Global (National) Income Inequality is a National (Global) Problem
In this edition of the newsletter, I’m revisiting an article I wrote a couple of years ago for Plough that tried to provide a theological analysis of the nominal economy (numbers on a spreadsheet) and its relationship with the real economy (the production and consumption of goods and services.) I’ve recently been reading some trade theory which has added new dimensions to my concerns about financial speculation, connecting to a related issue of rising income inequality and the global imbalances that result. But before I jump in, some items to note.
First, for The Dispatch, I wrote about HBO’s show Succession through the lens of Harvey Mansfield and Hannah Arendt. “Politics depends on frequent human interactions. Politics pushes us away from others by inciting a desire to achieve greatness, but it also pulls us closer to others by making us want to be recognized as great…Succession presents a view of the greatness of ambition, but it also starkly reminds us that ambition alone cannot secure happiness absent other virtues.”
Second, I just published a new comprehensive report on minority banking, co-authored with a researcher at John Hopkins University’s 21 Century Cities Initiative. Our report examines the characteristics of where Minority Depository Institutions are located and includes analysis of 2021 loan originations from a representative sample of 10 banks. The latter analysis also includes forecasting data via Moody’s. Among our top-line findings:
Most MDI branches (62%) are located in zip codes with poverty rates higher than the national average, compared to just 38% of non-MDI branches.
25% of MDI branches are located in zip codes in which the MDI is the only bank with physical presence in that zip code. This means that MDIs are the only bank branch in 174 zip codes that are home to 3.5 million people.
The 10 banks in our sample deployed 3.38 billion dollars in more than 6,000 zip codes in 2021. These banks collectively issued more than 20,000 Paycheck Protection Program loans to support small businesses amid the pandemic.
More than 70% of loan dollars from the 10 banks in our sample went to zip codes that have higher poverty rates than the nation when measured at both 100% and 125% of the federal poverty line.
Third, Pastor Tim Keller was an exemplary leader, a seasoned thinker, and above all, a grace-filled pastor. I was struck by the following from a recent tribute to him in Christianity Today: “Keller would have excelled as a professor if he’d stayed at Westminster Theological Seminary instead of moving to New York with his young family and planting Redeemer. He made enough money on his books and speaking that he would never have run out of venues inviting him to pontificate. But God called Keller to pastoral ministry, and that is what so often set him apart…As easily as Keller quoted obscure academics or New York Times columnists, he aimed to build up the local church.”
Income Inequality, the ‘08 Crash, and Worker Solidarity Across National Borders
A couple of years ago, I wrote an article for Plough that was critical of NFTs, crypto, and other speculative assets. I situated my discussion within a broader consideration of the nominalism/realism debate within medieval circles, and also talked about Platonism. It was a sprawling, messy, and fun essay that could only ever have been published in an open and curious publication like Plough.
I began the Plough article with the following argument about the morally weighted nature of political economy:
For the Old Testament prophets, the proper way to evaluate the success of an economy was not the number of transactions, the ratio of imports to exports, or the amount of gold held in reserve. Instead, the prophets were primarily concerned with whether the poor could afford to buy food. Again and again, prophets indicted Israel for robbing the poor, mistreating the economically vulnerable, and exploiting the worker. These prophets understood that political economy – the chosen legal, political, and social structures that shape markets – is not morally neutral. Instead, the specific ways we collectively structure economic activity as a political regime expresses justice or injustice, over and beyond the ethical dimensions of our individual decisions about buying, selling, borrowing, and saving.
In other words, individual behavior matters, but so does the broader structure of laws, policies, incentives, etc., that help to shape, constrain, or direct individual behavior. The focus on the broader structural analysis is particularly important for understanding globalism, and how the choices of one nation and its members can negatively affect another.
One of the threads of critique that I levied against NFTs and the like in that original essay is that they allow the wealthy to hoard wealth rather than directing that wealth toward productive aims in the real economy: “When a wealthy person buys a new sports car, that money reverberates throughout the global economy: more demand means more car parts supplied and more cars assembled and sold, with jobs dispersed throughout every point of the supply chain. The economy benefits again when the sales tax generates tax revenue, which can be spent later on public goods. In contrast, the sale of NFTs does not lead to tangible (shall we say “real”?) economic expansion, when measured in terms of growth in outputs, rather than number of financial transactions.”
