Rising Tides Lift All Yachts: Why the 1% Grabs all the Gains From Growth

By L. Randall Wray

You’ve probably seen references to the work of my colleague (and former student), Pavlina Tcherneva in recent days. If not, take a gander at this:


The NYT article includes links to her published article in the Journal of Post Keynesian Economics, the first issue edited by me and my Levy Institute colleague Jan Kregel. Pavlina also presented her results at the just finished International Post Keynesian Conference at UMKC. We’ll soon have a website up with many of the powerpoints and papers. The next conference will be held in 2016. Mark your calendars.

Back to the topic at hand. Rising Tides Don’t Lift All Boats. Who wudduva thought?

Actually, you have to conclude that economists and policy-makers are an optimistic lot. Going all the way back to the Kennedy days, it has been conventional wisdom that if you can boost economic growth, everyone wins.

Actually, as I’ve long argued, that is remarkably naïve and counterfactual. In good times, the powerful grab the spoils. In bad times, they get government bail-outs.

Why on earth would you want to be powerful if you could not protect and even enhance your well-being no matter what the economy does?

Why do elites everywhere always clamor for economic growth? Every policy advocated by them is justified on the argument that it will boost growth. Cut taxes on the rich! Eliminate regulations! Free trade! Slash welfare! Balance the budget! Save Wall Street!

Every policy they hate is said to hinder growth: raising minimum wages; environmental protection; school lunches for poor kids; vacations and sick leave for workers.

Where such policies do enhance growth, the rich will get more than their fair share. Where the policies do not boost growth, they will increase the share of the rich. Heads they win and tails they win too.

Who would be surprised by that? Well, just about every economist and policymaker on the planet. Why? Because they refuse to consider POWER. While our economy is often referred to as “market-driven”, it is actually driven by power. P. O. W. E. R.

Anyone who’s been paying attention has noticed that the power of the top 1% has risen inexorably over the postwar period. Their ability to shift ever more of the gains from growth to themselves has risen commensurately. As Pavlina demonstrates, the pay-off is obvious. Here’s one of her graphs.


As you can see, with each recovery from a downturn, the rich capture a larger share of the subsequent growth.

She has shown that no matter how you slice up the rich at the top of the income distribution—the top 10%, the top 1%, or the top few tenths of a percent of the top 1%, their share of the spoils from growth has increased in each subsequent recovery.

And when things go bad, Uncle Sam jumps in to rescue them. In the latest calamity, we had tens of trillions of dollars of attention paid to rescuing our top tenth of a percent on Wall Street, and mere peanuts thrown at Main Street. In other work, Pavlina has documented that the “fiscal stimulus” was not aimed at those who suffered the most; and students of mine, namely Andy Felkerson and Nicola Mathews showed that Uncle Ben originated well over $29 trillion in low interest rate loans to rescue Wall Street. (Go here for papers on this project: http://www.levyinstitute.org/ford-levy/governance/)

No wonder that when the economy began to recover, our One Percenters captured more than all the gains. They are rich and powerful, and Uncle Sam directed almost all his efforts to them.

As Hyman Minsky argued back in the 1960s, if you want to reduce poverty you must include job creation as a central component of your War on Poverty. He (correctly) predicted that the Kennedy-Johnson War on Poverty would fail because it did not contain such a program.

Further, he argued that once you’ve provided jobs to all who want to work, you need to gradually shift the distribution of income toward the bottom. You do that by holding down income growth at the top while gradually increasing pay at the bottom.

We did neither, of course. Inflation-adjusted minimum wages have plummeted since the 1960s. Joblessness has risen. As documented by many, while labor productivity has continued to rise on trend, inflation-adjusted median wages have stagnated since the early 1970s.

Who got the difference? The rich and powerful.

Some progressives want to continue the failed policies of the past. They want to use the tried-and-failed twin strategy of economic growth plus welfare dressed in its modern garb, the basic income guarantee. As Minsky argued, we certainly need welfare. Our generosity is a measure of our humanity. However, throwing more money at the poor will never solve our unemployment and poverty problems.

