Welcome to “A Civil American Debate”

(This welcoming page was initially posted in March of 2011. It was updated in early 2014 to reflect our recent concentration on the economics of wealth and income distribution.)

The Economics of  Wealth and Income Inequality  

Go here for a chronological list of all posts addressing the economics of America’s most fundamental problem: the continuing and accelerating growth of income and wealth inequality, the decline of the “middle class” and the entire bottom 99%, and inequality’s causes and solutions. These posts describe and develop the essential features of the dynamic causes and effects of income and wealth redistribution in a modern market economy, with a primry focus on the U.S. economy. 


Our Executive Summary on economics (April, 2011) contains an early look at our views on the American economy. These views have expanded considerably, are now more refined, and are accounting in more detail for changes in the field of economics that have taken place over the last two centuries. The essential features of America’s economic problems have not changed, but our intent has been to expand on the failure of the economics profession to comprehend how market economies really work.

Our discussions of other topics are listed on the Contents Topics page. We have left the following introduction unchanged from when it was first posted in March of 2011.



When we started this project after the Tucson tragedy, we were determined to chronicle America’s past, identifying and discussing major problems, and hoping to help America find ways to work its way out of the current crisis.  By then, we were already gravely concerned about the results of the mid-term elections and a rapidly deteriorating situation.

Our plans to conduct a relatively leisurely series of fact-based discussions and debates quickly gave way, with the facts we are discovering and the current events that are unfolding, to a sense of urgency.  We now intend to provide a broad, fact-based information and analysis service.  We want to join others who are encouraging all Americans to get involved and stay involved in the political process.  Our primary focus for now will be on detailing the stunning economic and social facts and analysis that explain how we arrived at this crisis situation, and what can be done to turn things around.

Most Americans are probably unaware of how dangerous the current situation is for everyone but the very wealthy.  Large corporations and very wealthy people mostly have it their way in Washington, and through control of the media they are able to shape public opinion in ways that serve their interests.  We will show how they are hurting the American middle class and all Americans in the economic bottom 99% , and explain why major concepts in their self-serving ideology and propaganda are wrong.

Today the middle class is shrinking, unemployment hovers around 10%, housing foreclosures and bankruptcy rates remain extremely high, and adequate health care and education are falling more and more out of the reach of middle class Americans.  The middle class is in decline, and poverty is on the rise.  In September of 2010, CBS News Reported that one in seven Americans (43.6 million people) were living in poverty, up 8 million from August of 2004.  In sharp contrast, the rich have been steadily getting richer, and the top 1% holds the majority of America’s wealth.  This is nearly the same inequality in wealth distribution that existed in 1928, just before the beginning of the Great Depression.   Within the top 1%, a small group of multi-billionaires has achieved astronomical wealth, and they are now working to expand their control of federal, state, and local governments.  Their agenda amounts to an all-out attack on what is left of a dwindling middle class.  This grew out of disastrous policies started 30 years ago in the “Reagan Revolution,” but it is not what Reagan wanted.

The Last Two Years

After the Bush Administration ended with an economic collapse into the Great Recession and a massive Wall Street bailout, we could only share America’s guarded hopefulness that the newly elected President Obama could turn things around.  His administration appeared to stem the tide of economic collapse, stemming job losses and avoiding a deeper recession or depression.  Despite his party’s majorities in both houses of Congress, however, Obama was unable to achieve any real Wall Street reform or even produce much health care reform.

Chillingly, Congressional Republicans had become the party of “no,” openly opposing the President’s recovery efforts with filibuster after filibuster and revealing a political strategy of blaming him for the failure of those efforts. We would have expected everyone in Congress to want and to work for economic recovery, but we were sadly disappointed.

When in January 2010 the Supreme Court decided in Citizens United v FEC that corporations had constitutionally protected speech permitting them to spend as much as they desired in election campaigns, a whole new level of concern set in.  Sure enough, in the November elections corporations and billionaires spent millions of dollars, often anonymously, in support of Republican and tea-party candidates.  Consequently, voters provided the party of “no” and its new tea-party allies with a House majority and gains in the Senate, insuring that Obama would not be able to advance his recovery and jobs creation agenda in the next two years.

