Skip to content

Why the Current Structure is so Entrenched

Not only is the current structure of our economy and organization of our society designed to redistribute wealth from the poor to the rich, it is out of any direct human control.  There are systems in place to ensure that the right people are at the necessary places to ensure the self perpetuation of the system.  These controls are so pervasive that no person or small group of people can dismantle them.

The economic systems are the most straight forward.  Speculators and others in investment markets are interested in only one figure: how much return they can get.  In financial markets as fluid as those in the US there is no thought of long term investment.  What can yield the highest returns at the very moment gets funded.  A company making sacrifices at present for stability and growth down the road has a harder time getting access to capital.

The boards of directors of companies are under the direction of the owners who want results quickly less they sell their stakes.  These directors instruct their companies and hire executive officers to ensure that the company operates in such a short sighted manner.  If an executive officer or a majority of the board acts differently they are replaced, by the owners if necessary.  A speculator or investor with a different priority then the mainstream can operate but they are in such a minority that their efforts are drowned out.  Necessarily it is those with the short sighted mentality that make the biggest gains and thus develop the most weight in the decision making process.  This system self selects people to maintain the working order of the system and individuals who are different are marginalized.

The political system is controlled by the economic system.  Politicians are largely beholden to those who finance campaigns.  Even on a local level there is a lot of pressure to run a high money campaign as those have a greater chance of being successful.  Individuals and institutions with the most money are the ones with the deepest pockets and exert the most influence on the political process and on politicians.  Those who get the most money in the economic structures have the deepest pockets when buying politicians.  This with few exceptions here and there, political interests tend to align themselves with economic interests which are interested in massing concentrations of wealth in few individuals.

These control structures are so invasive that when someone in power wishes to change something, he or she is quickly found out of power and a more cooperative person in his or her place.  We live in a society whose goal is the perpetuation of these social structures.  In short, the people live to support the society as opposed to a situation where the society exists to support its people.

This is not only true in the decision making aspects of society but in all aspects as well.  Workers and others have their role to play.  There is no shortage of workers willing to work in jobs that damage their communities because of the price of being jobless and because of a positive unemployment rate.  Workers are often put in positions where they end up damaging themselves or damaging their families.

A family whose two adults work more than 60 hours a week to support itself cannot spend the time necessary to raise children in a healthy environment.  Families are living closer to their margin and have no room for safety and are failing at increasing rates (http://www.bankruptcyaction.com/USbankstats.htm).  In these situations, families and individuals who desire to act on principle are often damaged.  Those who are willing to compromise on anything survive and perpetuate a society in which we all are willing to turn on our neighbors if necessary.  Those who aren’t find themselves in dire situations.

These control structures are quite good and doing their job.  It may be better to say have a living wage and real unemployment protections but these cannot happen in our society the way it is structured and organized.  People often undercut their own long term benefit out of short term necessity.  Others who seek to change these structures find themselves defeated by those willing to benefit off of them.  These structures are so pervasive as to effect every area of society and to harm the vast majority of people in one way or another.

It’s a Matter of Organization

Working men and women for decades have improved the nation’s capacity to produce without seeing much benefit themselves.  We live in a nation of plenty but poverty is still quite problematic with a 14% poverty rate (http://www.census.gov/prod/2010pubs/acsbr09-1.pdf).  In addition with 15% of households having trouble putting food on the table (http://www.ers.usda.gov/Briefing/FoodSecurity/) 25% of all food designated for human consumption goes to waste (http://www.nytimes.com/2008/05/18/weekinreview/18martin.html).  Lastly with hundreds of thousands homeless (http://www.huduser.org/publications/pdf/4thHomelessAssessmentReport.pdf) there are millions of vacant housing units (http://www.usatoday.com/money/economy/housing/2009-02-12-vacancy12_N.htm).

The workers of the United States already produce enough goods and services for everyone to live in comfort but that fails to happen.  Families are working longer hours (http://www.bls.gov/opub/working/page17b.htm) to obtain slow material improvement.  Planed obsolescence is rampant and our society produces a large amount of waste.  Much productive time is spent in socially damaging industries such as marketing and defense.

Our society is organized to require people to work and the American people work yet there is constant want in the society.  This drives the production consumption cycle but also leads to a large amount of suffering.  American workers could satisfy the natural needs and a fair amount of the natural desires of the American population in less productive hours then is spent today.  It is way the economy is organized to drive production levels higher while at the same time levees consumers always unsatisfied with their status quo.

