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Home Publications Blogs Beat the Press It's Monday and Robert Samuelson Is Defending the One Percent, Again

It's Monday and Robert Samuelson Is Defending the One Percent, Again

Sunday, 02 February 2014 21:09

Yes, not much of a surprise here. (I had to check the date to be sure I wasn't reading an old column.) Anyhow, let's start with the punch line:

"Economic inequality is usually a consequence of our problems and not a cause. For starters, the poor are not poor because the rich are rich.

"The two conditions are generally unrelated. Mostly, the rich got rich by running profitable small businesses (car dealerships, builders), creating big enterprises (Google, Microsoft), being at the top of lucrative occupations (bankers, lawyers, doctors, actors, athletes), managing major companies or inheriting fortunes. By contrast, the very poor often face circumstances that make their lives desperate."

Really? So the fact that doctors and lawyers secure themselves protection from competition and thereby drive up the cost of medical care and other products (yes, we do pay for corporate lawyers in the price of goods and services) doesn't affect the income of the poor? Not where I learned arithmetic.

How about the fact that the rich use their control over politicians to get them to run high unemployment policies by reducing the deficit and demand in the economy. This costs low and middle income workers both jobs and wages (see Jared Bernstein and my book on the topic.)

Oh yeah, and what about the fact that the Wall Street boys can get themselves too big to fail subsidies from the government ($83 billion a year according to Bloomberg, a bit more than the SNAP budget)? And of course they also get exemptions from the sales taxes that other industries have to pay. Where does this money come from if not the rest of us?

But hey, Robert Samuelson tells us their wealth has nothing to do with other people suffering. Who are you going to listen to, common sense, logic, and arithmetic or Robert Samuelson?

Then we get Samuelson telling us:

"Finally, widening economic inequality is sometimes mistakenly blamed for causing the Great Recession and the weak recovery. The argument, as outlined by two economists at Washington University in St. Louis, goes like this: In the 1980s, income growth for the bottom 95 percent of Americans slowed. People compensated by borrowing more. All the extra debt led to a consumption boom that was unsustainable. The housing bubble and crash followed. Now, weak income growth of the bottom 95 percent 'helps explain the slow recovery.'

Actually, the logic goes like this, as told by those of us who knew enough about the economy to see this crash coming. The economy suffers from weak demand because of so much money being redistributed upward to rich people who spend a smaller share of their income than middle and low income households. This problem was aggravated enormously by the explosion of the trade deficit that followed the run-up in the dollar due to botched East Asian financial crisis in 1997.

In the presence of weak demand the Fed allows interest rates to fall more than would otherwise be the case. In the absence of investment demand, these low interest rates create an environment that is very conducive to bubbles, hence we got the stock bubble in the 1990s and the housing bubble in the last decade. In the absence of another bubble to boost the economy we are continuing to see slow growth and high unemployment.

That one is probably too simple for Robert Samuelson to understand, but for most other people it provides a pretty direct link between inequality and the economic and social disaster of the Great Recession.

So the story is pretty simple. The system has been rigged to redistribute income upward. The rich have used their control of the political process to ensure that it stays that way and their control of news outlets like the Washington Post to try to distort reality.


Comments (19)Add Comment
Not only WaPo distorts reality to keep policies, pols, and discourse rigged
written by jaaaaayceeeee, February 02, 2014 8:55
Even the most liberal of the mainstream news media spends a lot more time on policies that don't cost the comfy anything, like social issues.

What percentage of mainstream news reporting propagates opposing views, instead of educating on aims, risks, and what has worked in the past, like you do?

Only editorialists, who will be crowded out by others(the only kind of crowding out going on, yet the kind you never hear of) have pointed out that this week's Republican proposals don't add up on the economy, health, or immigration.

Do we need status quo countdown clocks and sirens?
Have some sympathy, Dean
written by ifthethunderdontgetya™³²®© , February 02, 2014 10:06
It's hard out there for a pimp like Robert Samuelson.
Talking points of the shills for the rich....
written by Marko, February 03, 2014 12:03
They repeat the same themes ,and use the same mis-direction tactics , over and over:

".....the poor are not poor because the rich are rich. The two conditions are generally unrelated."

First , they always focus on the "poor" , because the idea of going up against the 99% terrifies them. It's the 1% against everyone else , Samuelson , not just a few at the bottom. Deal with it.

Second , they haul out the "zero-sum fallacy" meme , saying that rich people don't inhibit other's ability to earn money. No ? Well , given that U.S. economic growth , as well as other advanced economies , historically falls in a very narrow range - say 1.5-3.0% real per capita growth. If the top 1% consistently grow their incomes at a rate higher than that , their income shares will grow. This is exactly what has happened over the past four decades , as the 1% income share has gone from under 10% to over 20%. And if this process continues for long enough , the 99% will literally become slaves , at 0% income share. I'd say that's pretty much a zero-sum outcome.
written by JSeydl, February 03, 2014 5:46
The economy suffers from weak demand because of so much money being redistributed upward to rich people who spend a smaller share of their income than middle and low income households.