Exit polls revealed that voters were mainly concerned about economic recovery and jobs.  Many had been persuaded that Obama’s policies were failing and that the new members of Congress they voted for would do a better job of accomplishing his goals.  The voters had been seriously misled: the radical right has no intention of accomplishing these goals.

Instead, the radical right immediately pursued its agenda of advancing the interests of America’s most wealthy people, in opposition to those of all other Americans.  Currently (March of 2011) the radical right seeks to slash spending for federal programs that benefit ordinary Americans by some $60 billion,  including funding for low-income housing, early childhood, Low Income Home Energy Assistance grants, community health centers, and other services for the poor, asserting a politically false and economically impossible “goal” of thereby eliminating deficit spending and reducing the growing federal debt.

These cuts would be counterproductive, serving only to eliminate 700,000 to a million more jobs, worsening the economy and increasing the deficit.   Closing the deficit, however, is not the radical right’s real concern.  They served notice in December of their indifference to budget deficits and the federal debt when they forced renewal of the Bush tax cuts for the wealthy.

Our  Mission

Too many people in the middle class and below, we believe, are not yet sufficiently aware of the dramatically increased consolidation of wealth and income within the top 1% of Americans over the past 30 years, and this group’s steadily increasing control of government and the media.   Nor,  we suspect,  do they yet realize how significantly that consolidation of wealth has hurt them economically.  We were not aware when we started studying these issues of how incredibly serious the economic situation had become, but we believe we have identified and explained the major economic consequences of the last thirty years of the “Reagan Revolution,” and they are stunning.  Nobel prize-winning economist Paul Krugman and Robert Reich, among others, have convincingly argued that the radical right is leading America into another depression, destroying the prosperity and freedom of everyone in the economic bottom 99%.  We too believe that a serious depression is imminent,  but can be avoided if America changes course now.  But there is no margin remaining for political error.

Today a minority group of right-wing radicals within the wealthiest top 1%, which as noted has been given the right to buy elections, seeks to advance a very radical political agenda of privatization and corporate control of government.  This threat has emerged suddenly this year in states like Wisconsin, Michigan and Ohio, where democracy and democratic self-government are now themselves under direct attack.

This site is dedicated to demonstrating the true gravity of the current situation. Within the various categories on this site you will find analyses and findings presented in bite-sized chunks, and we will be continuously adding more details and facts.

You will find this Welcome note both as a page and as a post.  A  Summary post, also posted on the menu bar as a page, summarizes our major conceptual conclusions.   We have also prepared an Economic Summary which contains our stunning conclusions about the effect of the “Reagan Revolution” on the economy over the past 30 years, cross-linked to the relevant posts.

We provide a Resources category listing recommended reading, action groups, and information sources.  Finally, we will develop a Recommendations category where we intend to post suggestions and discussions (our own and from others) about what the bottom 99% can do to turn things around.

Our most important purpose right now is to encourage everyone to get involved and stay involved until our lives, our democracy, and our American way of life are safe from the corporate attack.  We urge everyone to organize, join political action groups, learn about what is happening in America, learn the truth and broadcast it far and wide, as we are trying to do.  We can’t do this alone.

The Future Is at Stake

We especially encourage young people, the so-called “lost generation” that is finding it progressively harder to get a good education as funding and programs evaporate from elementary school all the way up to graduate school.  You are fully aware of what is happening to you: Most students like you are finding it increasingly difficult to get higher education without incurring huge debts it may take a lifetime to repay, and even to find jobs once they have their degrees.  Increasingly, only the very rich can afford high quality education.