A question that did not really occur to me when writing that essay (and that is therefore left unasked and unanswered) is, “why are the wealthy placing so much money in speculative assets in the first place?” On the surface, the answer is simply, “because they are seeking high yields.” But many wealthy investors are conservative, so why would they place money in volatile assets rather than making safer and more stable investments in the real economy that can still provide solid yields, and which has the added benefit of creating social value?
In exploring that question, here is a relevant passage from former Fed chair Ben Bernanke’s autobiography which I am currently reading. In this section of his book, Bernanke is considering the conditions that led to the ‘08 housing market crash and subsequent global recession:
Yet another factor driving house prices was a tidal wave of foreign money that poured into the United States. These inflows…[increased] the demand for mortgage-back securities…In speeches, I tied the conundrum to what I called ‘the global savings glut’ - more savings were available globally than there were good investments for those savings, and much of the excess foreign savings were flowing to the United States.
This passage gets us halfway to answering the question, or rather, it answers the questions but implies a further question. Bernanke’s first insight is that part of what led to the housing market transforming into a bubble is that lots of foreign investors were buying up real estate (including land) to hold as appreciating assets - which both reflected rising prices and contributed to even more rising prices, in what turned out to be a vicious cycle. Bernanke’s second insight - the global savings glut - explains why that foreign money poured in: the wealthy had too much wealth, there weren’t enough opportunities for more productive investments, and so that excess wealth went into assets in an unsustainable way that created market distortions and led to global economic woe.
Left unsaid, but important, in this analysis: workers (that is, those who make a living through income and not through the returns of capital) paid the ultimate price for this global savings glut. Many workers were laid off in the recession, and even the workers who remained employed faced a cool labor market with no bargaining power for higher wages or other benefits at their current firm, or easy transition to a different and better firm. This point about workers is one I’ll come back to momentarily.
Okay, so we’ve answered the initial question: > why are the wealthy putting so much money into speculative assets instead of putting that money into productive investments? > Answer: because there is more wealth than there are productive investments.
One way to read this is to identify the problem as being too much wealth for the wealthy, with the corresponding solution being to tax the shit out of the wealthy. I certainly think there are merits to a wealth tax, but I think that’s more about limiting the amount of intergenerational power that comes from intergenerational wealth transfers. On the other hand, there’s a question here about why there are not more productive investment opportunities available, and how might we increase those opportunities so that the wealth of the wealthy flows toward productive uses rather than market distorting bubbles?
This brings us, weirdly enough, to income inequality. That’s my takeaway from a recent book by Matthew C. Klein and Michael Pettis entitled Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. Note: this is not a user-friendly book - the argument is varied, complex and often hard to follow. But I’ll attempt to lay out some core premises and walk through the implications as narrowly pertains to this post.
1): Marginal propensity to consume (save) - this is standard economics. The poorer you are, the more of your income you spend on goods and services (for example, a higher percentage of your income goes to groceries and rent); inversely, the wealthier you are, the more of your income (either income from employment, or income from capital gains) is not consumed, and therefore goes into savings, investments, etc.. Percentages matter, but so do absolute dollar amounts: there’s only so much food, even expensive food, that a wealthy person will buy, and only so many garages to hold only so many sports cars - and so there are caps on consumption for the wealthy, despite their purchasing power being greater.
2): Producers have demand curves for goods and services: they increase production when demand from consumers is higher, they decrease production when demand is lower.
3): Combining the two insights above leads us to recognize that demand from the middle and lower class for goods and services is the primary driver for production curves for most goods and services (aside from high end luxury items like Rolex watches.)
4): Taking the three points together: if a nation has substantial income inequality, then the lower and middle class have less money to spend on goods and services, which leads to less production…
5): …And less production means less productive investment opportunities domestically, which means the wealthy have to seek out investment opportunities abroad…
6): …But if income inequality is diminishing production in nations across the globe, the wealthy will struggle to find productive opportunities even abroad and will instead park their money in speculative assets…like mortgage-backed securities in the lead-up to ‘08.