A parable is taught in first year economics course: why does the baker bake bread?  The answer is that the baker needs to be able to provide for his or her family and bakes to earn the income to support that and not because the baker wants to feed people.  Another interesting question is if the baker need not bake to satisfy his or her family, would the baker still bake?  I challenge that the answer to this question is yes.  People who have the opportunity often use it to volunteer their skills or goods to help others in need.

Constant want is unnecessary to sustain production but it is necessary to sustain socially damaging overproduction.  A society largely liberated from want would still produce at comfortable levels to sustain mutual well being with more time being afforded to leisurely and erudite pursuits.  This would require a change in how society is organized but a society can be organized to meet human needs as opposed to satisfy the perverse artificial need based motivation of the modern economy.  That’s not to say that the needs themselves are artificial but they need to be present.

The way society is structured is to maintain economic and political control of society in the hands of an elite few.  Poverty and the threat of poverty is essential to this means of control.   A society moving to truly try and satisfy human needs would mean broadening this social control over society in a truly democratic manner.  It is only matter of organization that poverty persists in a land of plenty.

Structure Matters

Structure Matters

The way an economy is structured is of great importance.  The drivers of wealth creation and those who ultimately control that wealth need not be the same.  To the extent that workers are necessitated by life needs to spend a portion of their income, they are not free while those benefiting most from an inequitable economy have considerably more economic freedom.

People influence market forces in proportion to their wealth and not in human proportionality: each person has equal influence.  If public institutions encourage wealth hording amongst the best off the decisions of an economy are made by those with the most wealth and an economy serves to benefit these individuals.  The benefit delivered to others in a society is merely incidental.

The question is: are public institutions in the US serving to amplify the market power of wealthy individuals?  I suggest that looking at who benefits from a growing economy is a way to answer this question.  I looked at real median household income (soruce: the US Census Bureau, Selected Measures of Household Income Dispersion: 1967 to 2009 http://www.census.gov/hhes/www/income/data/historical/inequality/taba2.pdf, their summery here: Income, Poverty, and Health Insurance Coverage in the United States: 2009 page 6 http://www.census.gov/prod/2010pubs/p60-238.pdf, both found here: http://www.census.gov/hhes/www/income/data/statistics/index.html) from 1967 until 2009 and compare it with real US GDP per capita (source http://www.measuringworth.org/usgdp/) from 1967 until 2009.  This comparison is apt as it is comparing a median against a mean.  When the median rises compared to a mean it means that the bulk of a distribution is shifting downward and vice versa.  The differences in the two measures makes an examination of an individual year meaningless but there is value in comparing temporal changes.  To simplify maters I took the situation in 1967 to be a baseline which is an arbitrary distinction.  I wish I had pre-1967 figures but I was limited by what the Census Bureau provides.  I divide the median income level against the GDP per capita level to get the final ratio.  Graph to fallow the table:

Year Real GDP Median Inc Ratio
1967 1.00 1.00 1.00
1968 1.04 1.04 1.00
1969 1.06 1.08 1.02
1970 1.05 1.07 1.02
1971 1.07 1.06 0.992
1972 1.12 1.11 0.993
1973 1.17 1.13 0.967
1974 1.15 1.10 0.950
1975 1.14 1.07 0.936
1976 1.19 1.08 0.912
1977 1.23 1.09 0.887
1978 1.29 1.13 0.881
1979 1.31 1.13 0.862
1980 1.29 1.09 0.847
1981 1.31 1.08 0.820
1982 1.27 1.07 0.842
1983 1.32 1.07 0.807
1984 1.40 1.10 0.783
1985 1.45 1.12 0.773
1986 1.48 1.16 0.781
1987 1.52 1.17 0.773
1988 1.57 1.18 0.755
1989 1.61 1.20 0.749
1990 1.62 1.19 0.734
1991 1.59 1.15 0.724
1992 1.63 1.14 0.704
1993 1.65 1.14 0.690
1994 1.70 1.15 0.678
1995 1.72 1.19 0.690
1996 1.76 1.20 0.683
1997 1.82 1.23 0.676
1998 1.88 1.27 0.679
1999 1.95 1.31 0.671
2000 2.00 1.30 0.651
2001 2.00 1.28 0.636
2002 2.02 1.26 0.624
2003 2.05 1.26 0.614
2004 2.11 1.26 0.596
2005 2.15 1.27 0.590
2006 2.19 1.28 0.584
2007 2.21 1.30 0.587
2008 2.19 1.25 0.571
2009 2.11 1.24 0.588