We graduated from high school fifty years ago, and you can take it from us:  It hasn’t always been this way.  What is happening today to education in America is outrageous.  Among the most important freedoms in America are your freedoms to get a quality education, to provide economic security for yourselves and your families, and to find fulfillment in life.  Now you must work hard to preserve those freedoms. You all are the keys to regaining your freedoms and making sure that you will have a real future, so please get started.

Here is a recent tape of a political action by Coffee Party USA  that took place at Wesleyan University, to which all young people can (and should) relate.

The huge push-back in Wisconsin against the overt attack on public-sector workers and their unions shows that once they became aware of the sinister hidden agenda of the tea-bagger plutocrats, Wisconsin citizens reacted immediately and decisively.  Here is a video of a Wisconsin farmer explaining how Scott Walker’s tax-cuts-for-corporations and spending-cuts-for-people agenda will devastate Wisconsin communities.

All Americans in the bottom 99% must continue to support the people of Wisconsin as they struggle for justice and attempt to recall legislators and a governor that won election on false pretenses.  It’s not just about unions, and it’s not just about Wisconsin.  What happens in Wisconsin, Michigan, Ohio, and Florida – anywhere in America – affects us all.

There is no doubt that the American people can defeat the power of the radical right, their wealthy patrons and their corporations, once they are aware of the truth and are galvanized into action.   Many progressive organizations and unions are fighting these suddenly very extreme attacks, and they are gaining in strength.

To be sure, the right-wing media has the ability to cause many people to act against their own interests.  But these people are in the minority, and we all have the power to ignore the radical media and disregard their propaganda and their distortions.  If we remain calm and confident, through hard work we can win this class struggle.  It is up to us.

As Michael Moore pointed out recently in Madison, Wisconsin, the 400 wealthiest people in America have as much wealth as the entire lowest half of the population, 155 million people!  But we all need to remember and stay focused on this: They don’t have anywhere near as many votes.  It’s the top 1% against the bottom 99%, so make democracy work and take back your country.

Please send our link to everyone you can.  And bookmark it for our updates! Constructive comments, questions, and information are welcome.

(We invite you next to read our Summary page, where we outline our major conceptual conclusions so far, and our Economic Summary.  Mike’s initial post, The American Bad Dream, reflects on the major developments that have affected his views and concerns over the past 50 years.)

ARC, JMH – 3/16/11

(Contents Topics)

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The Dangerous Delusions of Mainstream Capitalism

The economics profession is in a state of confusion unparalleled in the history of the social sciences.  The devastating stock market crash in 2008 had not been anticipated. In its aftermath, The Economist  [1] opined: 

[T]there is a clear case for reinvention, especially in macroeconomics. Just as the Depression spawned Keynesianism, and the 1970s stagflation fueled a backlash, creative destruction is already under way. * * * Paul Krugman, winner of the Nobel prize in economics in 2008, [has recently] argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”

Recently, The Economist [2] underscored the field’s lack of progress over the last eight years:

Almost eight years have elapsed since the financial crisis took hold in August 2007 and still the same issues are being fought over. Who should suffer the most pain – creditors or debtors? Is the best way to achieve growth short-term fiscal stimulus or long-term structural reform? And, in Europe in particular, how does one reconcile democracy with international obligations?

Debt is a claim on future wealth: lenders expect to be paid back. The stock of debt accordingly tends to expand at moments of economic optimism. Borrowers hope that their incomes are set to rise, or that the assets they are buying with borrowed money will increase in price; lenders share that enthusiasm.

But if wealth does not rise sufficiently to justify the optimism, lenders will be disappointed. Debtors will default. This causes creditors to cut back on further lending, creating a liquidity problem even for solvent borrowers. Governments then step in, as they did in 2008 and 2009.

The best way of coping with too much debt is to spur growth. But developed countries, even America, have struggled to reproduce their pre-crisis growth rates. So the choice has come down to three options: inflate, default or stagnate.

