Thursday, May 18, 2017

Widening Income Gap and Growing Household Debt: Are They Related?

Two seemingly unconnected headlines on growing household indebtedness and the widening income gap derive in significant part from the same underlying phenomenon:
Michael Corkery and Stacy Cowley. May 17, 2017. Household Debt Makes a Comeback in the U.S. The New York Times,
Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse. The Federal Reserve Bank of New York said Wednesday that total household debt in the United States had reached a new peak — $12.7 trillion — in the first three months of the year, another milestone in the long, slow recovery of the nation’s economy…. 
Debt can fuel consumer spending, which accounts for nearly 70 percent of all economic activity in the United States. It also allows Americans to make large investments in education and housing, which can help build personal wealth and financial stability.
Household debt rises while household income stagnates and/or declines:
Ross Kerber and Peter Szekely Earnings gap over U.S. workers grows for S&P 500 CEOs: union report.
The average S&P 500 chief executive made $13.1 million last year, 347 times more than the average U.S. worker, according to a labor group analysis released on Tuesday, up from 335 times as much in the previous year.
What explains the rise in household debt and, simultaneously, the decline in personal income for the majority of the population? Michael Hudson offers the idea of the toll booth economy to capture the underlying mechanisms responsible for growing inequality and debt:
Michael Hudson. May 20, 2009.The Toll Booth Economy. Counter-Punch,
The post-bubble tomes assumes that we have reached “the end of history” as far as big problems are concerned. What is missing is a critique of the big picture – how Wall Street has financialized the public domain to inaugurate a neo-feudal tollbooth economy while privatizing the government itself, headed by the Treasury and Federal Reserve. 
Left untouched is the story how industrial capitalism has succumbed to an insatiable and unsustainable finance capitalism, whose newest “final stage” seems to be a zero-sum game of casino capitalism based on derivative swaps and kindred hedge fund gambling innovations. 
What have been lost are the Progressive Era’s two great reforms. First, minimizing the economy’s free lunch of unearned income (e.g., monopolistic privilege and privatization of the public domain in contrast to one’s own labor and enterprise) by taxing absentee property rent and asset-price (“capital”) gains, by keeping natural monopolies in the public domain, and by anti-trust regulation. 
The aim of progressive economic justice was to prevent exploitation – e.g., charging more than the technologically necessary costs of production and reasonable profits warranted. This aim had a fortuitous byproduct that made the Progressive Era reforms seem likely to conquer the world in a Darwinian evolutionary manner: Minimization of the free lunch of unearned income enabled economies such as the United States to out-compete others that didn’t enact progressive fiscal and financial policy. 
A second Progressive Era aim was to steer the financial sector so as to fund capital formation. Industrial credit was best achieved in Germany and Central Europe in the decades prior to World War I. But the Allied victory led to the dominance of Anglo-American banking practice, based on loans against property or income streams already in place. 
Today’s bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80 per cent), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.
Trump's tax breaks for the rich and proposed de-funding of public education (see here) illustrate the toll booth economy described by Hudson and documented in my own research on neo-feudalism (see

Growing dispossession is very likely to lead to revolutions of rising expectations.

Beware elites....


  1. This is the type of debt that kills the economy and production. The media dreads and scaremongers over public debt as if all debts are created equally. Looking at the past history, the exceedingly high level of private debt will end in nothing but tears.

  2. After a really lengthy period of prosperity America is due for a long and painful period of austerity--for the masses at least. This is not entirely a bad thing as the effects of affluence on character are known to be mostly unfavorable. And if you think about it there has not been any great out burst of happiness in the past fifty or sixty years. There have been many new human rights invented such as the right to housing, education, health care etc. In short the invention of numerous utopic visions. But no one has invented a way to fund them that will work. So back to the usual historical circumstances.

    1. I subscribe to the public banking movement. Michael Hundson and Ellen Brown are both proponents of public banking.

  3. I like Michael Hudson. A good idea that might take a generation to produce.

  4. Unlike vast majority of economists, we need more economists like Michael Hudson who has practical experience. Paul Wilmott is another guy I like. He's probably the smartest quant in the world.

  5. The repeal of Glass-Steagall Act was a mistake.