US GDP and Income Growth
Income to GDP Ratio
It is important to note that while real GDP more than doubled during this time period, median income failed to grow more than 30% (and I’ve heard arguments that the growth is solely due to more hours worked) during the same time period.  Such slow growth in a median compared with such high growth in a mean suggests that the distribution got longer at the upper end while the figures were static for a large portion on the lower end.  This suggests that many families were materially stagnant in an expanding economy.

More to the point there is just about a constant decrease in the ratio during this time.  I take this to be an indication that there has been a constant relative accumulation of wealth amongst those already wealthy.  The economy of the past forty years has been one of stagnation for a large portion of people who need an economy to work for them the most while at the same time working quite well for those already well off.

I also looked at the rate for growth of the per capita GDP for a larger period.  I used the same source for the figures and I measured the year to year growth rate and the average annual growth rate over ten and thirty years leading up to a year.  I took the geometric mean, of course.
GDP growth

The graph seems to indicate a relatively constant rate of growth in GDP per capita at 2% per year from 1950 until 2010 with it being slightly higher in the 1960’s and slightly lower in the 2000’s.  It seems that income equality seams not to have had an impact on the overall growth in GDP in the situation looked at.  If anything a more equal distribution helped the GDP grow faster and a less equal helped it to grow slower.

The overall point remains, that the way an economy is structured determines who benefits and who does not.  A debate about how to structure an economy usually is talked about how the economy will grow the most but what the past forty years have had more to do with improving things for the most wealthy without regard to growing things for those less wealthy.  Structures both public and private are set up to this end yet an economy structured to help those in need of it most would likely be just as effective at that end as the current economy is at it’s end.

A Place for Debt

Debt and investment provides liquidity for producers to be able to anticipate consumer demand.  One of the ways this happens is by the use of fractional reserve banking.  In fractional reserve banking, a bank is required to keep part of someone’s savings deposits in reserve.  If this amount is 15% and one deposits $100 in a bank, the bank keeps $15 and loans out $85.  This $85 dollars is able to be loaned to a producer to generate wealth.  The bank then passes on the maturation of the loan as interest on the savings.

 

Debt is an essential part of the modern US economy being used to allow producers to keep up with consumer demand.  It allows for flexibility and foresight.  It can also be used to aid speculation feeding a speculative bubble.  It can also be used to artificially inflate the indicators of wealth in a society.  In the fractional reserve situation above there is an indication of $185 dollars in an economy (a $100 deposit and an $85 loan) despite there actually only being $100 in circulation.  A precipitous increase in the amount of debt in a society can cause an inflated measure of the wealth in society.

 

In a situation where debt is being abused to keep consumer appetites artificially inflated and to keep up the ability of producers to meet this inflated demand, a culmination of this unsustainable situation causes a crash in demand and a crash in producer ability along with an apparent large loss of wealth.  In such crashes there is no wealth being destroyed (nothing is physically being destroyed) but the accounting is showing a drop in wealth in society.  This is merely a correction to reflect the reality of a situation by a destruction of imagined wealth.  It is necessary although painful but attempts to avoid the pain by maintaining the unsustainable situation only causes more pain in the long run.

 

What I desire to emphasize is that there is no change in actual wealth in this situation.  Debt in any case and in a holistic perspective is only an accounting tool.  When used well it allows for the present creation of wealth based on its use in the future.  When abused it allows for a production of goods that is unjustified by future distributions of wealth.  Someone who purchases something with a $100 of debt that cannot repay it still influences consumer demand and is either generating $100 of wealth for him or herself and taking it from another or must lose $100+ of wealth him or herself in the future to make up for it.

 

The presence of debt as an accounting tool is caused by the fact that money itself is an accounting tool.  Money is a measure through which wealth is measured.  Distributions and flows of money is what allow for information to be transmitted for the functioning of the production consumption cycle.  The money is an abstract quantity designed for this information exchanged but the actual wealth is produced by producers and consumed by consumers.

