Thursday, March 26, 2009

On the "disparity in income growth"

I've been reading some Philip Arthur Fisher, who is generally considered as the father of modern growth investing and as one of the first to link the notion of competitive advantage with sustainable growth.

Although his books were written in the 1950's , he had a few interesting quotes that made me think a little bit about our present situation with regards to the Bush tax cuts and the spread of incomes.

The first:
"[The Middle Ages] was a period when most of the Western world lived in an environment of unnecessary want and human suffering. This was largely because the considerable mental ability of the period was devoted to fruitless results. Consider what might have been accomplished if half as much thought had been given to fighting hunger, disease, and greed as was devoted to debating such points as the number of angels that could balance on the head of a pin."

The second:
"Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged. This causes a vast increase in the amount of money, so that each individual unit of money, such as a dollar, becomes worth less than it was before... This, of course, is the classic form of inflation...Expressed in constant dollars - that is, in real value - American stocks [and therefore American industry as a whole] in both World War II and the Korean period undoubtedly did fare less well than if the same period had been one of peace... there was too great a diversion of effort from the more profitable peace-time lines to... defense work."

The third:
"Now we come to a very different type of price influence. This is a change that is purely psychological. nothing has changed in the outside or economic world at all. The great majority of the financial community merely look upon the same circumstances from a different viewpoint than before. As a result of this changed way of appraising the same set of basic facts, they make a changed appraisal of the price... they will pay for the same shares."

And one from a paper by Parker and Vissing-Jorgensen, published by NBER:
"The consumption of high-consumption households is more exposed to fluctuations in aggregate consumption and income than that of low-consumption households in the Consumer Expenditure (CEX) Survey. The exposure to aggregate consumption growth of households in the top 10 percent of the consumption distribution in the CEX is about five times that of households in the bottom 80 percent. Given real aggregate per capita consumption growth about 3 percentage points less than its historical mean during the past year, these figures predict that the ratio of consumption of the top 10 percent to the bottom 80 percent has fallen by about 15 percentage points (relative to trend). Using income data from Piketty and Saez (2003), we show that the income(especially the wage income) of rich households is more exposed to aggregate fluctuations, so their higher income exposure is a likely contributor to their higher consumption exposure."

in other words...

any assertion that the middle class has suffered over the last decade while the rich have done considerably better neglects the notion that we WERE IN A FINANCIAL BUBBLE. Generally, large fluctuations in the economy help the rich more than the poor, and a financial bubble happens to disproportionately help rich people because of the nature of the kind of people who a) can afford to buy mortgage-related investments and, significantly, b) do business that relates to mortgage-related investments.

Thus, all that perceived gain by the top 1% of households may have just been fictitious (see the third Fisher quote). What is much MORE likely is that everybody declined just a little bit in real terms because we were in the middle of two wars (see Fisher quotes 1 and 2).

Thus, the Democratic crusade to bring the middle class up at the expense of the rich because the rich have "benefited so much from the last decade and the poor have not" misses the crucial point that much of that benefit seemed real and was not, and the rich are being hurt much more by this downturn than the poor, media coverage notwithstanding.

EDIT: On the "rich are being hurt much more by this downturn than the poor" quote - Obviously, the rich are in a much better position than the poor, and even small changes in the assets of the poor makes a big difference in quality of life, whereas moderate changes in the assets of the rich are less important to their welfare. My quote was pointing out that in terms of assets lost, the rich have lost, proportionate to what they have, much more than the poor, indicating that any "gains" the rich have made the last ten years were far more illusory than real.

My point with this post is to point out how disingenuous it is to claim that the rich have done exceedingly well in the last ten years while the middle class and poor have gotten screwed. In reality, it's very likely that everyone's real welfare has declined slightly, whether rich or poor.


  1. "the rich are being hurt much more by this downturn than the poor, media coverage notwithstanding."

    Jesus, Trevor, you can't honestly believe that. They may be losing more $$, but in terms of quality of life summed up over the past decade, you cannot even argue that the rich are suffering more. So what if they lose their yachts - look at the 12.5 million Americans hunting for work, the tent cities sprouting up all over the country, the income gap that became a chasm, etc. If Wall Street and Washington don't come to understand and get in front of the (rightful) anger that is seething across this country, we're all screwed, and it is that sort of outlook - of the rich whining - that is going to land us in a very deep hole. Someone like Ron Paul, as crazy as he seems, could stand a very real chance if this country degenerates further.

    Hunger and poverty - the real seeds of tyranny.

  2. posted an edit - my point wasnt in terms of welfare, it was in terms of proportion of assets lost. It's meant to illustrate that while yes, the middle class has gotten a little screwed over the last ten years, the "gains" of the rich were more illusory than real, and it's more likely that everybody's welfare declined over the last ten years. This isn't a "woe to the rich" point, it's a "we all got screwed, rich or poor, so don't claim otherwise" point.