Connecting the dots

Angry Bear’s Spencer notes that, during the so-called Great Moderation, labor’s share of the economic pie (i.e.,  nonfarm business output) fell ten percentage points.

If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

OK, let’s raise a stink: the rate of exploitation rose.

Interfluidity’s Steve Randy Waldman, in turn, notes the relationship between the shift in the distribution of income and the asset bubble:

Follow the money. Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

Why? In Keynesian terms, poorer people have a higher marginal propensity to consume. The relatively poor include people who are cash-flow constrained — that is they cannot purchase what they wish to purchase for lack of green, so their marginal dollar gets immediately applied to the shopping list.

And the role of the monetary authority?

In “good times”, central bankers actively suppress the median wage (while applauding increases in the mean wages driven by the upper tail). During the reset phase, policymakers bail out creditors. There is nothing “natural” or “efficient” about these choices.

Slowly but surely, we can begin to connect the dots: a falling wage share (indicating a rising rate of exploitation), increasing wage inequality (indicating increased distributions of the surplus to the highest tier of “wage-earners) led to asset price inflation (as wage-earners turned to credit to make durable purchases and recipients of the surplus bid on financial assets), while the state actively supported all three activities.