Income Inequality and Inflation
I have a mansion, I forget the price.
Ain’t never been there, they tell me it’s nice.
I live in hotels, tear out the walls.
I have accountants pay for it all.
Lucky I’m sane after all I’ve been through.
I can’t complain but sometimes I still do.
Life’s been good to me so far.
Life’s Been Good - Joe Walsh
…..
Income inequality is a real thing. I’m not fond of the term (I think it should be increasing income disparity), but it exists and it has been increasing steadily in the U.S. and most advanced economies for 40 years. It is greater in blue states than in red ones.
Inflation is a real thing (duh). It has been declining (called disinflation) for 40 years as well. At least until about a year ago. No Joe Biden, it started well before the Russian invasion and is better described as “Biden’s price increase” than “Putin’s price increase.”
Let’s take inflation first. It has not peaked, in spite of what the propagandists in the media tell you. The most recent CPI index showed consumer inflation at 8.5%. As I told you last week, you are likely experiencing price increases much higher than that. After the CPI number came out, the Producer Price Index (PPI) increase was released at 11.2%. That is the highest they have ever recorded. Producer’s costs feed into what consumers buy. Furthermore, commodity prices are now 51.9% higher than they were a year ago. This feeds into everything as well. Inflation is still on the way up. Wages are part of inflation, and they are only up 6% at the moment. This is likely to change as more and more people realize that they are getting a pay cut in terms of what they can buy.
The underpinnings of income inequality are very complicated and way beyond the scope of this writing. Suffice it to say that globalization increases income inequality, as those at the top pf the pyramid can market their wares to a wider audience. Globalization further increases inequality as wages in Nebraska have to compete with wages in China for work. High asset prices including stocks and real estate and collectibles and crypto increase income inequality since the more assets you have, the more they go up. And if you have no assets, you get none of the benefit of this price appreciation.
Inflation and Income inequality don’t have an economic connection of which I am aware. But history shows there is some correlation. The measure of income inequality (known as GINI) was the same in 1950 as it was in 1983. That means that throughout the 1960s and 1970s, when inflation was rampant, income inequality did not increase. It reached a low right around 1970 and has been climbing ever since.
I believe that we have entered a new period in which inflation will be persistent for years and probably decades. I am reading a book entitled “The Great Demographic Reversal” by a British economist Charles Goodhart and American economist Manoj Pradhan. For reasons they describe in a very academic way, de-globalization along with continuing labor shortages and other factors will continue to increase prices over time.
What will this to do income inequality? History would say it will shrink it. Asset prices do not inflate as interest rates and inflation rise. They often deflate. The returns you need in a high inflationary environment are higher which means the value of the underlying asset must go lower. Wages rise and asset values decline in relative terms. If Amazon’s stock drops in half because inflation squeezes their margins, Jeff Bezo’s net worth will decline significantly. Don’t worry about him though. He’ll still be like Joe Walsh in the song above. But he will need to pay his workers more.
So, what’s the politics of all this? Both inflation and income inequality fuel the rise of populism. That means the Trump wing of the Republican party and the Bernie Sanders wing of the Democratic party. I don’t mean Trump and Bernie, because I think the time for both of them has passed. But their spiritual successors will carry forward the torches. Interestingly, although these populist movements are inspired by the same problems, their solutions couldn’t be more different.
The Dem populists believe that taxes on the wealthy will reduce their wealth and bring income inequality down. They also believe that inflation can be handled by printing more money to give to people so they can afford higher prices. They are idiots.
Wealth taxes bring down the wealth of the top, but also the wealth of the bottom. Basically, everyone is poorer. Technically this reduces inequality but it is not good for society. Lenin tried this. It did not work. The left also finds themselves in a conundrum as they often do. They want to send checks out to everyone but somehow (a mystery to their small minds) much of that money winds up in the hands of the wealthy. There is a reason the vast majority of billionaires in America are Democrats. Dem policies help them, not the people Dem advertising would suggest they help. And the wealthy ones I know use their influence to favor tax increases on everybody…except them. They get loopholes.
The Republican populists want to accelerate deglobalization to raise wages, and suck money out of the economy and raise interest rates to encourage savings and investment. This should reduce income inequality but will trigger and asset bubble burst which will mean a big downturn for a while until the economy adjusts. There will be a lot of disruption and pain from this as there was in the early 80s when Volcker broke the back on inflation.
There is no free lunch. The economy is in a bad place where we can keep the gravy train going for a while and let massive inflation reduce everyone’s spending power or try to reset things and have a pretty big recession. The current leadership is trying to thread the needle between the two outcomes.
You can say that this should be an academic exercise and whatever the brightest minds think will give the best economic result is what we should do. You can also hope that pigs will soon fly. Politics is unavoidably a part of this whole decision matrix as elected politicians don’t like to tell you that they are going to cause you pain and it’s for your own good. They prefer to let the pain develop organically and blame it on Putin, big companies, the other party or their ex-spouse.
So, you are wondering having read the last 1000 words if there is a point to my ruminations here. There is. Both inflation and income inequality are bad. Both breed social unrest. The political class does not like that. They will try to fix them both. Maybe they will succeed and maybe they won’t. But it is going to be a rough ride because there is no painless path forward. I know. Spoken like an accountant. Well, I am an accountant. Look at it this way. We have been on a drug of lots of free money and cheap everything for a while. It felt good. But it makes us do bad things. Getting off drugs involves pain. But it is better than staying on the drugs.
Be cautious. Be flexible. If there is one thing that is certain, it is that the world will look a lot different in a year than it looks right now.
I remain respectfully,
Congressman John Campbell
Drive fast & live free