Offshoring Jobs and the Income Gap

Wealth Inequality from a Macroeconomics Perspective

Introduction

Boushey reports in Unbound that “the very richest households—the top 1 percent—save 51 percent of their income, while those in the bottom 20 percent save just 1 percent.”[footnoteRef:2] The income gap between the top 1 percent and the 99 percent in the US has only increased since the Great Financial Crisis of 2008, when the Federal Reserve responded to the bursting housing bubble with three rounds of unconventional monetary policy. As Pew Research has shown, “economic inequality, whether measured through the gaps in income or wealth between richer and poorer households, continues to widen.”[footnoteRef:3] The widening wealth inequality in America is directly related to Keynesian economics, unconventional monetary policy, and central banking intervention, which benefits the top 1 percent to the detriment of the rest of the population. This subject is important because if it goes unaddressed, the vast majority of the US population will end up as little more than serfs under the 1 percent. This paper will address the issue of wealth inequality by looking at the gap between the 1 percent and the 99 percent, explaining how Keynesian economics and quantitative easing (unconventional monetary policy) have exacerbated that gap over the past decade plus since the Great Financial Crisis of 2008. [2: Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do About It. (Harvard University Press, 2019), 144.] [3: Juliana Menasce Horowitz, Ruth Igielnik and Rakesh Kochhar. “Trends in Income and Wealth Inequality.” Pew Research, 2020. https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/]

Research

Classical economic theory posits that free markets are balanced by the law of supply and demand. This was the basis of Adam Smith’s view that economic order and balance could be maintained so long as nations did not attempt to engage in a zero sum game. Keynesian theory developed in response to perceived market irregularities and is based on the idea that markets will not self-correct when problems because markets are inherently imperfect. During a recession, for example, wage reductions mean earners have less to spend and savers will keep money out of the economy if the interest rate is high enough. Keynes therefore suggested that fiscal policy (government spending) and monetary policy (control of the money supply by the central bank—the Federal Reserve in the US) should work strategically to counter business cycles and ensure balance in the economy. This idea necessitated, however, that the free market economy be transitioned into a command economy. Keynes himself “lost faith in the power of his monetary transmission mechanism, and had moved his preference towards fiscal policy,” but as shall be shown here, fiscal responsibility has not been a hallmark of the US government since 2008, and monetary policy has been used to support the markets.[footnoteRef:4] [4: Marc Lavoie and Brett Fiebiger. "Unconventional monetary policies, with a focus on quantitative easing." European Journal of Economics and Economic Policies: Intervention 15, no. 2 (2018), 141.]

Wealth Gap

The wealth gap in the US has widened as a result of the concentration of wealth in the hands of a few, the fact that inflation has occurred while wages have not risen enough for the working class, and that the wealthy 1 percent have amassed significant political power, which limits the potential for the rest of the population to prompt legislation that would address issues, such as monopsony and monopoly by the 1 percent.[footnoteRef:5] The chart below shows the extent to which the income gap has widened in recent years. [5: Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do About It. (Harvard University Press, 2019), 195.]

[footnoteRef:6] [6: Growth of Family Income. Source: Andrea Witte, http://www.connectthedots.usa.com/.]

As can be seen, for more than three decades in the post-war era, income grew at the same relative rate for all classes in the US. After the Great Financial Crisis of 2008, and the unconventional monetary policy of the Federal Reserve that led to trillions of new dollars being created and used to purchase US debt and mortgage-backed securities, the income of the top 1 percent surged while income stagnated for much of the rest of the population. That surge in the income of the top 1 percent is explained by the fact that the wealthiest individuals stood to benefit the most from central banking intervention that boosted the equities market, as they have the most investible income.

What accounts for the post-war years period of income rising harmoniously among the various classes in the US? Weber’s theory of social stratification helps to provide context. Weber’s theory posited that as economic growth occurs in a capitalistic society, the middle class grows expand as well. The expansion of credit after WWII helped to foster such economic growth in the US, and all classes benefited as can be seen in the chart above. The Bretton Woods agreement helped in that expansion of credit as it allowed the USD to serve as the reserve currency of the world so as to balance out economic instabilities. The Petrodollar system prevailed in the 1970s when Nixon closed the window on the gold standard; it ensured that USD would still be in demand (as oil would only be traded using USD, as part of the Saudi-US Petrodollar agreement.[footnoteRef:7] [7: D. E. Spiro, D. E. The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Cornell University Press,1999), 3.]

