Unearned income, unemployment and inflation
Unemployment and inflation are considered the most important macroeconomic indicators – measurements of how the economy is doing in various parts. The explanations for the causes of inflation and unemployment are woeful. A significant factor in this woefulness of explanation is that unearned income plays a major, if not the only, role in these two issues. To identify unearned income as the major, or only, culprit behind inflation and unemployment would risk undermining the entire foundation of capitalism, namely unearned income. Truth can be confronting.
When a purchase of goods and services takes place there is an exchange of money for the goods or services. To be more precise, there is a monetary demand for a good or service on one side; and on the other there is someone offering a good or service who demands money. The exchange happens when both parties find it advantageous to themselves. Now if there is in the economy as a whole, a ‘shortage of monetary demand’ for goods and services, then a lot of such transactions do not happen – people are offering, or prepared to offer, goods and services but there is an inadequate monetary demand for the offerings. Businesses go flat, people are laid off or not employed, the self-employed suffer an inadequate compensation for their work. The phenomenon of unemployment develops. Unemployment affects everyone who has to work for a living because workers and businesses are undercutting themselves in order to retain some income and some sales.
Simply increasing the money supply via government deficit spending (to increase monetary demand) is no true answer because in principle, any quantity of money in a society shouldn’t prevent an economy from being in full employment. If the money supply was double or half what it currently is, and the distribution of money remained the same, then prices would also be double or half what it is, but we would still have the same problem of unemployment.
The problem lies in the fact that some people are in possession of a large portion of the money supply, and are not demanding goods and services with their money. It is thus a question of distribution or circulation of money. If money circulates properly, it will end up in the hands of people who will, or can only, use that money to purchase goods and services. If that is the case, we would have a full employment economy.
Unearned income is the cause of this defective circulation of money. When wealthy people receive unearned income – income made without contributing towards the production of goods and services – they tend to spend only a small portion of their unearned income in the purchase of goods and services. The bulk of their unearned income is rolled over to purchase even more assets like property, shares, and government bonds. These assets then provide them with a higher future level of unearned income – in the form of rent, interest on loans, share dividends. The persons and businesses who are paying these rents, interest payments and corporate dividends, are then not spending that portion of their own income on the purchase of goods and services. If the whole of society is in this situation, it creates a huge cascading effect. Person A, in having to divert a portion of her income to her loan interest repayments, has to forgo some spending say with person B, who then has less money to purchase goods and services (because A didn’t buy from him) as well as having to divert some of his own income to for his loan interest repayment. Person C, who might have sold a good or service to B, also replicates and adds to the process; and so on.
If in theory the people receiving unearned incomes were to spend all their income on the purchase of goods and services, this would create a full employment economy. But since the capitalist economy rewards the minimisation of current spending in order to receive a greater future source of unearned income, the wealthy will naturally strive to minimise their purchases of goods and services, and divert their spending to the purchase of more assets. Multiple problems ensue. One is that assets increase in price. Land becomes impossibly expensive for those trying to purchase their first home. The increase in price of shares also has enormous deleterious effects on the economy [link to follow]. The second thing to note is that as the wealthy get wealthier, they spend even less money (as a proportion of their income) on goods and services. A person on say $100,000 income will purchase pretty much the same quantity of food as a person on $1 million income. The latter will have a much larger proportion of his income left over to roll over into the purchase of more assets. This means that a smaller and smaller proportion of unearned income is recycled back into the purchase of goods and services. It leads to the evisceration of the middle class – society gets divided into those who don’t have to work for a living and who gets wealthier over time, and those who will never quite get on top of things because loan repayments and rent keeps them paddling hard just to stay afloat.
Why deficit spending is not an answer
Some people advocate deficit spending by the government, i.e. spending more money than is collected in tax revenue, as a fix for the unemployment issue. Leaving aside the inflation argument, let’s see why this is hardly a proper fix.
The government spends some extra money into the economy. The initial spend creates some employment, say more public servants. The people who receive this extra income, for their own financial security, might take out a bigger mortgage by buying a more expensive property, or perhaps an investment property. So already there is a haemorrhage of money out of the goods and services economy into the investment economy. Now other parties, including businesses, who are the beneficiaries of this government deficit spending (eg by receiving government contracts) also do the same thing – they divert a portion of their extra income into the purchase of shares, or take out bigger loans (and thus pay more unearned income to banks in the form of interest payments). Very quickly, the extra spending initiated by the government peters out as the extra income is diverted into the purchase of assets and interest payments to banks. The capitalist economy just hoovers up the money very quickly; assets increase in price, and the unemployment problem is there once again. Does the government just keep escalating this kind of deficit spending just to minimise unemployment in the short term? Hardly appealing as a proposition.
Falsely attributed causes of unemployment
To this author (Gavin Tang) the standard explanations for how unemployment comes about is so much blah blah. Either it’s a form of dissembling or it’s a case of clutching at straws. This is a typical explanation. There are some commonly held attributions for the cause of unemployment which are also wrong. Here are the three main ones.
- Technology. It is argued that technology displaces workers and thus causes unemployment. Technology makes for a cheaper good or service. The beneficiary of this technology is the buyer as well as the owner of the business (more profits). When people purchase a product X that is made cheaper by technology, they save some money. If the money saved is used to purchase other goods and services, the buyer is creating a demand elsewhere in the economy. This demand creates new jobs by exactly the same extent to which workers were displaced by technology in the making of product X. Likewise if the owner of the company also uses the extra profit to purchase more goods and services, he/she will be generating demand elsewhere (as opposed to demands for workers), and hence new jobs will be generated somewhere else in the economy. In trying to understand the cause of unemployment one has to see what happens to aggregate demand in the economy.