How do we reconcile this with the personal saving rate data? If inequality is constraining consumption, why is the personal saving rate still so low, and why did it fall so far prior to the crisis?
written by sherparick, February 03, 2014 7:10
By for the strongest pro-rich, anti-worker policy is the Federal Reserves and other OECD central banks priority on fighting inflation by having chronic unemployment. This policy has depressed wages and weakened unions and has led directly to the shift of the shares of GDP from labor to corporate profits over the last 35 years. Trade deals and increasingly aggressive application of intellectual property law (patents, trademarks, and copyrights have made it worse).
The housing wealth effect more than offset the impact of the shift in income
written by Dean, February 03, 2014 7:14
If we assume that 10 pp of income shifted from the bottom 80 percent to the top 1 percent, and the MPC of the 1 percent is 60 percent, compared to 90 percent for everyone else, this would imply a drop in consumption of 3 PP of disposable income. (Those MPCs are pulled out of the air, but just to get an idea of orders of magnitude.) On the other hand the increase in stock prices above their trend relationship to profits (which happened in the 1980s) and housing prices above their trend values (which began in the late 1990s) could more than offset this. At its peak in 2000, the stock bubble $10 trillion, when disposable personal income was $7.5 trillion. Assuming a wealth effect of 3-4 cents on the dollar gets $300-$400 billion in additional annual consumption, or 4.0-5.5 percentage points of disposable income.

The beginnings of the housing bubble probably added another $1-$2 trillion in wealth by 2000. With a housing wealth effect of 5-7 cents on the dollar, that buys you another $50-$140 billion in annual consumption, or another 0.7-1.9 pp of disposable income. By 2006 the housing bubble was at $8 trillion, with the stock market probably $3-$4 trillion above a level consistent with its long-term trend.

So the basic numbers fit pretty well. In essence, we lose consumption from the upward redistribution which is made up by consumption due to bubble wealth effects. It's not a pretty picture, but the math works.

written by JSeydl, February 03, 2014 7:37
Okay, so let me summarize what I think you're saying. The way your blognote reads, it seems as though you're saying inequality reduced consumption demand, which in turn reduced investment demand, leading to the bubbles. (Investment and consumption are highly correlated - let's ignore trade for the moment.) But that can't be what you're saying because, as you specify, the bubbles boosted consumption, which should have led to higher investment. But we didn't really get that much of an investment boom, other than in the bubble-related industries. So do we need to fall back on a belief function of some sort to say that even though the bubbles boosted consumption, they still didn't lead to much productive investment because firms recognized that the higher consumption demand was unsustainable?
Inequality, Opportunity and Zero-Sum Lies
written by Last Mover, February 03, 2014 7:44

One reason Robert Samuelson gets away with writing like this is his chosen framework of zero-sum tradeoffs as he applies them to "inequality".

Most Americans have bought into this framework, including many loser liberals as Dean Baker would say. They believe inequality means unfair, not lack of opportunity, even as they talk opportunity, something conservatives pounce on with glee.

For example even though Obama talks about opportunity all the time he casts it in a "fairness" framework, never in an economic competitive framework that has been destroyed by economic predators to undermine opportunity. In effect Obama actually agrees with Samuelson despite being on the other end of the maker-taker spectrum in terms of who should get what part of a zero-sum economic pie.

Both Obama and Samuelson want you think they are talking about makers at high income and wealth levels who are not takers. Both are lying. They have to lie to justify the proposition that there are enough (middle class) maker slots in the economy in a positive sum framework (read "enough room for everyone since there are no trade-offs") for anyone who chooses to work hard enough to fill those slots in terms of effort, education and skills. Sound familiar?

Under current conditions the lie grows even larger as it spills over into the underemployed macro economy which as Paul Krugman notes, Americans just don't get - that applying the same austerian zero-sum framework to government spending and debt just increases unemployment and inequality even more. It's not a stretch to say the concentrated rich have become so powerful, even a return to full employment can no longer restore the middle class in terms of historical economic equality.

When Samuelson invokes explanations like this for inequality ...
In the 1980s, income growth for the bottom 95 percent of Americans slowed. People compensated by borrowing more. All the extra debt led to a consumption boom that was unsustainable. The housing bubble and crash followed. Now, weak income growth of the bottom 95 percent 'helps explain the slow recovery.'

... the key word is unsustainable, meaning it was the implied unavoidable zero-sum trade-off between excess debt used to consume excess housing that actually ended up destroying the middle class.

