I have been talking about the danger of too low inflation for some time. This graph portrays the history of inflation since the 1970s, when the Arab oil embargo caused oil prices and inflation to soar to unacceptable heights. It made Americans realize how dependent they had become on 1) fossil fuels to run the economy, and 2) other people’s oil.
Inflation since then—at least the Fed’s preferred PCE Index that is the broadest measure of price fluctuations—has been tamed. In fact, so much so, the worry today is too little inflation via ever more efficient manufacturing that now employs a fraction of the employees it once did for the same output.
Why such a worry? Because the globalization that drove most of the higher-paying jobs overseas to cheaper climes has driven down most households’ incomes as well as prices that could lead to a deflationary spiral, which would signal an incoming recession. It worried the Fed under Ben Bernanke so much that he brought on the various QE programs after the Great Recession to ease credit by bringing down interest rates to the record lows of today.
In fact, the 10-year Treasury yield has slipped to 2.29 percent from a seven-year high of 3.23 percent last October, and it’s been under pressure to go even lower from a flareup in trade tensions between the U.S. and China.
It hasn’t done much for growth. The distribution of household wealth in America has become even more disproportionate over the past decade, with the richest 10 percent of U.S. households representing 70 percent of all U.S. wealth in 2018, compared with 60 percent in 1989, according to a recent study by researchers at the Federal Reserve.
“The share of assets held by the top 10 percent of the wealth distribution rose from 55 percent to 64 percent since 1989, with asset shares increasing the most for the top 1 percent of households. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.
Wealth has transferred from those that work for a living to those that live off rents, which is income from existing assets—whether it’s stocks, bonds, real estate, or even charitable foundations where many of the wealthy shelter their incomes.
Economics Professor Gabriel Zucman has researched what happened, especially since 1980 when Republicans began to dominate the political landscape. The top 1 percent of income earners controlled 7 percent of the wealth then, whereas today they control 39 percent.
A second result has been the cutbacks in health care spending to the tune of $1.5 trillion over 10 years from the Republicans 2017 tax cut bill that reduced corporate taxes to 20 percent. So instead of spending on such public benefits as expanded health care and infrastructure spending, the tax savings went into the pockets of corporate shareholders and their CEOs.
President Trump acknowledged as much with his latest walkout of the scheduled meeting with Democrats on an already agreed upon $2 trillion infrastructure bill. Washington Post’s E.J. Dionne, Jr. said as much in his comment about Trump’s latest blowup.
“Trump’s theatrics were also very convenient because they disguised the fact that he cannot now, or ever, deliver on his signature promise to create a “great” infrastructure program. This is why Trump “infrastructure weeks” have become a standing joke in Washington. LaTourette (a Eisenhower moderate Republican) was right: The Republican Party is no longer interested in spending public money to solve big problems if doing so gets in the way of cutting taxes.”
How dire is this trend? Americans are so stretched to maintain a decent standard of living that they aren’t saving much of anything. The Fed announced recently that 40 percent of working Americans haven’t saved more than $400 for emergencies. Economist Stephen Roach reacted to the $1 trillion budget deficit that will result from the low savings rate.
“When Reagan took office in January 1981, the net domestic saving rate stood at 7.8 percent of national income, and the current account was basically balanced. Within two and a half years, courtesy of Reagan’s wildly popular tax cuts, the domestic saving rate had plunged to 3.7 percent, and the current account and the merchandise trade balances swung into perpetual deficit.”
It has hovered in the 3 percent range ever since and government revenues now cover just 79 percent of public spending. The rest must be borrowed, which cannot go on forever.
Where have all those corporate profits gone? Ask Professor Zucman, who estimates $8 trillion is sheltered in offshore accounts—some legally, but much of it hiding from the IRS.
Harlan Green © 2019
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