The issue was, and remains, growth. How is it caused and controlled? Those questions cannot be answered by mainstream supply-side economics. The failure to understand growth, frankly admitted by some leading mainstream economists (including notably Paul Krugman and John Bates Clark Prize winner Raj Chetty) is, as Krugman once put it, the economics profession’s “dirty little secret.”  The lack of understanding is palpable: The Economist’s short list of options is incomplete: A fourth option — indeed the only remaining option — is to “equilibrate,” i.e., reduce the inequality of wealth and incomes. This argument, as yet, has occurred to very few professional economists, and it gets no attention at all in mainstream economic reports and debates .

Why the theoretical disarray? The “science” of economics made an abrupt about-face in the late 19th Century, when it  began to concentrate on the development of a new ideology. The new movement was called “neoclassical economics” and the movement has taken over mainstream economics in America and the world since the late 1950s. The excellent explanation of this phenomenon advanced by the prominent Georgist economist Mason Gaffney [3] begins with this:  

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what a degree the founders of Neoclassical economics changed the discipline for the express purpose of deflecting George, discomfiting his followers, and frustrating future students seeking to follow his arguments. The stratagem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. “Nothing pleases a … single taxer better than … to use the well-known economic theories … [therefore] economic doctrine must be recast” (Patten 1908; Collier, 1979).

George believed economists were recasting the discipline to refute him. He states so, in his last book, The Science of Political Economy. George’s self-importance was immodest, it is true. * * * George’s view may even strike some as paranoid. That was this writer’s first impression, many years ago. I have changed my view, however, after learning more about the period, the literature, and later events.

When I began my in-depth study of “The Economics of Inequality” a few years ago, I started with the work of John Maynard Keynes, the famous British economist who endeavored during the 1930s to explain recessions and depressions —  i.e., constraints on growth. I soon discovered from reviewing his General Theory of Employment, Interest, and Money that he, too, was critical of the neoclassical school, though that was a title not as yet given to it, and his General Theory was designed to refute its basic tenets. His primary target was the ideology of Alfred Marshall, a late 19th Century British economist. As Gaffney noted:

Major texts by Marshall, Seligman, and Richard T. Ely, written in the 1890s, went through many re-printings each over a period of 40 years with few if any changes. Not until 1936 was there another major “revolution.”  

That, of course was the “Keynesian revolution.” As Gaffney observes, there was an intense interest among American neoclassicists in discrediting Henry George, for he had identified the concentration of income and wealth as the source of inequality in his famous book Progress and Poverty (1878). Modern neoclassicism has also targeted the work of Keynes and Karl Marx; but Keynes had not dealt directly with inequality, and Marx was easier to discredit because of his association with communism.

Keynes is remembered mainly for his advice on how government could stimulate flagging economies: (1) monetary policy, to encourage borrowing with low interest rates, and (2) fiscal policy, government borrowing (deficit spending) to stimulate flagging economies with increased spending. The meat and potatoes of his General Theory has been all but forgotten: He established that growth depends on demand, not the mere availability of supply, and when aggregate demand is weakened, an economy declines. In today’s parlance, the capitalists are not the job creators: they react to the expectation of future profits, and that expectation lies behind investment decisions. It was the dynamic culmination of “classical” economics which, from Adam Smith on down, had been concerned with optimizing social welfare, and Keynes saw that goal as being fulfilled when an economy is at full employment. And Keynes presumed that progressive taxation would be employed to control the distribution of income and wealth. 

This all made good sense, but “neoclassical” economics had a different agenda. It was built upon “micro-economic” ideas designed to maximize individual success, and profits. Starting with Marshall’s fantasy about automatic growth and adjustment to full-employment equilibrium, neoclassicism went much further: The aggregation of individual actions designed to optimize personal success, said Paul Samuelson, optimizes society’s welfare as well. An entire system of ideology, starting from the allegation that “the invisible hand of Adam Smith” ensures perfect efficiency and resource allocation and running through Arthur Okun’s alleged trade-off between efficiency and equality, was created and proselytized. When I checked, the only support Okun cited for his argument was — the “invisible hand” of Adam Smith! Of course, Smith never meant the expression to be interpreted that way, and the term “neoclassical” is a misnomer: Classical and neoclassical economic ideas are opposed in both intent and result.  

