Even though there has been a big uptick in news stories on rising economic inequality, and more chatter among economists about the idea that high levels of inequality are associated with lower growth, much of the messaging has come from the Democrats desperate to use the one dog whistle that might rally their badly abused base. Even though inequality has risen under Obama, thanks to policies that favored rescuing banks and enriching the medical-industrial complex over helping ordinary citizens, the Democrats are all too willing to rely on their perceived lesser-evilism relative to the Republicans. After all, it was only Romney’s billionaire warts that kept Obama from what would otherwise have been a well-deserved 2012 defeat.
But while the Administration has been pushing inequality as a useful campaign theme (the signal was inviting Thomas Piketty to meet with Treasury Secretary Jack Lew), in parallel, it also appears that some of the expressions of concern about inequality among the policy classes are genuine. Not that they care about the lot of the lower orders per se, but at least some wonks are on board with the idea that high levels of income and wealth inequality are bad for growth. The tell that the interest is real is that economists are starting to identify mechanisms by which greater income disparity is a drag on commercial activity.
The lead story in the neoliberal-leaning Financial Times is an example: “Record income gap fuels US housing weakness.” It goes without saying that the state of residential real estate is of particular concern, since every post-World-War-II recovery has been led by housing. The article dutifully notes that prices don’t tell the whole story, since purchases by rental investors have distorted the averages. From the Financial Times:
The income gap between America’s richest and poorest metropolitan regions has reached its widest on record, shaping an uneven housing recovery that threatens to hold back the broader revival of the world’s largest economy.
The gap has narrowed and widened in past cycles, but the rebound from the most recent financial crisis has seen the ratio hit its most unequal since data collection began 45 years ago, fuelling policy makers’ concerns…
A patchy labour market recovery has meant significant variations in job and income growth between regions across the US, which in turn has intensified the divergences across the country’s housing markets…
While some areas are experiencing bubble-like conditions, others are flailing. In Austin, Texas, a surge in technology jobs has driven demand. But in Akron, Ohio, which is struggling to boost employment through a new manufacturing base, house purchases have been more muted. In the government town of Sacramento, California, anxious homebuyers are waiting on the sidelines after being priced out by investors…
Stanley Fischer, Janet Yellen’s deputy chairman at the Federal Reserve, highlighted the central bank’s concern about housing in a speech this week. “The housing sector was at the epicentre of the US financial crisis and recession and it continues to weigh on the recovery,” he said.
In contrast to previous recoveries, he noted “residential construction [has been] held back by a large inventory of foreclosed and distressed properties and by tight credit conditions for construction loans and mortgages”…
But job and income growth are playing an outsized role, [Fannie Mae economist] Mr [Mark] Palim added, particularly as mortgage interest rate rises and home price increases affect affordability.
The number of Americans in work has surpassed the pre-recession peak. But there has been little lower and middle wage growth, constraining demand for houses across much of the country.
The rebound in construction, led by apartments, has been concentrated in pockets of the country where incomes are among the greatest.
Yves here. I know this may seem like weak beer, but this is actually progress of sorts. The Fed is finally beginning to understand after years of trying, its program to revive the economy through the confidence fairy and the wealth effect has failed. Admittedly, the overview in the article falls well short of recognizing the full dimensions of the problem: short job tenures and a high proportion of employment growth in part-time jobs; persistent high unemployment levels among the young; a large proportion of college graduates wearing the yoke of student debt. Not only has the Fed been a key architect of a lousy labor market by since Volcker relying on creating ample labor market slack so as to keep inflation low, but it also appears to recognize that it has painted itself in a corner. A rate increase will make housing even less “affordable” measured in consumer of borrowing capacity. Of course, Dean Baker has pointed out that this notion is absurd, since lower housing prices also make housing more “affordable.” But the central bank doesn’t want to push asset prices much if at all in the wrong direction due to the impact that will have on homeowner psychology, as well as on investors who recently invested in mortgage products.
The issue remains, to invoke a Venezuelan saying, that while policymakers have changed their minds, they have not changed their hearts. Central bankers and economists may finally be coming to grips with the depth and extent of our economic wounds. But they are still unlikely to be able to accept that all the evidence shows that we are at the end of an economic paradigm, and even worse, one designed by orthodoxy economists that has proved to be an abject failure. Thirty years of relying on deregulation to spur “innnovation,” giving more of the benefits of productivity growth to capitalists rather then labor, masking stagnant wage growth with higher borrowing levels, and the resulting financialization of the economy, has produced underinvestment, more frequent and severe financial crises, declining educational attainment.
But it’s inconceivable that the incumbents will face up to the full dimensions of their misrule. First, it is well nigh impossible for people to admit mistakes of this magnitude. Second, and at least as important, no new paradigm has emerged to replace the failed orthodoxy. Recognition that the old precepts have failed and understanding some of the critical elements of that failure still falls well short of being able to map a new, effective course of action.
Thus what one can anticipate is greater incoherence and inconsistency: more and more official admissions of the nature of festering economic and increasingly social ailments, coupled with either pathetically small course changes or doubling down on failed policies.
The upcoming few years will make for fascinating theater. Too bad we have to live with the outcomes.