 

How money is used in modern economies necessitates the use of dept so that producers can meet the demand of consumers.  If poorly regulated debt can hide the presence of economic stagnation and make it harder to deal with such a situation.

Ownership Market or Speculation Market

While it isn’t investors that create wealth, they do have a role to play in an economy.  Investors negotiate the consumption production cycle and direct capital so that producers can meet consumption demand.  A society benefits most over the long run with an investment system that rewards long term and consistent creation of wealth.

 

One way of satisfying this is the banking system where banks collect savings and then loan the money in part to businesses based on an assessment of the ability to repay the loan.  Loan and savings rates would fluctuate if banking is a competitive market so that an equilibrium of investment happens consistent with the particular banking norms.  Modern economies also set up investment markets where parts of companies can be purchased because of promises of wealth creation.

 

The rules that govern these investment markets are essential to their good functioning.  With rules that encourage long term planning and prudent investing a consistent level of wealth creation can be generated.  On the other end speculation can be incentivized.  A speculator in an investment market looks to create wealth for him or herself by holding a security until it rises in price and selling it without regard to long term wealth creation potential.  A successful speculator can predict how a security will perform in the near future and act on those readings.

 

Speculation incentivizes the appearance of short term wealth creation without regard to long term performance.  A society in which investment or ownership markets have been replaced by speculation markets is marked by short term volatility in investment markets, speculative bubbles, and the sacrifice of long term wealth creation for the appearance of short term wealth creation.

 

Not only are producers less likely to make needed costly investments to drive long term success, the speculators serve no useful social function while speculating wealth for themselves.  These people are parasitical on a society while at the same time actively damaging to the long term well being of the population as a whole.

Inefficiency from Inequality

There is a long standing principle in mainstream economic thought that efficiency and equality are mutually exclusive.  I cannot give that argument justice but it must hold that efficiency creates inequality or that equality creates inefficiency.  The only way I can consider the later argument working is if equality creates incentives to underproduce which is an argument that has been made.  I disagree with it but I’ll talk on that later.  The former argument is that efficiency creates inequality.  I’m sure this argument has been made as well but I am unfamiliar with it.  Instead of dealing with the argument directly I desire to explore how the two can be compatible.

Part of the question of compatibility between the two is the measure of fiscal multiplier.  A fiscal multiplier is how much the GDP changes relative to the amount of money spent by a government.  What fiscal multipliers are is a subject of much debate amongst economists with no consensus.  Generally direct spending is given a multiplier greater than one and tax cuts are given a multiplier less than one.  This means that a dollar taxed and spent by the government generally has the impact of growing the economy when these are the case.

In general when adjustment in fiscal policy are made the net impact on GDP is the multiplier of the spending divided by the multiplier (in absolute value) of taxes used to fund the spending times the amount spent.  When this number is greater than one the economy as a whole benefits from spending: ie. the spending is more beneficial than the taxes are harmful.  Different taxes and different spending have different multipliers and the problem is these are hard to measure.

A study was done in response to the stimulus spending in 2009 (http://www.nber.org/papers/w16759.pdf?new_window=1 via http://tpmcafe.talkingpointsmemo.com/2011/02/22/washington_wrecks_the_economy_more_evidence/ via http://www.tinyrevolution.com/mt/archives/2011_02.html) that shows that spending on infrastructure likely has a multiplier of at-least 1.5 and spending on direct aid to the poor has a multiplier of at-least 2 at-least in a recession.  These are large figures and larger then a tax raise that has a multiplier of less than 1 or slightly greater than 1.  This would directly suggest that at-least in a recession that taxing the wealthy and spending the money on the poor helps boost society’s GDP.

The question remains is why would there be such a disparity between the three aspects.  The answer is revealed in spending habits.  Someone who is getting by week to week or month to month is largely spending all of the money he or she earns while someone who has the luxury of a substantial savings or other wealth reserve has the ability to fund this reserve.  The poor spend more money than the rich as a portion of income.  Since it is the cycle of production and consumption that drives GDP, the poor are more efficient drivers of GDP then the rich are.  Thus increasing equality drives short term efficiency in GDP growth.

