Inequality Of Spending
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September 09, 2008, 02:24 AM
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The news that the government has officially taken over mortgage giants Fannie Mae and Freddie Mac reminds me of a popular argument in recent years among libertarian pundits and economists, to the effect that:

"Well, sure, inequality in income and, especially, in wealth is increasing ... But, that`s okay because inequality in spending isn`t up as much. Have you seen the rims these bozos are buying these days?"

Okay, but how exactly was increased spending on flat-lining earning power ever supposed to be sustainable?

This was all just a new wrinkle on the now-discredited wage inflation policies seen in countries like Argentina, Italy, and Britain in the 1960s and 1970s. Back then, the workers would complain to the government that their wages were too low, so the government would order the employers to pay them more. The employers would then complain to the government that they couldn`t pay their loan obligations, so the government would print up more money. The resulting inflation would make financial and business planning harder, discouraging saving and long-term investments, so the economy would stagnate.

One lesson the elites took away from this sorry episode was that rising wages were A Bad Thing. Thus, today you constantly read newspaper articles that simply assume that illegal immigration keeping wages down is A Good Thing.

Yet, the fundamental problem remained. So, over the last two decades, a new, unspoken solution policy evolved:

1. Keep wages down.

But if labor can`t afford to buy more stuff, they`ll complain, and capital will suffer as well because they can`t sell their goods to labor. So, the second part of the strategy was:

2. Keep spending up.

How can you do this? Easy — get lots of people to borrow more! Cut out the middleman (the employer). Instead of leaning on the employers to pay higher wages, the government has been leaning on lenders to lend more money to homebuyers and homeowners. And, this is politically easy to achieve, because while employers begrudge paying wages, lenders like to lend. It`s what they do! It`s easy and fun to create money through fractional reserve banking by just assuming that you are more likely to get paid back than you actually are.

Of course, eventually this house of cards had to come down, but the taxpayers and savers will be there to bail the lenders, borrowers, and spenders out.