Abandoning the demand-side paradigm made it impossible for mainstream economics to understand growth. The missing piece, which Keynes was on the verge of merging into his dynamic demand-side economics, was the distribution of income and wealth. Karl Marx and Henry George had been correct that the accumulation of wealth and concentration of income creates inequality and decline, though they both lacked a dynamic model to explain exactly how. Regardless, mainstream economics had buried their ideas so deeply in neoclassical ideology that when the current U.S. inequality cycle began in the 1980s with the Reagan revolution, no one had any suspicion that the growing income and wealth inequality had any macroeconomic significance at all!

in 2014 and 2015, the economics profession is beginning, like a fairy-tale princess, to awaken to the truth. And the truth is harsh. [4] The concentration of income and wealth at the top — a gradual process — automatically reduces economic growth; and it is caused by the lack of a sufficiently progressive system of taxation.

Everyone conveniently forgot about one piece of axiomatically correct theory that emerged from the late 19th Century — Irving Fischer’s “Quantity Theory of Money” (QTM): The problem supply-side theory keeps running into is that in a depressed economy, when growth is being continuously reduced, the money needed even to regain previously expected levels of effective demand is simply not in circulation. The QTM recognizes that income is a product of the money supply times the velocity of money, over a given time period (typically we think of GDP, or income in one year). When most of all new income growth is going high within the top 1% (even the top 0.1%) The velocity of money necessarily slows.

This is irrefutable. All of Milton Friedman’s theorizing about the causes of and remedies for the Great Depression were erroneous, because he presumed a constant velocity of money. That was a huge error, and it provided all the necessary support for the very wrong supply-side ideas that now control public policy — the austerity doctrine, and the trickle-down myth.

This brings us back to the recent musings of the Economist. Try rereading the latest piece on “The Debt Trap” with this distributional perspective in mind: Yes, there is a debt trap. Money, by the way, is debt in a modern economy. It is created and destroyed by the banking system when it makes loans and writes them off. When the amount of outstanding debt gets too large, bubbles form and, as happened in the Crash of 2008, they burst. Upon a crash, the artificially inflated value of assets collapses back down to a closer reflection of their real, tangible value. 

More debt bubbles are inflating as we speak. This is happening in the United States, with a gradually accruing and increasingly devastating level of damage, mainly because of the perpetuation of tax reductions granted on top incomes over the years, and also because of a lack of progressiveness elsewhere in the taxation system (sales and use taxes, property taxes, etc.)

Now the U.S. is threatened with a serious federal budget crisis which, as I have discussed in earlier posts, is not recognized for what it is by the Congressional Budget Office, which is still subject to wrongful neoclassical idealism. But CBO can certainly do arithmetic, and it expects interest on publicly held federal debt to rise exponentially and astronomically. CBO projects that within the next six years it will overcome the entire national defense budget.

The Economist reminds us that “debt is a claim on future wealth: lenders expect to be paid back.” But lenders to our federal government do not expect to be paid back. Ever. Even CBO is constrained to point out that, in these circumstances, this pace of debt growth is not “sustainable.” 

American capitalism is far more unstable, in our current environment and under current institutional circumstances, than almost anyone imagined possible. That is because for forty years the United States has pursued an idiotic fiscal policy. I keep asking: How much time do we have left?                   

JMH — 10/8/2015  


[1] “What went wrong with economics,” The Economist, July 16, 2009 (here).

[2] “The Debt Trap,” The Economists, July 11, 2015, p. 64. Buttonwood (here).

[3] Mason Gaffney, The Corruption of Economics, “Introduction: The Power of Neo-classical Economics,” 1976 (here).

[4] J. Michael Harrison, “The Economics of Inequality,” The Torch Magazine, (here).