See here: http://www.levyinstitute.org/publications/the-war-on-poverty-after-40-years for an exposition of Minsky’s critique of the failed approach and his proposal for an alternative. As he argued,

“The war against poverty is a conservative rebuttal. . . . It can spread poverty more fairly. . . . However, this approach, standing by itself, cannot end poverty… The liberals’ War on Poverty was born out of neoclassical theory in which it is the poor— not the economy— that is to blame for poverty. The War on Poverty tried to change the poor, not the economy.”

As Stephanie Kelton and I wrote in 2004, 60 years after the War on Poverty began: “’Keynesian’ policies to raise aggregate demand in order to stimulate private sector employment have also been adopted on the belief that economic growth would raise the demand for labor and thereby “lift the boats” of the poor. Still, unemployment rates have trended upward, long-term unemployment has become increasingly concentrated among the labor force’s disadvantaged, poverty rates have remained stubbornly high, real wages for most workers have declined, and labor markets and residential neighborhoods have become increasingly segregated as the “haves” construct gated communities and the “have-nots” are left behind in the crumbling urban core… According to Minsky, the critical component that was missing in 1964, and that remains AWOL in 2004, is a government commitment to full employment. Only a targeted jobs program, paying decent wages, will successfully fight poverty among the nonaged in a politically acceptable manner.

“How,” Minsky asked, “can the distribution of income be improved?” He answered: “First of all by full employment.” By this, Minsky meant that it was necessary to achieve and sustain “tight full employment,” which he defined as: “[the situation that] exists when over a broad cross-section of occupations, industries, and locations, employers, at going wages and salaries, would prefer to employ more workers than they in fact do… The achievement and sustaining of tight full employment could do almost all of the job of eliminating poverty”.

As Pavlina’s work has demonstrated, that was also the position of J.M. Keynes, who favored policies that would directly employ workers over the “pump priming” policies favored by 1960s “Keynesians”. As Minsky explained, those policies would favor the “already well-off”. Pavlina’s work shows convincingly that that was precisely the result.

16 responses to “Rising Tides Lift All Yachts: Why the 1% Grabs all the Gains From Growth

  1. “However, throwing more money at the poor will never solve our … poverty problems.”

    I apologize for being so harsh, but you sound like John Cochrane.

    • I apologize for being so harsh, but it sounds like you don’t know what you’re talking about.

      That was one of the best sentences in the entire article, and is more true than you can imagine. Handing somebody food stamps and a rent check and walking away is not how you deal with poverty, because they will never have the opportunity to pull themselves out of it. I can all but guarantee you they’ll be poor forever. In NYC affordable housing program, the average turnover is THIRTY YEARS. PEOPLE DON’T EVER LEAVE. The average apartment turnover for people who work for a living is under 3 years. Less than 1/10th.

      Even more obvious is the fact that doing this will do ZERO to help income inequality on paper. Why? Because “in-kind” benefits aren’t counted as income. In NYC we hand out thousands of apartment subsidies worth up to $75k/year per family. That is a very real and tangible benefit – not having to pay for your housing – that increases effective earned income. But the truth is, it’s not counted in poverty calculations. Same with food stamps. Same with Obamaphones.

      So you have a situation where a family can be receiving $100k-$150k in “in-kind” benefits, with ZERO of it showing as income, and these are the people we’re supposed to feel sorry for? Then you have the poor saps who are working minimum wage jobs, who have ZERO help from the gov’t and are struggling to get by, but since the family takes home $50k-$60k per year in take home income, they’re not eligible for any benefits, and in fact, owe a large portion of their earnings in taxes.

      Let’s see – do nothing and make $100k in benefits, or work hard and make $30k in benefits. You do the math.

      So in fact handing free things to these people does zero to help poverty, and these people who are sitting around doing nothing are doing zero to help the economy, others, or themselves.

      We need to help the people who get up each day and go to work, trying to EARN their piece of the American Dream.

      Notice that I said earn. Not get.

    • Tyler: Why not give the poor what they want? Jobs. Why not respect them? Why relegate them to institutionalized charity? Why don’t you want to allow them to fully participate in society?

      Look deep within yourself and try to figure out why you want to deprive them.