In other words, the middle class did it to themselves says Samuelson and sealed its fate to doomed, deserved increased inequality. But Dean Baker easily outs him with the lie. At the macro level the debt and housing consumption was sustainable because it replaced lost demand from falling wages that drove long term inequality in the first place.

Yes, the housing bubble itself was highly distortionary at the micro level in terms of relative prices, but in terms of a full employment economy, it never broke the zero-sum rule of exceeding full employment to cause the usual problems of excess deficit spending and inflation. In this context the housing bubble actually postponed rising inequality at the macro level until it burst, after which it rapidly increased inequality through the ensuing economic carnage that took down the middle class even more while elevating the rich at the same time to an astronomical level.

As the lies designed to confuse real makers from real takers continue to undermine the middle class, remember they are easily debunked. Simply throw back into their face exactly what they assert and demand an answer:

Why do you claim inequality is about opportunity in a positive-sum framework but give explanations and solutions that apply only in a zero-sum framework?

Why do you claim that both a fully employed economy and an underemployed are both a zero-frame framework given the obvious absence of trade-offs in an underemployed economy?

Are you or have you ever been a member of the Communist Party Neo-Fascist Party of American Economic Predators who hate free markets that work?

Thank you for that answer. We thought so.
Investment as a share of GDP didn't change much
written by Dean, February 03, 2014 9:35

I don't see anything peculiar with investment. It did fall as a share of GDP in the 1980s which can be easily be explained both the surge in the trade deficit leading to a drop in manufacturing output as a share of GDP (a capital intensive sector) and also high real interest rates. (Crowding out is not zero.)

Investment returned to more normal levels in the 1990s, with a mini-boom at the end of the decade which was the Y2K effect and the tech bubble. In the last decade, investment was about at its post-war average as a share of GDP. I don't see any mysteries to be explained.
written by skeptonomist, February 03, 2014 10:22
There is a basic fact of economics which often seems to be ignored not only by hacks like Samuelson but even by nominally liberal economists, which is that the interests of capital and labor are antagonistic, especially in the short term. Capital wants to keep labor costs down, which is best promoted if there is substantial unemployment. In the long term keeping wages down restricts demand, but things are set up now so that capitalists and managers are not very interested in what happens in the long term - they just want to make a killing in a couple of years, and they can keep almost all of it because of the tax laws.

Currently capitalists are exploiting very cheap foreign labor and also the expanding markets in those countries. This is good for workers in those countries, but bad for workers in the US. Fifty years ago the "middle class" was assimilating manufacturing workers but those jobs have largely gone and the middle class has been shrinking.
written by JSeydl, February 03, 2014 10:38
Ok, but then you are not in agreement with Summers/Krugman, who say that there has been a secular stagnation in investment such that the equilibrium real interest rate consistent with full employment has been well below zero even prior to the crisis. I thought you disagreed with their hypothesis, but I wasn't sure.

The only reason I was confused is because you wrote in this post:

In the presence of weak demand the Fed allows interest rates to fall more than would otherwise be the case. In the absence of investment demand, these low interest rates create an environment that is very conducive to bubbles

It seems to me that the Summers/Krugman hypothesis may be destructive. If there's not an investment shortage and we drive rates lower because we think a shortage exists, then the excess liquidity will just create another bubble. Now, in theory, if the problem is trade, driving rates lower should weaken the exchange rate and boost external demand. But if currencies don't adjust the way they are supposed to because of pegging actions by foreign governments, then the monetary expansion may not boost external demand. So we need to address the pegging actions. Now, here's the million-dollar question, which I think you will say yes to: Would you be okay with tighter domestic monetary policy if we made a better political effort to weaken the dollar against the main pegged currencies?
written by skeptonomist, February 03, 2014 11:16
The problem is not a "secular stagnation of investment" (that is an effect) or anything to do with interest rates. With certain reservations I agree with the simple explanation that Dean gives - there is too much money at the top and not enough at the bottom (or really the lower 99%). This leads on the one hand to speculative manipulations and bad movements of capital internationally instead of long-term constructive investment, and on the other to decreased demand. If demand is poor, there is no incentive for constructive investment.

This is not a situation that can be improved by changing interest rates or really anything else that central banks can do, barring helicopter distribution of money. There must be redistribution of wealth and income. Price inflation itself does not do this in the absence of wage inflation. Actually neither can be mandated by the Fed under current conditions. Central banks are not institutions for redistributing income and wealth downwards. In the 70's and 80's they thought it was their job to increase unemployment and restrict growth of wages and it is claimed that they were successful.
"The table is tilted, folks. The game is rigged"
written by Andrew, February 03, 2014 11:34
Baker's conclusion at the end reminds of George Carlin http://www.youtube.com/watch?v=rsL6mKxtOlQ
written by Joe Emersberger, February 03, 2014 7:00
Hi Joe
You wrote "Now, here's the million-dollar question, which I think you will say yes to: Would you be okay with tighter domestic monetary policy if we made a better political effort to weaken the dollar against the main pegged currencies?"