- Migrants. Many people think that when migrants come into the country, they displace existing residents from the limited employment opportunities. However when a migrant takes up a job (and displaces a local resident), they then use their income for the purchase of goods and services. Their spending (so long as it is not diverted to the purchase of assets) then create jobs to the extent that they have taken away jobs.
- Imports. An import appears to displace demand for locally made products and hence creates local unemployment. Every import has the effect of causing the currency to depreciate in value (every export leads to currency appreciation too). This effect will not be measureable unless the purchase is for a fleet of passenger planes – but it is there nonetheless. A depreciated currency makes it easier to export and harder to import – the local products become cheaper to other currencies, and imports become more expensive. This depreciation creates jobs in the export industries (including tourism). Thus every import will negate its role in creating local unemployment through the process of currency depreciation.
Consequences of unemployment
As explained above unemployment is closely linked to the growing inequality in society. The ever increasing concentration of wealth and income in a small minority creates a lack of demand in goods and services, and thence unemployment. Other things follow.
Unemployment forces people to lower wage demands. This makes it easier for company owners to bargain down wage rates. So while unemployment lowers company profits levels, it also lowers labour cost for company owners. This means that unemployment does not affect company owners to the same extent as it does to wage earners.
The lack of work and income resulting from unemployment leads to a lack of taxation revenue. Profound deleterious consequences follow. All kinds of things which can only be funded by the collective – things such as education, health, environmental measures, welfare – are left grossly underfunded. Things fall apart and people are left in some very hard places.
In some respects, in the highest level of corporate-finance planning, this is a very conscious and deliberate ploy. The aim is to privatise as much of the public sector as possible – for corporate profits and possibly for even darker motives (such as keeping people compliant through stress and fear). As Noam Chomsky describes the technique for privatisation: “Defund, make sure things don’t work, people get angry, you hand it over to private capital.”
All kinds of theories are put forward for the cause of inflation. This is not the place to debate the merits, or lack of it, in these arguments. However the single most important contributory factor to inflation is conveniently overlooked – the ever increasing price of assets and their respective unearned incomes, the ever increasing money supply caused by private banks, and the ever increasing amount of interest payments created by loans from banks.
As pointed out earlier, every form of unearned income is money diverted from the purchase of goods and services, which leads to a shortfall in demand for goods and services, which leads to unemployment. However, every unearned income is also a cost of production. So a business that has to pay higher rent or higher interest payments, has to mark up its prices to cover the higher cost of production. The same goes for individuals and wage earners – they will need to have higher incomes and wages to cover these ‘costs of living’. So every unearned income acts as a cost of production.
One source of unearned income which is not treated as a cost of production and actually projected to be the opposite are corporate profits. When a group of people working under a corporate name creates goods and services and then generate a ‘profit’, their labour is considered a ‘cost of production’ while the company’s shareholders takes the ‘profit’. The reality is the opposite. The shareholders are an (unnecessary and unproductive) cost of production. If the ‘profits’ were not diverted to shareholders it would either be a) distributed amongst those who engaged in production (the workers) or b) lower the price of the goods and services produced by the workers. The discourse of capitalism cleverly turns the argument upside down – workers are treated as a cost of production and not the shareholders.
As companies’ shares increase in price (which can be simply attributed to banks loaning out more and more money for their purchase), this increases the shareholders as a cost of production. How does this work? Consider the situation where a company’ shares are traded at $2.00. A 5% return equates to a return of ten cents per share. If over time the share price rises to $4.00, the same 5% return means that the shareholders have to return 20 cents out of each share. This can only be consistently done by a number of unscrupulous methods: putting the screws on workers, destroying the environment (externalities) or defrauding the public in any number of ways (political bribery, unsafe products etc).
To resume the inflation argument, as shares increase in price (as they generally do), the corporate dividends become an ever increasing cost of production.
As land increases in price, mortgages also increase in size. This means interest repayments also have to increase in size. This becomes a huge contributory factor to cost of production and hence inflation. The alternative for a lot of people to mortgages is to rent, but this too pretty much increases in tandem with property price.
The driver behind these escalating forms of unearned income – rent, mortgage and other loan repayments, share dividends – is simply bank loans. Banks loan out more and more money for the purchase of shares and property, and they drive up the prices of these things, which then drives up the unearned incomes associated, and inflation reflects the ever increasing cost of these things. In Private banks and credit creation, it is explained why the private banking system has to increase the money supply and thereby fuel the increase in price of land and shares, as well as the size of bank loans. Below is a replicate of the graph showing the increase in money supply cause by the banking system (green line). The blue line shows the contribution to the money supply of the Reserve Bank of Australia.
To sum up…
As asset prices increase (land and shares), so does their corresponding unearned incomes. Bank loans also increase in size, and this becomes a greater source of unearned income for the banks. All these increasing unearned incomes become both a contributory cost of production which results in inflation, as well as a diversion of money away from the purchase of goods and services. This results in unemployment. The increasing price of assets and their corresponding unearned incomes creates an increasing cost of living for people (inflation) whilst decreasing their capacity to earn (unemployment). The simultaneous experience of inflation and unemployment is called stagflation. Standard economic theory does not have a plausible explanation for why stagflation happens. It dances around the issue of unearned income; there is an aversion to questioning and addressing it, because to do so would undermine the entire foundation of capitalism.