Liberal economic policies lead to greater income inequality.
At least, this is what two articles in The New York Times suggest.
Since the 1960s, the U.S. economy has risen dramatically, but almost none of the gains have gone to the bottom 50%.
The dilemma for Porter, is "stark inequality or all-out war."
He seems to be saying either allow the inequality to remain or, because the battle is going to be so tough, wage all-out war against the situation.
Let's throw out a third choice.
The conditions that unfolded over the past 55 years or so have been the unintended result of federal economic policies. Rather than achieving the results the government wanted, higher levels of employment and less income inequality, the opposite has occurred: low labor participation rates consistent with what was the case in the late 1970s and greater income inequality.
Financial engineering is behind all this. However, it is financial engineering that the government used in the early 1960s to fine-tune the economy in order to achieve high rates of employment and a more equal income distribution.
The government's effort at financial engineering was based upon the theory of John Maynard Keynes, the English economist. The idea was to maneuver the government's budget to reduce the impact of depressions or recessions and to smooth out the business cycle, particularly on the downside.
This was the goal of the Kennedy administration in the early 1960s.
Toward the end of the 1960s, this approach extended to include greater fine-tuning of the economy, with the aim of achieving higher levels of economic growth. It relied on the statistical relationship between unemployment and inflation captured in what was knows as the Phillips Curve.
But expectations changed.
As the government stimulated credit inflation during the 1960s, business leaders and investors came to expect the government behavior and moved to take advantage of it. One-bank holding companies and Eurodollar deposits were just one innovation that came out of this period that lived off of the government's efforts to stimulate the economy, but there were many others.
In the 1970s, credit inflation grew, and the whole process of financialization expanded.
Essentially, what happened was that more credit creation went into financial services, and fewer funds went into industry. Incentives were much greater, more certain and quickly received in finance than in industry.
As we have seen in the economic recovery since the Great Recession ended in 2009, little of the money that the Federal Reserve has pumped into the financial system have gone into the production of physical goods. Economic growth has been a mediocre 2.1% throughout the recovery.
Over this time, financial services companies hired more people and commanded the largest relative share of U.S. employment, ever. Profits went to financial interests and not manufacturing interests.
General Electric and General Motors were earning way more than one-half of their profits from their financial divisions.
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Income inequality increased.
One can see what happened in the chart that accompanies the New York Times articles.
The chart shows that in 1980, 19.9% of the pre-tax national income of the U.S. went to the bottom 50% of wage earners. From there it was downhill all the way and now stands at 12.5%.
The top 1% of the population received 19.7% of the pre-tax national income in 1980, and this rose constantly to where it is 20.2% now.
Note how this coincides with the timing of government policy mentioned above. The big move toward Keynesian economic policies came through the Kennedy, Johnson and Nixon years.
Remember that President Richard Nixon bragged that "we are all Keynesians now!"
By the early 1970s, expectations had changed, and sophisticated investors moved more into assets that would appreciate in value such as real estate, gold, pictures and so forth. As they were rewarded, they found other outlets, and to service these outlets, financial innovation accelerated.
The three major characteristics of financialization were greater financial leverage, increased risk taking and more financial innovation.
No wonder the wealthy got wealthier.
The financial engineering of the federal government that created this environment spilled into the private sector, and those with money or education or both took advantage of it. Those without these resources suffered the consequences.
That is where we are today.
The move to correct this doesn't lie in advancing "total war." The move to correct this must start with the government's unrealistic belief that more financial engineering will resolve the issue.
The government needs to back track and create policies that not only reduce the incentives to just financial success but help to educate and train U.S. workers. This may take time.