Monday, August 3, 2015

We Are the 100%

I was playing around with data today, and noticed this strong relationship.

If there is a change in the trend of stock market returns, there is usually a similar change in trend in the earnings of production workers, with an average of about a 4 month lag.  The change in equity values is much larger, because equity owners accept most of the cyclical risk in the economy.

The 1990s were a period of relatively stable changes in the rate of growth of incomes and equity values.  It was also a period of high income growth and high equity valuation growth.  Stability is valuable.  It should be our goal.  To risk instability because investors might internalize that value or because capital might occasionally capture more of that value than labor is a rather self-defeating point of view.

Further, there seem to be two undeniable facts about incomes over time.

(1) In the end, we all rise and fall together.

(2) The distribution of incomes will have a stochastic quality.  There will be times when capital benefits more, when high incomes benefit more, or when low incomes benefit more from transitory economic developments.

Given that these two factors exist, there will be many times when the best policy for one group will be to encourage outsized growth for the other two groups.

If a stance against policy is based on the idea that the Fed is backstopping the stock market or the claim that accommodative monetary policy is a "bailout", it is just as much a stance against wage earners as it is against equity owners.  This is true even if capital is currently seeing more growth than labor or high earners are doing better than low earners.  And, even if we enter a phase when low incomes capture a larger portion of secular growth, capital will appear to benefit more because of its extreme cyclical exposure.

This is not a commentary on safety net policies.  Before we consider social support policies, there is the simple point that progress is progress.  There is a shocking amount of commentary in this country right now that amounts to saying we should undermine potential growth because it's the wrong kind of growth.  Worse still, there are appeals to stagnation that come from confusion, such as misunderstanding the difference between high wage incomes and capital incomes.

The 1990s was a very prosperous time for households with lower incomes.  It also happened to be a time when income variance grew and capital income was high.  Given the state of technology and the state of the developing world, that is probably what success looks like today - for everyone.

The longstanding challenge of human civilization has been the struggle to overcome our unfortunate tendency to destroy absolute prosperity through battles over relative status.


  1. Great post- that last line in particular is very well said.

  2. around here we hate the big businesses when they fire people because the fired people r miserable, and we hate them when they hire because "the new hires drive rents up"

    it's hard for me to tell what sort of enterprise meets Dem standards for approval

    1. It's an interesting phenomenon, I think, and one I don't have a solution to. The progressive paradigm begins with a virtuous goal of leveling the playing field of systemic injustices. But, categorization is the inevitable next step.

      Our perception of truth is tenuous and requires frequent adjustment. I liken it to walking a straight line through a pasture. It seems easy - the most natural thing. But, put a blindfold on, and within meters, you could be walking in any direction. Truth seeking requires constant feedback.

      But, group cohesion is served by constancy. So, a movement based on categories is bound to see those categories ossify. An unchanging symbol of the truth replaces an ever-changing estimate of the truth, because group loyalty naturally builds around it. A never-changing villain is the ultimate tool for group cohesion. And, I'm afraid this is where modern American progressives have ended up.

      The indignation is the thing. Racial and economic power imbalances are the villain. Any policy position is acceptable, as long as it is couched in anti-villain rhetoric. So, Bernie Sanders can be the savior of the downtrodden while bragging that he is against hiring or trading with Mexican workers (it's a Koch conspiracy, believe it or not) and we can prevent pretty much anyone in the bottom half of the income distribution from buying a home (got to keep a thumb on those predatory lenders).

      Yoram Bauman is a left-leaning economist who managed to pull together a group to try to get a carbon tax initiative on the ballot in Washington state. He's getting push-back from the left because he dared to make the proposal revenue neutral.

      An actual quote from the article:
      "Climate change will disproportionately affect poor and minority communities, they note, so any climate initiative ought to place racial equity front and center."

      You know, making that statement was really the goal for those activists. The symbol is the important thing, not the end result. The damage gets done when in the process of engaging in an arms race for symbol loyalty, they actually pass legislation.

    2. To clarify the last paragraph of my comment, I mean this in the Hansonian (Robin) sense. I spent time in the Bible belt. There were a lot of people there who put a lot of effort into letting you know how prevalent Jesus was in their lives. They were generally good people, and for the most part they were led to do good things by this identity. And they were absolutely sincere. But, the more obsessed ones became captives of their symbols over reality. When this becomes overwhelming, you get churches that dwell on selective types of sinners as the villains, and if those churches get political, it can get ugly. I think that phenomenon is widely understood. I think there are parallels with activist progressives. When I say the symbol is the end result, I don't mean that those activists are insincere. I mean that their emotional resonance comes from the symbol, even as they sincerely identify with creating a certain social change.

      This error of mistaking loyalty to the symbol for seeking truth is what makes mixing religion and politics so dangerous, in a way that I don't think progressives appreciate. Because, what happens is that the difficult questions required to provide painful feedback to a point of view are seen as disloyal. The blindfold is on.