As the US began to offshore production in the latter part of the 20th century, the middle class began to feel the effect: as Mandel has pointed out, “shifting production overseas has inflicted worse damage on the U.S. economy than the numbers show…many of the cost cuts and product innovations being made overseas by global companies and foreign suppliers aren't being counted properly. And that spells trouble because, surprisingly, the government uses the erroneous import price data directly and indirectly as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and real gross domestic product (GDP).”[footnoteRef:8] To counteract this trend, credit was once again made easy and in the beginning of the 21st century, that easy credit led to the housing bubble that burst in 2007-2008. Instead of bringing production back to the US to support workers, and instead of the top 1 percent investing in American businesses for American workers and their families, they invested in equities and continued to profit from speculative trading (derivatives) that fueled the mortgage-backed securities market up until the Great Financial Crisis. Economic growth did not support the growth of the middle class as Weber had anticipated because that economic growth was not based upon the production of middle class workers. America went from being a nation of production to being a nation dominated by the services industry. Production shifted to Asia, where it remains today. The middle class and its wages stagnated, while the wealth of the 1 percent continued to grow. [8: M. Mandel, “The Real Cost of Offshoring.” Business Week, 18(June 2007), 29.]

However, that wealth of the 1 percent could not have grown so substantially following the 2008 crisis without central banking intervention, which only widened the wealth gap, as the chart above shows. On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt. That was followed by two more rounds of quantitative easing. It did not end there. In response to the 2020 lockdowns, the Federal Reserve embarked upon another round of quantitative easing, injecting trillions more USD into the economy, which instantly caused the plummeting equities market to reverse course and soar to all-time new highs. Who benefitted from quantitative easing? The investing class (the wealthiest Americans) benefitted. Meanwhile, the working classes were shuttered at home, had their small businesses shut down, and were put on unemployment (becoming dependent upon the government for income). Small business owners did receive loans from the federal government that did not have to be paid back so long as the money was spent on employee payrolls. But at the same time, demand for business was blocked by the fact that lockdowns persisted. Many small businesses have not come back since the lockdowns went into effect. What were hoped would be only temporary closures have since become permanent closures as the chart below shows.

[footnoteRef:9] [9: Anne Sraders and Lance Lambert, “Nearly 100,000 establishments that temporarily shut down due to the pandemic are now out of business,” Fortune, 2020. https://fortune.com/2020/09/28/covid-buisnesses-shut-down-closed/]

Counter-Argument and Rebuttal

Some will say that central banking intervention (QE for short) was needed in order to prevent American companies from failing. Larger companies owned by the 1 percent were indeed kept afloat as a result of quantitative easing and the ability to access credit at low rates. If one is looking at GDP only, it appears that QE has been a success. The equities market has never been higher, and America has seemingly never been richer. Jobs were not lost as a result and the working class was able to find employment.

But the income gap persists—and it persists precisely because of QE and the suppression of interest rates by the Federal Reserve. Should rates ever be allowed to rise, the interest payments on the mounting debt levels of the federal government and larger companies would become too large. The Federal Reserve cannot allow rates to rise because it would lead to a wave of defaults. At the same time, it cannot stop buying US debt indirectly or securities, because the equities market would collapse. As pension funds, insurance funds, sovereign wealth funds, and mutual funds depend upon the equities market for survival, the role of the Federal Reserve has become clear: it must be the buyer of last resort.

Keynes argued that fiscal policy and monetary policy should go together to prevent money from being taken out of the economy by savers during recessions and to keep wages from stagnating. However, central banking intervention has led people to put money into the equities market because it is the only place they can get a return on their dollar, which is rapidly being devalued by central banking intervention (QE). Moreover, the jobs that have been created have been primarily in the services sector—not in production. Wages have not risen even though inflation has increased the cost of living for the working class. QE has benefitted the wealthy class, but it has lowered the standard of living for anyone unable to invest substantial sums in equities.

Conclusion

Initially after the 2008 crisis, it appeared the government had taken the right steps to stave off economic collapse. The unconventional monetary policy (quantitative easing) seemed like the right step. Businesses were saved and employment increased. However, what I learned through this macroeconomic analysis was that Keynesian economics has led to the creation of a command economy in which the central bank is now at the heart of economics in the US. Fiscal policy and monetary policy are now integrated to such an extent that the US Treasury Department is now run by former Fed Chair Yellen, who oversaw much of the first rounds of QE after the Great Financial Crisis. Currently, Fed Chair Powell is continuing QE because it appears that the labor market is still struggling to rebound from the 2020 lockdowns. The longer QE goes on, and the longer rates are suppressed (in accordance with Keynesian theory), the worse it gets for the 99 percent. Fed Chair Powell says that inflation is transitory, but anyone can see that the value of the dollar has dropped more than 90 percent since the creation of the Federal Reserve. Inflation was not felt so long as everyone’s income was growing together in the post-war years.

However, when credit tightened and jobs were offshored, the working class suddenly saw its ability to grow constrained. The allure of the American dream (everyone being a homeowner) led to many Americans taking advantage of easy credit during the housing bubble years—but that bubble burst when credit once more tightened. Today, housing prices have risen as investors have sought to put their money into tangible assets outside of equities. The middle class is increasingly being priced out of markets. So long as production remains overseas and the 1 percent is allowed to maintain its monopoly and monopsony in the marketplace, there will be no end to the widening wealth gap in America. That is the main take away from this research.