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Income Disparity Kills Economic Growth?

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March 03, 2008 – Comments (4)

This morning reading Naked Capitalism I notice he picks up much stronger a point from Robert Reich than I did when I first read Reich's piece yesterday, and a point strongly worth considering for economic analysis.

The point I picked up from Reich's piece was that the source of credit growth that cause the boom was different, there was enormous private lending which I looked at as kind of a parallel growth of money supply as the securitization of mortgage debt.  In both cases there is no reserves and the debt does not show up on bank balance sheets.  I could be interesting to look into how that debt was brokered because from what I understand of the era a lot of debt was never repaid.  I would tend to think if I was loaning money privately I would be checking out the ability to repay before lending.  Part of our belief system developing here around the walk-aways is because the loans were brokered by people who would never assume the risk and didn't know the loan clients.  I would have thought without the modern telecommunications that these problems would be much smaller.  

What Yves picked up was wealth inequity.  If you don't have a distribution of wealth going to the masses, well, they can't spend. 

When I think about Vancouver's economy over my adult life, I think about how many times there was this drivel in the news about wage competition from other countries. People in other countries simply can not clean our hospitals, drive our trucks, serve people in restaurants or retail stores, and the list of what they can not do is extensive.  When the wages in these jobs continuously lose buying power, well, where does the economic stimulation for the economy come from?  It creates an economy that you can liken to a family that is gradually increasing credit card debt.  There comes a point when there is nothing left.  Every year of my adult life it seems to me Vancouver has had more and more people move into the negative economic stimulation group, and then business that pays $8000 a month rent for a 1000 sq ft retail space and only $1600/month to their workers complain that business is tough.  When their workers fail to make enough to pay for rent, food, utilities and transportation, well, what do they expect?  When I worked on the Canada census in 97 I saw several households where 2 or 3 young adults were sharing one bedroom apartments because they could not even afford shared accomodation that gave them the privacy of their own room.

I strongly feel that our media was dominated by the corporate media bite "we can't compete with wages from other countries."  And then there are the economist that repeatedly state that minimum wage laws don't work and that they kill employment.  And having an ever increasing work force that lives in homeless hostels because they can't afford rent is a reasonable alternative?

No!  Economist promoting this rubbish have taken too narrow a view.  This nonsense comes from looking at examples where minimum wages are too high.  They simply also can be too low to be healthy for the economy, a level where wealth inequity means that there is no more wealth to redistribute to the wealthy and nothing to keep the economy running, an economy that becomes akin to the family with out of control increasing debt -- it break down.

4 Comments – Post Your Own

#1) On March 03, 2008 at 9:42 AM, dwot (97.03) wrote:

Reading today:

Rating agency corruption (my spin)- http://www.nakedcapitalism.com/2008/03/rating-agency-conflicts-in-munis-coming.html

 F--king rating agencies, sure people understand what their ratings mean, how else did about $1 trillion of junk mortgage potential losses come about?

Buffett says stocks are expensive

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#2) On March 03, 2008 at 11:30 AM, WillSurfForFood (88.01) wrote:

I didn't read the first link but I do agree that there seems to be a conflict of iterests problem with the ratings agencies. I think our government should probably spend a little attention on this problem rather than housing bail-outs or economic stimulus.

Thanks for the link to the Buffet article. This was an interesting quote from it:

"By any common sense definition, we are in a recession," Buffett said. "Business is slowing down. We have retail stores in candy, home furnishings and jewelry. Across the board, I'm seeing a significant slowdown."

It is always interesting to hear from business owners rather than just economists.

 

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#3) On March 03, 2008 at 12:54 PM, chk999 (99.98) wrote:

Econ is not called the dismal science for nothing. You can change the minimum wage, but the number of jobs available at that wage will change whether you like it or not. It isn't as simple as you move the minimum wage up and the number of employed people stays the same.

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#4) On September 18, 2008 at 1:32 AM, Marck11215 (< 20) wrote:

dwot makes a good argument yet chk999's only response is that raising the minimum wage affects unemployment ?  How can a substantial amount of jobs that are so integral to the functioning of business can simply dissappear if the minimum wage is raised?  Please help me understand...

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