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The Trickle-Down Nightmare

In my retirement, I have devoted myself to the investigation of income and wealth inequality, and in the process acquired a distributional perspective on how modern market economies actually work. When I began this project, I soon realized that it would involve tracing through the history of “political economy” the emergence of some very harmful, and very wrong, ideas. Consistently nurtured over more than 150 years of modern “neoclassical” economics, these are ideas that have come to control the perspectives and thinking of most economists, and of politicians and the mainstream media.

It seems not only surprising, but also quite remarkable, that bad ideas — that is, ideas that do not stand up under scientific scrutiny — have consistently favored the interests of wealth and power. For this reason, perhaps, it seems less surprising that these bad ideas now dominate economic theory and doctrines: Sadly, mainstream economics has become less a social “science” and more an elitist discipline dedicated, in effect, to the cultivation of inequality and the preservation of the interests of wealth.

Yes, there are pockets of “heterodox” dissent, but you have to dig to find them. Happily, the voices of dissent are growing louder as conditions worsen, but throughout history societies have reacted too late, and suffered enormous damage, and then had to learn hard-won lessons all over again, as ably recounted by Thom Hartman in his latest book, The Crash of 2016.

It has not always been that way. A period of significant objective scientific inquiry in economics got underway with Adam Smith, who published Wealth of Nations in 1776, and his immediate successors T. R. Malthus and David Ricardo. This period of “Classical Economics” continued on into the mid-19th Century through the work of the German Karl Marx, the British philosopher/economist John Stuart Mill, and the American Henry George, but began a rapid decline with the emergence of neoclassicism in the last decades of 1800s. 

Unlike classical economics, which was concerned with the overall welfare of society, neoclassicism promoted private gain. It made gigantic and often creative leaps to assume away unpleasant and morally troublesome aspects of reality, chief among them the fact that one party could gain wealth only at the expense of others. Alfred Marshall’s Principles of Economics (1890) made explicit one of the biggest neoclassical leaps of faith ever, namely, the idea that an economy can somehow always recover from the consequences of the accumulation of concentrated wealth. Forty-five years later, in what would be the last gasp of rational classicism, John Maynard Keynes took on Marshall and the neoclassicists, exposing the weaknesses in their thinking in The General Theory of Employment, Interest, and Money (1936). 

The last word of that title is revealing: Keynes’s target was neoclassical supply-side idealism, and modern neoclassicism has continued to ignore the role of the money supply in providing effective demand, and the constraint the finite money supply imposes on growth and recovery. Keynes emphasized the “principle of effective demand,” which essentially means that there must be a sufficient supply of money distributed throughout society to provide for the growth of demand, income and investment. An important ingredient missing from Keynes’s analysis was the Quantity Theory of Money (QTM), a theory developed by the American economist Irving Fisher and a few others in the late 1890s that expresses a mathematical truism: The amount of an economy’s annual income (GDP) is determined by the average size of the money supply and the average velocity of its circulation. The supply and velocity of money are the ultimate constraints on effective demand.

Intent on denying Marx’s prediction that inequality gradually grows over time in capitalist economies, neoclassical economics has consistently cultivated the “trickle-down” fantasy that wealth and income could be increasingly concentrated in the hands of a few with no adverse consequences for the less wealthy. To prop up this trickle-down fantasy, neoclassicists like Paul Samuelson and Milton Friedman marginalized the Keynesian emphasis on the sufficiency of “effective demand.” Today, Keynesian “demand-side” theory has been almost entirely discarded in favor of the “supply-side” approach Keynesian macroeconomics repudiated. Likewise, the QTM has been overlooked: Growing income concentration at the top reduces the amount of spending and demand below top incomes (which Keynesian theory requires for economic recovery) and that represents a decline in the velocity of money. That stagnation and recovery fundamentally depend on the velocity of money was completely overlooked by mainstream economics after Milton Friedman presumed a constant velocity of money in his famous theory of the Great Depression.