Notably, this book’s argument is also that because of the regressive nature of China’s political and economic system, the majority of its households/workers have little spending power to purchase what is produced domestically. But production and consumption drive economic growth, and so China is thus motivated to export goods beyond what might be considered normal comparative advantage in trade theory because that is the only way to support continued growth. (Since the financial benefits of exported goods is not widely dispersed, this leads to a continuous loop.) While less dramatic because less regressive, there is similar logic at work in Germany and the EU as a whole, where worker incomes are too low to support the amount of consumption needed to sustain growth without overreliance on exporting. This all results in a race to the bottom in terms of which countries can export the cheapest goods, even as it hurts domestic producers, which in turns means higher unemployment and lower wages for domestic workers.
Getting back to the Plough piece, then, the point I want to again make is that political economy is not neutral. When income inequality is allowed to expand dramatically within one nation, it leads to asset bubbles and eventually crashes in other nations. Similarly, when the workers of one nation have too little income to buy domestically produced goods, that incentives that nation to aggressively export excess goods in ways that undermine the businesses and labor markets of other countries. All of this has direct effects on the people who have the least amount of wealth to shield them from economic downturns, who are the most vulnerable within a labor market (for example, workers without degrees who are laid off when jobs are outsourced), who have the least amount of political or economic power (for example, the Chinese child laborers who endure exploitative conditions because the alternative is starvation.)
By the way, none of this suggests that socialism is better than capitalism, or that democracy is better than monarchy, or that x regime is more just than y regime. Exploitation is woven into the fabric of our fallen world, and while some systems are worse than others, some nations more oppressive than others - the point is that we always have a plank in our eye and a corresponding duty to address that plank.
So where does all of this leave us in terms of a biblical ethic or a broader philosophy/theology of justice and globalism? I think we still have the initial mandate from the prophets which is to work against oppression, boost the social safety net for the poor, ensure that the worker gets his due, be thoughtful stewards of whatever amount of income and wealth we possess, etc.. But I also think that on the more macro and global scale, this ethic requires a certain solidarity of the middle and lower classes of each nation with each other, as a check on the excesses of the wealthy elite in and across each nation. I don’t think you need Marx for that kind of global solidarity; there’s a lot of robust Catholic social teaching that we can instead rely on for a foundational framework. But much of CST is a century or more old, and hasn’t been adapted and applied to the kinds of financial conditions in the 21st century. What would a CST analysis of the ‘08 recession look like, for example?
In the end, this essay - even more than the Plough one before it - reveals thoughts mid-formed, ideas half-baked, lines of analysis that I am still trying to wrestle together. But hopefully what I have begun to sketch out here has some value as a starting place for your own thinking about these topics. I plan to hold these questions close at hand, and continue to hammer out writing in pursuit of insights around these themes.
What I Am Reading Elsewhere:
In The Daily Beast, Harvard researcher Ian Marcus Corbin and Senator Chris Murphy (D) argue that the Left - and American more generally - needs a spiritual renaissance. “Americans do want a firm economic floor that guarantees everyone access to the basic necessities of life, but they also want our politics to be organized around the question of what actually makes a society good. This is why we need spirituality; at its core, it is an attempt to ask and answer deep, fundamental questions about the world, the self, and society.”
In the Wall Street Journal, an interview with Henry Kissinger (conducted by one of my graduate school professors) who has just turned 100 years old: “"What Mr. Kissinger sees when he looks at the world today is 'disorder.' Almost all 'major countries,' he says, 'are asking themselves about their basic orientation...[and about] what they want to achieve in the world.'"
In Psyche, the Orthodox theologian David Bentley Hart pushes back on the narrative that AI has or can have human-like consciousness: “When one decomposes intentionality and consciousness into semiotic constituents, signs into syntax, syntax into physical functions, one is not reducing the phenomena of mind to their causal basis; rather, one is dissipating those phenomena into their ever more diffuse effects."
In the New Statesman, Madoc Cairns reflects on “how Jacques Maritain, the most influential Catholic intellectual of the 20th century, changed the world.” - "Maritain’s pluralism isn’t laïcité: the exclusion of religion from public life. Christianity would animate his new society as the soul animates the body. Laws would still reflect Christian teaching, he thought, but through spiritual attraction, not political domination..."
In The Washington Post, a profile of Sean McElwee that is…well, you just have to read it all. Trust me. “All of the Zoomers that work for me are bisexual, and all of them have long covid,” Sean McElwee said. “I’ll believe long covid is real when someone who is not bisexual has it.”