Important to the notion of economic efficiency is the question of what an economy is supposed to do.  An economy is supposed to provide goods and services to a population.  I will make the further claim that necessary goods need to have a higher priority than luxury goods.  Since the spending power of different segments of a population determine what production occurs, greater equality leads to production more balanced with humane priorities.  This leads to the conclusion that increased equality creates efficiency in an economy.

Who Creates Wealth

In mainstream political discussion it is assumed that “investors” create wealth.  I challenge this assumption.  Wealth is created when something is created that has greater value than that of its non labor inputs.  The creation of goods from raw materials or the creation of creative works are examples of wealth creation.  Directly it is those who directly create these objects rather than those that invest that create wealth.  Instead of a blatantly false direct statement the assumption generally means that the activities of “investors” lead to an increase in GDP.

To understand this issue one needs to understand what GDP is.  The GDP is the value of production that occurs in a society.  It is important to note that consumption only occurs when the investor thinks that the production will be consumed.  The consumption drives production which is how wealth is created to fund consumption.  In normal settings more wealth is created in the production process then is consumed in society leading to a massing of wealth within a society.

It is important to note that with the necessary presence of investment decisions, it is consumption that drives production and not investment itself.  The availability of credit means that the funds for investment need not be present at the time of production for production to occur as long as credit is available.  In modern economies governments set themselves up to provide credit through central banks usually accepting some measure of inflation for the availability of credit to fund production.

If credit markets are operating responsibly, production will be driven if and only if there is the anticipation of consumption.  Thus while workers are directly responsible for wealth creation, it is consumers who indirectly drive wealth creation.  How much spending power different segments of a population have has a direct impact on the production that occurs in that society.

Who Pays Taxes and How Much

I’ve heard several things claimed about the US tax structure that I thought to figure some things out.  The first thing is to figure out how much in taxes do people actually pay.  I was able to look up the total historical US receipts from the White House(http://www.gpoaccess.gov/usbudget/fy10/hist.html table 1.1) and compare it to the GDP from the Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp).  If I can figure out how to show a graph I’ll do so but otherwise the table would have to suffice.

Figures are in Billions of Dollars

Year Reciepts GDP Ratio
1929 3.9 103.6 3.7%
1930 4.1 91.2 4.4%
1931 3.1 76.5 4.1%
1932 1.9 58.7 3.3%
1933 2.0 56.4 3.5%
1934 3.0 66 4.5%
1935 3.6 73.3 4.9%
1936 3.9 83.8 4.7%
1937 5.4 91.9 5.9%
1938 6.8 86.1 7.8%
1939 6.3 92.2 6.8%
1940 6.5 101.4 6.5%
1941 8.7 126.7 6.9%
1942 14.6 161.9 9.0%
1943 24.0 198.6 12.1%
1944 43.7 219.8 19.9%
1945 45.2 223 20.3%
1946 39.3 222.2 17.7%
1947 38.5 244.1 15.8%
1948 41.6 269.1 15.4%
1949 39.4 267.2 14.8%
1950 39.4 293.7 13.4%
1951 51.6 339.3 15.2%
1952 66.2 358.3 18.5%
1953 69.6 379.3 18.4%
1954 69.7 380.4 18.3%
1955 65.5 414.7 15.8%
1956 74.6 437.4 17.1%
1957 80.0 461.1 17.3%
1958 79.6 467.2 17.0%
1959 79.2 506.6 15.6%
1960 92.5 526.4 17.6%
1961 94.4 544.8 17.3%
1962 99.7 585.7 17.0%
1963 106.6 617.8 17.2%
1964 112.6 663.6 17.0%
1965 116.8 719.1 16.2%
1966 130.8 787.7 16.6%
1967 148.8 832.4 17.9%
1968 153.0 909.8 16.8%
1969 186.9 984.4 19.0%
1970 192.8 1038.3 18.6%
1971 187.1 1126.8 16.6%
1972 207.3 1237.9 16.7%
1973 230.8 1382.3 16.7%
1974 263.2 1499.5 17.6%
1975 279.1 1637.7 17.0%
1976 298.1 1824.6 16.3%
1977 355.6 2030.1 17.5%
1978 399.6 2293.8 17.4%
1979 463.3 2562.2 18.1%
1980 517.1 2788.1 18.5%
1981 599.3 3126.8 19.2%
1982 617.8 3253.2 19.0%
1983 600.6 3534.6 17.0%
1984 666.5 3930.9 17.0%
1985 734.1 4217.5 17.4%
1986 769.2 4460.1 17.2%
1987 854.4 4736.4 18.0%
1988 909.3 5100.4 17.8%
1989 991.2 5482.1 18.1%
1990 1032.1 5800.5 17.8%
1991 1055.1 5992.1 17.6%
1992 1091.3 6342.3 17.2%
1993 1154.5 6667.4 17.3%
1994 1258.7 7085.2 17.8%
1995 1351.9 7414.7 18.2%
1996 1453.2 7838.5 18.5%
1997 1579.4 8332.4 19.0%
1998 1722.0 8793.5 19.6%
1999 1827.6 9353.5 19.5%
2000 2025.5 9951.5 20.4%
2001 1991.4 10286.2 19.4%
2002 1853.4 10642.3 17.4%
2003 1782.5 11142.1 16.0%
2004 1880.3 11867.8 15.8%
2005 2153.9 12638.4 17.0%
2006 2407.3 13398.9 18.0%
2007 2568.2 14061.8 18.3%
2008 2524.3 14369.1 17.6%
2009 2156.7 14119 15.3%
2010 2332.6 14660.4 15.9%

