Warnings about increasing inequality, steadily growing louder over recent years, have become a roar.
As Paul Kelly details in The Australian today, this was the subject of Rupert Murdoch’s speech to the G20 in Washington earlier this month, in which he mainly blamed monetary policy for causing a “massive shift” in societies to benefit the super rich.
Australian Treasurer Joe Hockey picked up the theme in Parliament yesterday, saying: “Loose monetary policy has done its work and unfortunately made the rich richer through rising asset values.”
And one of the architects of that loose monetary policy, Federal Reserve chair Janet Yellen, also picked it up in a major speech on inequality a week after Mr Murdoch’s speech, for which she had been sitting in audience and sitting next to him at dinner. But, naturally enough, and unlike Mr Murdoch and Mr Hockey, she didn’t blame monetary policy.
Zero interest rates and quantitative easing have definitely benefited the rich at the expense of the poor and middle classes, but as this chart from Thomas Piketty’s book on inequality, “Capital in the 21st Century”, clearly shows, it was not the source of it:
Rising inequality began in the 1980s and was the direct result of Reaganomics, and more specifically President Reagan’s decision to cut the top marginal income tax rate from 70.1 to 28.4 per cent as well as the maximum capital gains tax rate to 20 per cent.
That had such a horrendous effect on the Federal budget that Reagan took back half the 1981 tax cut, but since then the top marginal tax rate in the US has remained lower than at any time since 1931, when it was raised from 25 to 63 per cent.
Note on the chart above that 1931 is about when inequality began to decline.
That chart starts in 1910, but if it were to go back earlier, say for another 1000 years, the income share of the top percentile would be even higher, throughout history.
In other words the period between 1950 and 1988, when the top 1 per cent had less than 10 per cent of the wealth, looks like an aberration.
Unless something is done in response to these calls from leaders like Rupert Murdoch and Janet Yellen, history may show that in the history of the world, the existence of a middle class lasted less than 40 years.
In effect, super-loose monetary policy has delivered the coup de grace to a middle class that is bleeding from thirty years of fiscal policy.
The benefits of the 1980s tax cuts for the rich were meant to trickle down, but they were captured and held onto instead, and now zero interest rates and quantitative easing are increasing the value of their assets.
The financial crisis of 2008, which produced the monetary policy that is now being widely blamed for inequality, had its roots in the repeal of the Glass Steagall Act in 1999.
This was another piece early 1930s New Deal legislation that separated securities trading and commercial banking - its repeal was promoted by then Federal Reserve chair, and Ayn Rand devotee, Alan Greenspan.
It was, in effect, part of the second phase of the New Deal rollback that Ronald Reagan had started.
Less than a decade after the repeal of Glass Steagall, the global banking system seized up, effectively insolvent.
At the risk of over-simplification, the Wall Street division of the Top One Percent sold too many mortgages to the lower classes that had been created by the failed ‘trickle-down’ economics of Reagan. Their inability to repay the loans both caused the crisis and drove them deeper into poverty.
American taxpayers then bailed out the banks and investment banks to the tune of $1,270 billion, but left mortgagees who had defaulted to their own devices. And the right-wing of the Republican Party ensured that the bailout was not paid for by increased taxes on the rich.
In fact, as Paul Krugman points out in today’s New York Times, “the destructive ideology that has taken over the Republican Party”, has blocked any kind of government spending at all, including social programmes for the poor and public infrastructure.
As a result, all of the work in pulling the US out of the 2008 recession and increasing employment despite very low spending on both consumption and investment, has been left to the central bank.
Any central bank can do two things: manipulate interest rates and materialise money from thin air.
In doing those things, the Fed has effectively been attempting another trickle-down wheeze – the theory being that if wealth increases as a result of rising asset prices, then maybe businesses will invest and consumers will spend.
Nice theory; didn’t work, just like Reaganomics.
The fact that leaders like Rupert Murdoch and Joe Hockey are now worried about inequality is very encouraging.
Maybe something will be done other than simply increasing interest rates next year.