Trickle-down and the QTM

It is fairly easy to explain why the perpetuation of the trickle-down myth requires overlooking the realities imposed by the QTM: The trickle-down argument requires that when the wealthiest get richer there is enough stimulation and growth so that the entire economy will do better as well: The losers, as always, are those who are not trying hard enough to succeed. The QTM, however, demolishes that fantasy, for it establishes that when the wealthiest get richer, everyone else is worse off.

The entire issue of growth and prosperity is intimately linked to the distribution of wealth and income, as I have emphasized over the past several years. Mainstream economics has steadfastly refused to admit that inequality growth has any macroeconomic implications at all. That denial has become impossible to maintain: The many trillions of dollars of net worth that has accumulated within the top 1% since 1979 was overlooked for decades, and is only now being discovered. But with the acceleration of inequality growth since the Crash of 2008, the reality of wealth concentration has become difficult to overlook. For example, Paul Buchheit reported in Nation of Change on November 14, 2014 (here), that “American wealth has been sucked away from the middle to a greater extent than in any major country except Russia.” Moreover:

A revealing study from the Russell Sage Foundation found that: — Median wealth has dropped, stunningly, by 43 percent since 2007 — Only the richest 10% of the country gained wealth since 2003.

Ignoring these facts is to ignore QTM: It is not just a “theory,” it is a mathematical certainty. Even more stunning is the high concentration of income redistribution, which economist Emmanuel Saez has reported is consistently moving higher and higher within the top 1%, and is locating somewhere near or within the top 0.1%.   

This leads to enormous levels of confusion and misinformation. An excellent example can be found in the recent New York Times article “As Economies Gasp Globally, U.S. Growth Quickens” by Nelson D. Schwartz, dated August 28, 2015 (here). This was a tremendously optimistic report:

The latest evidence of this shift came on Thursday, as the Commerce Department revised sharply upward its estimate of economic growth in the second quarter to a healthy annual pace of 3.7 percent, from an initial estimate of 2.3 percent. At the same time, the Labor Department, in reporting another drop in weekly unemployment claims, provided further evidence that the job market was on the mend. * * * With markets remaining on edge, investors are already turning their attention to coming data about the economy’s course, which will help determine whether the Federal Reserve will make its long-awaited move to raise interest rates in September or wait until later meetings. 

To project growth at an annual rate of 3.7% for any length of time is a classic example of neoclassical trickle-down optimism. The annual rate of GDP (income) growth has been around 1% since 2008, and that includes the income at the top. And the job market cannot really be mending at such a pace with median incomes drastically falling, as dictated by the QTM (Craig Roberts, July 8, 2012, (here):

And while median income is falling, quite naturally, household borrowing must increase to keep up effective levels of effective demand.  The following graph (reproduced from azizonomics blog, here) shows private sector debt as a percent of GDP over the last century. Americans were relatively cash rich after WW II, a condition that persisted until the depression-era 1930 debt/GDP ratio returned in the late 1990s:


Meanwhile, as reported by the St. Louis Fed (here), corporations “are holding record amounts of cash,” and cash holdings have grown rapidly since 1995: 

In 2011, cash holdings amounted to nearly $5 trillion, more than for any other year in the series, which starts in 1980. The increases in cash holdings grew steeper from 1995 to 2010, with an annual rate of growth of 10 percent (from $1.22 trillion to $4.97 trillion).

Here is their graph of the growth of the aggregate cash and equivalents of U.S. firms: 

Aggregate Cash and Equivalents of U.S. Firms And here is their graph of the ratio of cash to net corporate assets:

Ratio of Cash to Net AssetsAccording to the attached report “Why are Corporations Holding So Much Cash?” by  Juan M. Sánchez and Emircan Yurdagul (here):

A close look at the balance sheets of publicly traded U.S. firms shows that their cash holdings have increased dramatically since the mid-1990s except for a slowdown around the financial crisis. The two explanations most frequently given for the growth in cash pertain to fiscal policy and structural factors.

