The real reason behind ‘Our Broken Economy’

The NY Times today ran a much-hyped op-ed column entitled ‘Our Broken Economy, in One Simple Chart’. Said chart (below, produced by researchers including Thomas Piketty) shows how income growth in the US has gone from being strongest for people on the lower incomes to favouring the rich and especially the super-rich.

Inequality, in other words, have gone from contracting to increasing. This is true. We know that wages have stagnated for many lower and middle income workers and that the rich have not suffered similarly. The graph doesn’t tell us anything we didn’t already know.

True to the NYT’s left-liberal tilt, author suggests something must be done and prescribes ‘a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation’. For good measure, the author then goes on to lambast the Trump administration for trying to engineer more inequality.

Yet another article bemoaning rising inequality. Yet another article completely omitting any mention of central bank policy.

But the real reason why the rich are getting richer is obvious. In the years since the researchers’ base year (1880) the S&P index is up by more than 2200% (not inflation adjusted). Just since January 2009, the index is up by almost 300%. Anyone who follows financial markets know that the overriding reason is the ultra-loose monetary policy pursued by the Federal reserve.

S&P 500 Index

As asset prices from equity to housing have exploded in value, the owners have obviously enjoyed increasing wealth. The rich get richer.

At the same time, too low interest rates have postponed the inevitable bust and the accompanying re-allocation of capital from current to new, more productive uses. Inefficient capital allocation means lower living standards and lower productivity. The working class suffers from stagnating wages.

The mechanics are simple, the causality indisputable. Yet, the NYT article contains not a single mention of the Federal Reserve. This is not likely to reflect a carefully considered exoneration of Fed policy. More likely is it that the author simply is too ignorant to acknowledge the immense power of the central banking system in shaping asset prices – or too dishonest to highlight it. Much better to exploit the emotional subject of inequality to promote a misguided left-wing policy agenda.

The article fits an all too familiar pattern of observing a problem and prescribing the wrong medicine, based on a flimsy or completely absent understanding of the real mechanisms at work. The NYT should be lambasting the destruction of functioning capital markets that is a result of worldwide central bank policy which is perpetuating mis-allocation of capital, instead of peddling poorly thought through, misleading journalism.

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