What Happened in 1980? (...besides a lot of real wealth starting to change hands.)


"Deficits and a mounting debt, therefore, are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, “public” sector. Moreover, whenever deficits are financed by expanding bank credit – in other words, by creating new money – matters become still worse, since credit inflation creates permanent and rising price inflation as well as waves of boom-bust u2018business cycles.'"

~ Murray N. Rothbard "Repudiating the National Debt"

As I did the research for another essay, I came across some interesting data regarding the changes in real wages that seemed to begin in approximately 1980. Just for grins, I dug up more data on income, courtesy of the Economic Policy Institute, and analyzed it, creating the charts below. The first chart below shows the median family income in the U.S. from 1966 through 2003, in 2003 dollars. (Only the data up to 2003 was available.)

This chart shows what I would predict based upon my impression of the goal and purpose of the Federal Reserve. While my impression may be incorrect, one conclusion still seems obvious: A massive transfer in real wealth from the lower quintiles to the richest quintile seemed to begin in approximately 1980, at least according to this measure. The chart below, which was generated from the same data, shows average percentage increases in real wages from 1966 wages for each quintile.

Up until about 1980, the growth in real wages across economic classes seemed relatively uniform, that is, enjoyed by everyone. Thereafter, one can see that the growth in wages is skewed toward the upper income levels. In my view, this skewing exemplifies the transfer of wealth driven by inflation (and increased national debt) and to whom that money flows. That transfer continues today. My suspicion: The State, via the Federal Reserve, is the facilitator of that transfer. (I'm not alone in my suspicion, as a recent LRC podcast seems to indicate.) It strikes me as curiously ironic that the Monetary Control Act, which gave the Fed much broader powers, including the power to "monetize" sub-prime mortgages, was passed in 1980. Again, while I am certainly no economist and therefore cannot draw a firm conclusion, my suspicions are strong.

Either way the result is rather obvious. That result is the widening gap between the proverbial ends of the income spectrum that seemed to accelerate beginning around 1980. According to a well-researched and fascinating presentation on the economy by Chris Martenson, entitled, "The Crash Course," the Greek philosopher Plutarch stated, "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." That this imbalance seems to be ever widening in the current U.S. society should be, in my view, cause for concern, no matter the amount of debt. This is not because it is inherently bad for some to be more proficient at making money than others. Differences in performance are both normal and expected. However, when the State facilitates that difference well, "Houston, we have a problem!" (FYI, Jim Davies has a wonderful essay that explains some of the caveats of the Crash Course, one of which is its Malthusian point-of-view. Davies' essay very worthwhile; nearing required reading in my view.)

Make no mistake; the production of fiat money by a central banking scheme drives much of this widening gap between the ends of the socio-economic food chain. Libertarian philosopher and Austrian economist Roderick Long explains:

When the central bank creates money, the new money doesn't propagate throughout the economy instantaneously; some sectors get the new money first, while they're still facing the old, lower prices, while other sectors get the new money last, after they've already begun facing the higher prices. The result of such "Cantillon effects" is not only a systematic redistribution of wealth from those less to those more favoured by the banking-government complex, but an artificial stimulation of certain sectors of the economy, making them look more inherently profitable than they are and so directing economically unjustified levels of investment toward them.

Speaking of debt, how has that changed since 1980? The graph below, taken from zFacts.com and modified just slightly, shows national debt as a percentage of gross domestic product, with the president at the time thrown in for fun.

While correlation is not necessarily causation, it certainly seems like the creation of a mountain of debt fits with the beginning of the transfer of wealth from the bottom of the economic food chain to the top. It should be noted, however, that there is a "lag" on the chart above. In other words, the national debt had already turned the corner on an exponential curve before 1980. If total national debt is not the harbinger of wealth transfer, it certainly seems to fit rather nicely, as the graph below, taken from an informative analysis by a gentleman named Steven McGourty seems to illustrate.

It seems clear that by continuing to erect a huge pile of national debt, Reagan, and pretty much every president since, with the exception of Clinton, has successfully strengthened the State's wealth transfer medium. Fleecing the sheeple, while keeping them entertained, dumb, and afraid of bogus threats versus real ones; what a concept! (I have to give it to Slick Willie. While he had a tendency to use The Oval Office for, er, relatively novel pursuits, he apparently understood that out-of-control national debt was not a good thing, per se. Then again, maybe he was just busy with other things!)

Nixon, by unilaterally removing the systematic brake on debt expansion imposed by the Gold Standard, decreased the amount of time necessary for the debt curve to reach its exponential portion. (He really was a crook, only he wasn't alone.) I admit that I haven't a real clue what will happen going forward, but I would bet that it won't be as pleasant as say, a root canal, particularly if that future enjoys the same amount of State control over the money supply as the past. Given that this essay is being penned during U.S. election time, it is also worth noting one other truth. Neither party has any interest in reversing the course the U.S. state has been on since Nixon's time with regard to spending fiat money. (Only the recipients at the margins might change.) In fact, all indications are that spending will accelerate.


I'll end this essay the same way I started it, with Rothbard:

In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of one trillion dollars. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their President, who would not let them down.

As Murray opines, these are "Famous last words." While one might argue that Reagan let those Republican congressmen down, I'd assert that he actually made the wealthiest 20% very happy. That happiness continues today, for the time being. (Personally, I don't think Reagan ever planned to balance the budget, but that's a debate for another day.) There was a time when I would have said this gravy train of "free" money for whomever or whatever boondoggle would continue for as long as the coercive state draws breath, but even the State can't change the laws of math.

Those laws indicate that the debt load of the U.S. has each of us headed for a bumpy — possibly very bumpy — ride, of which this most-recent $700B scam was just the iceberg's tip. Buckle up. (And gentlemen, wear a cup.)