The Greatest Wealth Transfer In History – Part II

Yesterday, I posted an piece that gathered a lot of attention and generated a lot of comments. The article was titled “The Greatest Wealth Transfer In History.”

The article was based upon data presented in the New York Times written by Talmon Joseph Smith that began with the following statement:

“An intergenerational transfer of wealth is in motion in America–and it will dwarf any of the past.”

Unfortunately, it contained several misprints that many readers pointed out in comments on the article.

One of the misprints distorted this picture:

“The wealthiest 10 percent of households will be giving and receiving a majority of the riches. Within that range, the top 1 percent–which holds about as much wealth as the bottom 90 percent–will dictate the broadest share of the money flow.”

My article states “the bottom 10 percent.”

The second was as follows,

“In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation. By 2022, that wealth had more than tripled, reaching $140 trillion.”

My article gives the date as 2033, and not 2022.

I apologize for the mistakes.

The conclusion to my discussion still stands, however.

And, my conclusion was this.

For the past 40 years or so, the U.S. government, whether under Democratic or Republican leadership, conducted an economic policy that did not produce all the results that it wanted to produce.

The basic policy during this time was basically Keynesian in nature, augmented by the conclusions drawn from something called the Phillips Curve.

The underlying emphasis of these two directives were, one, the economy could be managed by means of demand-side policies that stimulated aggregate demand, and by generating a little bit of inflation so as to keep unemployment at a socially desirable level that was lower than would have been achieved without the macroeconomic stimulus.

If anything, the over-all picture created by this approach was that the income/wealth distribution in the United States would lessen. That is, wealth inequality would decline.

Mr. Smith’s article presents information showing that this decline in wealth distribution did not take place. In fact, wealth distribution has accelerated to more and more historic highs.

And, his narrative indicated that the historic highs would continue on into the future.

The Problem

The Keynesian approach connected with the Phillips Curve assumptions leave us short in terms of timing.

The emphasis of the government on aggregate spending is primarily focused upon short-term outcomes and is also focused upon spending programs that will drive up asset prices.

Aggregate demand programs are generally spending that gets to the economy as fast as it can. The programs are designed to get results and get them right away.

During the economic recovery that followed the Great Recession, economic growth in the United States was around a compound annual rate of 2.2 percent.

Almost everyone was disappointed at this very slow growth and constantly raised questions about why the economy could not grow faster.

Over and over again, reports were produced that showed that the growth of labor productivity was extraordinarily low… in some years running below 1.0 percent. I have written many posts on this outcome.

Two things here. First, politicians wanted programs that produced fast results. Explicitly directed demand-side spending allowed for this to take place and the politicians, seeking re-election concentrated on programs like this in order to “show results” to their constituents.

But, since the early 1980s when consumer price inflation was halted, the government to avoid the direct spending on consumer goods that could blow up consumer price inflation again.

So, the government programs resulted in slow economic growth due to reduced growth in labor productivity and low consumer price inflation.

The first raised questions, and the second was applauded.

The second issue pertains to the results achieved by using the assumptions pertaining to the Phillips Curve.

Remember, the Phillips Curve related the rate of unemployment in the economy to the rate of inflation the country was experiencing. The higher the rate of inflation, the lower the unemployment rate.

But, to build in a rate of inflation into the price system means to write in government policy as the expectation for this higher rate of inflation.

Sophisticated investors like government policies that build in price increases. Targeting price increases lowers the risk to investors and hence they move into this direction.

And, over time, the sophisticated investors move into areas in which the government is trying to achieve its goals.

The Example Of The 2010s

Perhaps the most blatant example of this kind of policy approach was that of the monetary policy in the 2010s.

In terms of building a policy program for the 2010s, Federal Reserve chairman Ben Bernanke explicitly set out his ideas for a stimulative monetary policy in terms of stimulating the stock market.

From much of the research that Mr. Bernanke did as a professor of economics at Princeton University, Mr. Bernanke set up to stimulate the stock market so that rising equity prices would generate a rise in consumer wealth, and this additional wealth would then be spent so as to secure an expanding economy.

So, the rise in asset prices seems to have been a major part of the economic policies of the past.

Let me just add that another area where asset price inflation was helpful in achieving economic growth was in housing and commercial real estate.

Note, that rising asset prices do not count as consumer price inflation. So, asset prices could be driven higher and higher, and this would have little or no impact on the consumer cost of goods and services.

And, so we have the picture of what I have termed as “credit inflation.”

What Is Needed?

In terms of the focus of the government on economic activity, I believe the government needs to focus on policies that are more directed to the supply-side of the economy.

These programs result in higher growth rates for labor productivity and these higher growth rates result in faster growth of the real economy. And, the faster growth of supply, the less pressure exists for increases in consumer prices.

And, you don’t need the stimulus of assets prices… of stock prices or housing prices… to generate the accelerated rate of wealth expansion. This would have a major impact on the rising rate of wealth inequality.

The problem with the supply-side?

It takes a much longer time for supply-side programs to become executed and a longer time for their full effects to spread through the economy.

And this, as mentioned above, is something the politicians don’t seem to like. They want quicker results so as to show the voters that they deserve to be re-elected as often as possible.

But, more on the supply-side at a later time.

One final claim about focusing on the supply-side… a supply-side approach to economic policy, because it does not need to hit the economy immediately, can be easier to finance and easier to keep budgets more in balance.

I believe that the U.S. government needs to focus more on the longer-term, focus more on supply-side programs, and focus more on responsible debt management.

This change of direction cannot be achieved immediately, but at this time the debt ceiling approach is being dealt with, and more attention needs to be given to the direction things are to take in the future.