’s income, they are not able to function as consumers. Less consumption means lower corporate earnings resulting in layoffs and then even lower corporate earnings and more layoffs. The vicious cycle feeds on itself.
Going forward at Wall Street On Parade, I will be calling this the Suspension Bridge Theory of Income Inequality: when the delicate balance of the structure shifts to extremes, it collapses under its own lopsided weight.
The data for the graph comes from the brilliant French duo whispered about in those secret Koch brother confabs as Piketty-Saez. They are indeed the nemesis of the Ayn Randians, proving with data going back to 1917 that dramatic income concentration at the top is a killer to the economy. Thomas Piketty teaches at the Paris School of Economics; Emmanuel Saez is the Director of the Center for Equitable Growth at UC Berkeley. Both wear the badge of honor of being denounced on the editorial page of the Wall Street Journal.
I've actually made this point before, but damned if I can find the post. It seems fairly obvious that if Apple wants to make an obscene amount of money selling Ipads, an obscene number of people have to be able to afford them. Same goes for cars, houses, etc.
Your average billionaire might actually have one or two of these devices, and buy them more frequently than us riff-raff, but he really can't realistically pick up the slack that results from the inequality he insists on increasing. It's hard to justify buying an Ipad (though I admit, I could try) when you're having trouble putting food on the table and keeping a roof over your head.
The sad thing is, or at least I suspect this is the case, that the first corporations to feel the inevitable pain will be those least responsible for causing the inequality in the first place. The bankers, who bear primary responsibility, are basically on government welfare; they'll survive any crash they can cause.
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