Why Income Inequality Matters; The Toxicity of Debt

Paul Krugman and Joseph Stiglitz are having a bit of a disagreement.  Joseph is citing income inequalities as holding back our recovery. Paul disagrees. He wants to agree and thinks he makes some good points but cant jump on board totally.  Paul cites some graphs of savings rates in his NYT column  and suggests that there is little evidence that the rich are underconsuming.

I dont think the underconsumption is from the rich. Its from the non rich who are losing incomes TO the rich.  I think Paul is making the wrong assumption about where the underconsumption is coming from. He seems to think that distribution doesnt matter much. As long as total income to the economy is the same demand will be the same. I think he's mistaken. I think he's mistaken because he dismisses the toxicity of debt

Let me offer an analogy to our economy using something I understand well, our cardiovascular system.

Lets think of the flow of money like the flow of blood through our body. Acid, a normal byproduct of cellular function is like debt. Healthy cells are getting the blood they need and are able to get their waste products, acid, removed.  But a cell that is either demanding too much or is in an area that is under perfused, runs the risk of accumulating acids to the point of toxicity and cellular death.

We have about 6 liters of blood in our body and it gets pumped around at  anywhere between 3 liters minute to 15 liters a minute.  There is a natural hierarchy of perfusion within the body.  The brain, and kidneys alone receive over half of our cardiac output in normal conditions. So while at any given time over half the blood in our bodies is going through brain and kidneys, the rest of the bodies needs must be maintained or their debt (acid) will build up and not just kill that tissue but the whole body.  In times when the heart is either incapable to meet the needs (failure) or the needs of the tissue are just too great (infection or vigorous exercise) acids build up.  As long as inflows are met, acid wont reach toxic levels but if not sickness or death is imminent.

Incomes are what keeps consumers healthy. Debts are a normal part of our modern capitalist system as well and as long as the flow of incomes meets debt service their is no problem.  But we want growth, and our banks encourage growth by taking on more debt. They want more people taking on more debt. These debts must be cleared or they will reach toxic levels and freeze the system.  They freeze it in two ways 1) They stop getting paid or 2) They are the ONLY thing getting paid.  As I said earlier, incomes are what keep consumers healthy and even if total incomes stay close to the same, if that total is only being distributed between 30% less of the consumer force, their debts become toxic and affect the whole system. Banks fail and businesses lose customers.

When 30%, I imagine its even more than this now, of your potential consumer base is only getting enough income to barely service old debts, these debts hurt everyone. They become a systemic problem not just a personal problem. The rest of the people cannot nor will not increase their debt levels enough to offset this reduction.

Distribution of flows matter.  There are healthy distributions and un healthy distributions