Tax Burden on the Economy

This is the total amount of money the US Federal Government takes in each year from all sources.  I would love to also have state and local level figures but I haven’t found a quick concise source for it.  From what I’ve learned the states take in (in total) about half of what the federal government takes in and that figure increased noticeably since the 1970’s.  The fit is for post 1944 figures and is am affine least squares fit.  For post 1944 numbers, the average receipt level as a share of GDP has been 17.4% with a standard deviation of 1.32%.  The slope for the affine fit is .00000466%/year which would give a variation over 67 years (1944 through 2010) of .000299% much less than the standard deviation indicating little overall trend since 1944.

It’s important to note that despite drastic changes in how receipts are collected that the total amount has been roughly between 15% and 20% of GDP since 1944 with noticeable variation during that time.  With the state contribution it is likely that over the past half century the total tax burden on the economy has risen from around 15 to 20% to about 27% over a half century.  Total tax levels have been relatively constant in the US since World War Two.  I also have no evidence of this but I suspect the post WWII taxation level when compared with the pre WWII taxation level to be due in large part to a large standing military.

The big takeaway of this is that the level of federal taxation is independent of the income tax structure or the top marginal rate.  This means that a change in structure in taxation only changes the distribution of money taxed and not the total amount.  Also note that the top marginal rate has gone down from 91% in the 1950’s to 35% in the 2000’s (http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213).  This would suggest a shifting burden away from the wealthy as being responsible for taxation.

I will throw two studies at you (http://ase.tufts.edu/gdae/pubs/wp/03-10-tax_incidence.pdf (note page 16) and http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf (note page 12)). That indicate that the tax structure in the US is almost completely proportional (a little on the progressive side) which is a significant change from a progressive tax structure of the past.

Private Debt Crisis

There is a lot of discussion on the public debt situation in the United States.  There is not a lot of discussion on the private debt situation in the United States but it’s an even more important issue.  As a general economic rule, for individuals, groups, or societies, savings is paying for prosperity tomorrow with poverty today and debt is paying for prosperity today with poverty tomorrow.  The optimal situation is a solid and balanced investment policy but there are different ideal savings and debt rates in given situations.  One idea is to borrow money to make investments that will yield returns greater than the costs of the debt.  This can be done on a social level as well as on an individual level.

While there is an appropriate use of debt in a capitalist society, debt can be abused with negative consequences which can be quite severe.  Debt that costs more than the gains from investment depletes wealth for example.  There is antidotal evidence that individuals are using debt, both consumer and mortgage debt, to fund everyday life needs.  This is a problem as this debt is a drain on the wealth of the individuals and often the levels of debt being used as operating expenses exceed the total wealth of the individuals.  This is a guaranteed pathway into bankruptcy in which the debt cannot be repaid.  According to an untrustworthy source (http://www.bankruptcyaction.com/USbankstats.htm) consumer bankruptcies have been increasing since the 1980’s indicating a misuse of household debt.