I bet Dean's answer would be that he'd be ok with somewhat higher interest rates if that came after sufficient stimulus got us to full employment and increasing wages - and the interest rate increases did not threaten either of those things but merely helped ward off bubbles. Strengthening unions would be a part of ensuring that the gains from adequate stimulus got directed to the majority and stayed there - at least as important to US workers as the government not maintaining an overvalued dollar.
The Summers/Krugman investment story is mistaken
written by Dean, February 04, 2014 4:16
Yes, we are not seeing a notable shortfall in investment demand against plausible counterfactuals. Lower interest rates still do have some positive effects on investment and also help to boost consumption, most importantly through mortgage refinancing and also car buying. And, it does put downward pressure on the dollar.
They didn't buid it on their own!
written by Perplexed, February 04, 2014 11:27
"So the story is pretty simple. The system has been rigged to redistribute income upward. The rich have used their control of the political process to ensure that it stays that way and their control of news outlets like the Washington Post to try to distort reality."

The rich could not possibly have done this on their own, they would have gone nowhere without the "intellectual" support of economic "science." It is economic "science" that "builds the intellectual infrastructure" that the rich use haul away their booty with. It is the support of economic "science" for the castration of market power and denial of risk pooling that are the results of those who supply "labor" being exempted from the protections provided to every other supplier of every other commodity or service by the Clayton Act.

It is economists that provide the "intellectual" support for the idea that monopolies are an integral part of capitalism and not a threat to its existence.

It is economists that provide the "intellectual" support for tax preferences for the wealthy.

It is economists that provide the "intellectual" support, and the "intellectual" opposition to not measuring and reporting on rents as a share of the economy.

Economist have been building these "scientific" roads for the wealthy to haul away their booty for many, many years now (the Clayton Act was signed in 1914). It is economists who fail to admit their own role in this re-distribution and undermining of workers and the American middle class. It is economist who empower employers over workers by denying the risk pooling that would naturally occur with Clayton Act protections against anti-trust. It is economists that enable the political "divide and concur" strategy of employers to undermine labor (what would the political implications be of all workers sharing proportionately in the output gap? Do you think we'd be off-shoring jobs then?) Without the roads and bridges that economists built for them, the wealthy would have had to resort to their own efforts to build wealth and would have to share the gains with workers. They would be a very different "personality type" than most of the wealthy we have today.

Even the most primitive societies would divide the work that needed to done across all of the available workers, "progress" away from this was "driven" by economic "science" arguments that it was OK to deny a certain "category" of suppliers protection from anti-trust in violation of their rights to equal protection under the law. Mass unemployment is not a "physical phenomenon" of the world, it is legal phenomenon built on economic "science" to empower employers over their workers. It is so "baked in" to economic "science" that it may be impossible to change before it leads to even greater social unrest. The roads are well built now and well maintained, if economists don't explain how little "science" goes into their foundations, these roads will be extremely difficult to tear down or re-purpose to contribute to the welfare of all Americans.

Yes, the story is pretty simple and to historians its a very familiar one that never ends well. Its a story of power supported by the "ideas" and rationalizations that are required to achieve and enhance it. As usual, economists are right there to supply these "scientific" ideas when the "market" demands it.

"It's difficult to get a man to understand something, when his salary depends on his not understanding it" -Upton Sinclair

Does no one wonder why Dean Baker is such an "outlier" with regard to these "foundational" arguments? And even he has trouble breaking away from the "Loser Liberalism" corrals that his types of arguments are supposed to remain in so that the "science" isn't too threatened by them.

Re perplexed, One more factor to consider about Economic Science
written by John Wright, February 04, 2014 3:01
As attributed to Kenneth Boulding

"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."

If the world is forced by climate change to actually shrink and share future economic growth, the economic profession, and its "we can and must always grow the world wide economy" assumed truism will be shown to be fundamentally flawed.

The wealthy might be quite aware of future economic limits and are simply locking down wealth and assets to prepare for this eventuality.

Too many economists are cheerleaders for the wealthy interests and will continue to be.
The capitalist class rules capitalist democracy
written by Mike Ballard, February 04, 2014 4:37
In the USA, the share of overall income going to the top 1% rose from 10% in 1980 to 22% in 2012. That's capitalist democracy in a nutshell.
written by Peter.nh, February 05, 2014 1:00
There is so much that goes into inequality. To your point, many regulations cause income inequality. Then there are new taxes, fees, fines, or other charges that big companies have to pay, it filters down and gets charged to customers, therefore making the government rich along with the special interest groups, and associations who are collecting that money.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.