I've been meaning to write about Maxine Udall's Company Store Redux post. It's based on a paper by Michael Kumhof and Romain Ranciere called "Inequality, Leverage, and Crises." As economists like to do, this builds its understanding around a simplified model, dividing the world into two income groups: workers and investors:

The impacts of the two groups' preferences and behaviors play out differently depending which group is favored in terms of bargaining power within an economy. In the United States, where rising income inequality has been accompanied by erosion of labor union membership and political power and a rise in the political influence of financial and commercial interests, it's no surprise that bargaining power has favored so-called "investors." I say so-called, because usually when one "invests," one produces something, often of value to the rest of us: more productive physical capital; more jobs; innovation; or better and cheaper products. Something that doesn't require a taxpayer bailout and result in a near-10% unemployment rate. But I digress.

Kumhof and Ranciere note that as income inequality has grown in the US, it has fueled a recirculating flow of borrowing by working and middle class families and lending by the "investor" class, borrowing that has been necessary to maintain working and middle class consumption as real working and middle class incomes have stagnated or fallen: [ . . . ] Our current situation in which 5% of the population captures and owns a disproportionate share of national output, which it then lends to the teeming masses whose share of output has been stagnant or dwindling, is really just a new variant of the company store.

Udall goes on to describe mining company stores in terms that will be familiar to anyone who recalls Tennessee Ernie Ford's "Sixteen Tons" (actually a Merle Travis song, and worth seeking out in the original, although Ford's version is the one permanently etched in my mind, probably the most-played record I owned in the late 1950s). The key point is that when corporate control is so complete, wages just recycle back to the company in a closed loop -- kind of like the old joke about the bar that only rents you beer. The result:

Over time and as wage-earner bargaining power weakens, the investor class is able to capture greater proportions of workers' declining or stagnant real wages. The effect is that an increasing portion of middle-class wages circulate back to the financial sector as interest and fees instead of into the larger economy (except, of course, as it occasionally "trickles down" from the investor class to what over time is likely to become the equivalent of a servant class).

That's a pretty bad situation, at least if you're a worker or a servant, but it also turns out to be unsustainable:

In Kumhof and Ranciere's model, an eventual crisis causes a collapse of asset values, including those that wage earners have been borrowing to finance. The authors show through a series of simulations that only a restoration of wage-earner bargaining power (and therefore an increase in workers' relative incomes) produces the sustained reduction in worker leverage that is necessary to reduce the probability of another crisis.

My emphasis there, because that's the point I want to make sure you all get. The so-called investor class has pretty much had free reign to run the world company store since the early 1980s. They've become ever more dominant, ever more powerful, and ever more exposed to the absurdity of their political chokehold on the economy. The crisis occurred because they extended debt to people who couldn't afford it and justified it by pointing to asset values inflated by their own excesses. This basic critique has been made now and then -- David Harvey's The Enigma of Capital and the Crises of Capitalism (2010, Oxford University Press) is pretty dry but gets it right. The important thing about this piece is that it's one of the very few pieces that zeroes in on the only viable solution. As Kumhof and Ranciere put it:

By contrast, restoration of poor and middle-income households' bargaining power can be very effective, leading to the prospect of a sustained reduction in leverage that should reduce the probability of a further crisis.

Udall added the emphasis in her quote. Nice to have some theory here, but this should also be clear from practical examples. The US economy grew much faster from 1945-70 when real working class incomes were on the rise than it has from 1980-2010 when real incomes have been stagnant at best, even while asset prices inflated even faster. Even today, when you look at economies that are actually growing at significant rates -- China, India, Brazil -- one thing they have in common is that they are places where workers' real incomes and standards of living are growing (regardless of how pitiful they may seem relative to US and Europe). Moreover, real investments -- that is, investments that actually bother to increase productive capability -- are most often made in economies where real wages are growing (as opposed to the US, a capitalist nation with an ever-dwindling capital resource base, because we don't have the political will to halt its erosion). As Udall concludes:

If the model is right (it does seem a rather good fit with reality), all of these measures require that a government constituted to be of, by, and for the people enact policies that support wage earners, that its elected representatives start serving 95% of the people rather than the top 5% that has so effectively commandeered it. It also requires that we the people find ways to become less dependent on a financial sector that no longer serves our best interests. Unfortunately, the last will likely contract an already fragile economy, at least in the short run.

For the last 30 years, the government has been part of the problem in this trend to increasing income inequality. It's time for government to become part of the solution in reining in financial sector excesses and restoring workers to something that approximates a fair share of national output. Otherwise, most of us will eventually find out what its like to "owe our soul to the company store."

I've been trying to make this point all along, so let me reiterate: the only way to get the American economy going again -- seriously, the only way to save capitalism -- is to increase demand from the bottom of the economy up, and that can't be done without a redistribution of wealth and won't be done without a redistribution of political power. There are lots of ways to do this, and it doesn't have to result in perfect equality or anything close to it (although that would be nice), but it can't be faked (as it has through the extension of debt over the last twenty years). Still, we are a long ways from recognizing this truth, and will suffer mightily until we do.