The consequences to the individual are regrettable but there are social consequences of this misuse as well.  As long as a significant number of consumers are using private debt to fund operating expenses, there is excess demand for consumer items that will crash when the debt cannot be re-paid.  In addition there is an inflationary effect as the excess demand raises the costs of goods.  Also if government reacts to debtors going insolvent with inflationary policies there is additional inflation.  The reckless use of private debt by individuals and abusive debtors can have social consequences.

I’ve decided to take a look at some data about private debt and compare it to US GDP data.  The data from private debt is taken from the Federal Reserve schedule Z1 (http://www.federalreserve.gov/releases/z1/) and the GDP data is taken from the Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp).  The numbers are not adjusted for inflation (as far as I can tell) and are in billions of dollars.  I limit myself to the time period where data is available from the Federal Reserve schedule.

Figures are in billions of dollars

year

Houshold Debt

Business Total GDP Ratio
Total Mortgage Consumer
1979 1276.1 826.7 354.6 1347.0 2623.1 2562.2 102.38%
1980 1396.0 926.5 358.0 1478.1 2874.1 2788.1 103.08%
1981 1507.2 998.2 377.9 1662.0 3169.2 3126.8 101.36%
1982 1576.4 1031.1 396.7 1811.4 3387.8 3253.2 104.14%
1983 1732.0 1116.2 444.9 1999.1 3731.1 3534.6 105.56%
1984 1943.3 1242.8 526.6 2325.1 4268.4 3930.9 108.59%
1985 2277.8 1449.6 610.6 2577.5 4855.3 4217.5 115.12%
1986 2537.3 1648.3 666.4 2871.0 5408.3 4460.1 121.26%
1987 2755.1 1827.9 698.6 3122.6 5877.7 4736.4 124.10%
1988 3043.6 2054.2 745.2 3409.2 6452.8 5100.4 126.52%
1989 3319.0 2259.9 809.3 3641.5 6960.5 5482.1 126.97%
1990 3580.9 2488.8 824.4 3768.5 7349.4 5800.5 126.70%
1991 3769.7 2667.0 815.6 3676.7 7446.4 5992.1 124.27%
1992 3970.4 2840.0 824.8 3670.6 7641.0 6342.3 120.48%
1993 4210.3 2998.7 886.2 3691.5 7901.8 6667.4 118.51%
1994 4531.8 3165.3 1021.2 3842.0 8373.8 7085.2 118.19%
1995 4841.2 3318.9 1168.2 4142.8 8984.0 7414.7 121.16%
1996 5177.0 3523.8 1273.9 4415.0 9592.0 7838.5 122.37%
1997 5477.6 3739.3 1344.2 4851.5 10329.1 8332.4 123.96%
1998 5903.4 4040.6 1441.3 5417.1 11320.5 8793.5 128.74%
1999 6396.0 4416.3 1553.6 6033.3 12429.3 9353.5 132.88%
2000 6987.3 4798.4 1741.3 6590.0 13577.3 9951.5 136.43%
2001 7659.3 5305.4 1891.8 6955.3 14614.6 10286.2 142.08%
2002 8484.3 6009.9 1997.0 7146.8 15631.1 10642.3 146.88%
2003 9505.0 6894.4 2102.9 7337.1 16842.1 11142.1 151.16%
2004 10569.6 7835.3 2220.1 7794.7 18364.3 11867.8 154.74%
2005 11742.9 8874.3 2320.6 8467.3 20210.2 12638.4 159.91%
2006 12929.5 9865.0 2416.0 9355.5 22285.0 13398.9 166.32%
2007 13803.2 10539.9 2555.3 10574.3 24377.5 14061.8 173.36%
2008 13801.2 10495.5 2594.1 11187.7 24988.9 14369.1 173.91%
2009 13566.7 10339.8 2478.9 10897.1 24463.8 14119.0 173.27%
2010 13357.9 10069.6 2434.6 11087.2 24445.1 14660.4 166.74%
year Ratio Mort Rat Cons Rat Bus Rat
1979 102.38% 32.3% 13.8% 52.6%
1980 103.08% 33.2% 12.8% 53.0%
1981 101.36% 31.9% 12.1% 53.2%
1982 104.14% 31.7% 12.2% 55.7%
1983 105.56% 31.6% 12.6% 56.6%
1984 108.59% 31.6% 13.4% 59.1%
1985 115.12% 34.4% 14.5% 61.1%
1986 121.26% 37.0% 14.9% 64.4%
1987 124.10% 38.6% 14.7% 65.9%
1988 126.52% 40.3% 14.6% 66.8%
1989 126.97% 41.2% 14.8% 66.4%
1990 126.70% 42.9% 14.2% 65.0%
1991 124.27% 44.5% 13.6% 61.4%
1992 120.48% 44.8% 13.0% 57.9%
1993 118.51% 45.0% 13.3% 55.4%
1994 118.19% 44.7% 14.4% 54.2%
1995 121.16% 44.8% 15.8% 55.9%
1996 122.37% 45.0% 16.3% 56.3%
1997 123.96% 44.9% 16.1% 58.2%
1998 128.74% 45.9% 16.4% 61.6%
1999 132.88% 47.2% 16.6% 64.5%
2000 136.43% 48.2% 17.5% 66.2%
2001 142.08% 51.6% 18.4% 67.6%
2002 146.88% 56.5% 18.8% 67.2%
2003 151.16% 61.9% 18.9% 65.9%
2004 154.74% 66.0% 18.7% 65.7%
2005 159.91% 70.2% 18.4% 67.0%
2006 166.32% 73.6% 18.0% 69.8%
2007 173.36% 75.0% 18.2% 75.2%
2008 173.91% 73.0% 18.1% 77.9%
2009 173.27% 73.2% 17.6% 77.2%
2010 166.74% 68.7% 16.6% 75.6%