      • The problem with using “throwing money” derives from the power of framing. The phrase has been defined by the Right and, unintentionally, progressives who use it unavoidably reinforce the Right’s frame. (See _Don’t Think of an Elephant!_ or other writings by George Lakoff.)

        Unfortunately, framing remains a strength of those who favor the 1% and a weakness of those for the 99%. When that strength is matched, the ideas on the Left will have an excellent chance to win the “hearts and minds” of the great majority.

  2. financial matters

    I think better ways to ‘throw money at the poor’ would be single payer medical care, eliminating the FICA tax while doubling social security and free K-16 education. These ideas seem to resonate well with MMT as well as with Soddy and public bank enthusiasts like Ellen Brown. This would provide a better background on which to have a good discussion on employment.

    • Fine; but what about jobs?

      • financial matters

        Agree with LRWRAY below. With a better social safety net jobs become more participatory and contributive and less like slave labor.

      • Single-payer medical care, eliminating the FICA tax while doubling Social Security, and free K-16 education would create millions of jobs.

    • FM: Agreed. All medical care outside nose jobs and fanny tucks ought to be free. I also have no problem with K through Grad School free for all. Ditto standardized and healthy food and housing and clothing. And mass transit. And 4 weeks paid vacation, with roundtrip ticket to choice of destination.

      But don’t deprive people of jobs. Let them participate. Let them contribute.

  3. Erick Borling

    You’re the best Dr. Wray, but please avoid that “throwing money at the poor” cliché. Throwing money at the rich works fine for them, anyway. Also, that wrongly dismisses the power of money which can otherwise be characterized as investment. To whom does money yet to be created belong? In practice it is thrown at banks who use it for lending (I would say profiteering, as it seems), and so begins an unjust asymmetry of rights and power; a root cause of much suffering and injustice as you know.

    • Erick: throwing money at the rich “works” because they are rich. They are already powerful. The massive subsidies they get are just a gravy train. They already have it made.
      Throwing money at the poor keeps them poor. Keeps them outside society. Keeps them subservient (always worrying about the next hand-out), docile, dependent.
      It fits the neoclassical twin view: work is distasteful (marginal disutility of work) and must be rewarded (wage). The poor have “chosen” to take leisure because their reservation wage is too high. In other words, they are lazy. Given laziness, they are not productive; hence no one wants to hire them. But it impinges on our utility to see them starving in the streets. So we throw some charity at them. Please go away. Find a flop house. Sleep in a flea-ridden bed. Dumpster dive for some food. You are not worthy of a job. And given that the main social networks come from family and jobs (and those two are directly linked), you will have trouble joining significant social networks without jobs. You don’t deserve them. You cannot become a full member of human society.
      This is what throwing money to the poor (instead of jobs) does. Obviously, throwing money to the rich does not have the same outcome.

      • Changes to the TAX CODE beginning in the 60’s were ALL designed to throw money at the UBER RICH!
        The Tax Code is responsible for ALL the inequality in ALL societies and ALWAYS has been and the TAX CODE is clearly the driving force used by corrupted governments that are run for the benefit of the UBER RICH!
        Power and Money – one and the same – something the RICH know! But like Fight Club NO ONE can TALK about the TAX CODE as the source of human economic inequality!

  4. If you simply throw money at the poor (e.g., via BIG), you may alleviate their discomfort for a time, but the elites will simply invent new ways to take it from them (and protect those new ways with the force of purchased law, I might add). If instead you significantly tighten the labor market, it will be the elites who are forced to pay for jobs that allow the poor to rise, leading to the desired leveling of income distributions.

    • Benedict: exactly. Welfare is the conservative policy, working within the system and the neoclassical framework. Jobs for all fundamentally changes the system. That was Minsky’s point.

  5. Capitalism worldwide, intended or not, has clearly become Government sanctioned EXTRACTION of wealth created by human labor for the exclusive benefit of the .01%. The TAX CODE was and is the mechinism used by governments to allow the Extract and Harvesting of that wealth and bestow the power of MONEY on the CentaMillionaire$ and Billionaire$ who continue to use it the corruption of and by Government!
    Wealth created by labor is not being used for the benefit of ALL, and that is an undeniable fact of observed reality.