US Private Debt
 

There is a wealth of insight to be found in this data.  Private debt has been increasing steadily mostly lead by mortgage debt and consumer debt.  Consumer debt peaked in the 2000’s and has been decreasing nicely in the economic crisis.  Mortgage debt has not decreased bellow that which funded the bubble but business debt which has remained steady for the time that there is data grew precipitously throughout the 2000’s.  There is more to gain from this but these indications are what I’m focusing on.

One surprising bit of good news is that consumer debt is in rather good position.  This means that several economic effects can be avoided but one cannot.  The longer consumer debt continues to be misused to fund operating expenses the crash of excess demand is going to be worse.

When debtors providing consumer credit begun the default, demand for consumer goods will plummet leading to a likely deflationary spiral and individuals will not be able to afford basic necessities such as food.

The mortgage situation is disturbing as the levels of debt as mortgages remains too high.  The crisis in 2008 was a mortgage crisis but the correction is not complete and in fact has a long way to go.  This has the effect of continuing the protracted depression that we find ourselves in.  It may take more than half a decade for this driver of economic decline to run its course.

The most concerning indication is the ballooning of business debt over the past decade.  This is an indication that a natural stagnation has been occurring for a decade but, because of the power of faith, artificial growth has been sustained during that time.  This debt situation will need to be corrected necessitating an economic decline to a level that would have resulted from a decade of stagnation.  Only then can the causes of stagnation be addressed and economic growth resume.

Overall private debt has come down 7% of GDP (1.051 till$) during the crisis but it probably needs to come down 25% of GDP more (3.665 till$).  As painful as the depression has been so far, it is likely to get 3 to 4 times worse before an actual recovery can occur.  While on the surface consumer debt looks stable, there are still indications it is being misused.  When this unsustainable situation comes to a head and debtors providing consumer debt are forced to behave rationally, there will be a crash in consumer demand.  This will cause businesses to start to default in earnest on its debt leading to a massive economic decline.

While I cannot support this guess, I guess that the consumer debt crisis will happen in the summer of 2012 leading to a business debt crisis within a year or two.  In any case only when we as a society decide to or are forced to confront an abuse of debt will the economic decline be able to be addressed and progress be able to be made in improving the negative effects of a decade of abuse.

Introduction

My name is Benjamin Arthur Schwab and this is my third blog.  I plan on writing on what interests me whether it be economics, dharma, science, sports, or anything else that interests me.  I want to emphasize that I am only an amateur in all of these areas and in any area I am likely to write in.  I will try and write with all due respect for established standards but I’m certainly not going to adhere to professional standards.  I should not be taken as an expert on anything I say here nor should anything I say here be taken to be from an objective perspective or with due preference to counter view points.  I am going to write for my own personal benefit and want a place to collect these writings where I can easily share them if I desire.  If you read my blog I hope you can get something positive from it no matter what that may be.