Fiscal policy affects cash holdings in two ways, both of which involve taxes. First, public firms are seeing their profits rise elsewhere in the world; if these firms were to bring these profits from overseas operations back to the U.S., the profits would be relatively heavily taxed. Second, uncertainty about future taxes is on the rise.

Ah yes, taxation! We’ll get to that shortly. But first, we need to ask ourselves a couple of questions emerging from the Schwartz article: (a) How can the rate of GDP growth be expected to increase with median incomes in constant decline? (b) Doesn’t the ominous rise of private household debt portend further GDP decline? and (c) What does the huge increase in corporate holdings of idle cash tell us about why this is happening?

The answer to the last question clearly lies in the growing inequality of income and wealth distribution. When U.S. corporations are sitting on $5 trillion of cash, in tax-avoidance mode, it is obvious that they have far too much money which is not being invested and circulated throughout the economy. In terms of the QTM, this is a glacial pace of the velocity of money. This money obviously has not trickled down — and these are the conditions of incipient depression. 

Trickle-Down and the Laffer Curve

It’s all about avoiding taxation, and the trickle-down propaganda assault has come from both directions: As just discussed, the entire weight of neoclassical ideology is thrown behind the assertion that cutting income taxation of the rich investment class is good policy, because they will “work” harder and can obtain limitless additional wealth without hurting anyone else. Regardless whether that idea seems silly on its face, the QTM demonstrates its absurdity.

From the other direction, the argument is made that attempts to increase taxation of the rich capitalists will backfire, because they will lose the will to “work” for more money. When that happens, the argument goes, these wealthy “job providers” will invest less, pick up their marbles and get out of the game.

This argument is perhaps even less credible than the first. Warren Buffett has underscored the obvious point: “People invest to make money, and potential taxes have never scared them off.” (“Stop Coddling the Super-Rich,” by Warren E. Buffett, The New York Times, Op-ed, August 14, 2011, here). From the accumulation of trillions of idle cash just discussed, it is evident that it doesn’t take an actual tax increase to cause the hoarding of financial wealth at the top.

Lest it escape our attention how unimaginably huge the incredible $3.75 trillion growth of idle corporate wealth between 1995 and 2010 really is, consider this: The distance light travels in a year is about 5.86 trillion miles, and the closest star to our sun is Alpha Centauri, about 4.37 light years away. For a hypothetical trip to Alpha Centauri, at a cost of $1/mile, that idle wealth would be enough get you about 1/7 of the way there. The fastest spacecraft ever launched, Voyager 1, “would take well over 70,000 years to reach Alpha Centauri” (Paul Gilster, Centauri Dreams, here). Thus, in our hypothetical, the idle cash would finance about 10,000 years of space travel at the speed of Voyager 1! Even with that analogy, the scope of this problem remains virtually unimaginable.     

In an attempt to provide a patina of legitimacy to the argument, University of Chicago economist Arthur Laffer unveiled, at a 1974 Washington, D.C. dinner party with Jude Wanniski, Donald Rumsfeld, and Dick Cheney. a graph that has become known as the “Laffer Curve” (“The Laffer Curve: Past , Present and Future,” by Arthur Laffer, The Heritage Foundation, June 1, 2004, here). Here is a frequently published version of the curve:

Laffer-curve 3This symmetrical bell-shaped government revenue curve is based on the argument that no government revenue will be collected if the top marginal income tax rate is zero (which is obviously true) or if the top rate is 100% (which is essentially untrue, since CEOs reaching the top income tax rate in a tax year probably would not decide to shut down their corporations until the following year).

Since the top income tax rate has never been at 100% in U.S. experience, this is entirely a matter of fanciful speculation. Moreover, to suggest as this formulation of the government revenue curve does, that optimum revenues are achieved at a 50% top tax rate ignores the U.S. experience between 1945 and 1982, when the middle class grew and flourished and there was steady growth and prosperity, and the top rate was at 91% and 70%.

Econometricians have estimated the optimal tax rate for the United States at over 80%. Here is an optimum revenue curve generated by British economist Sir Tony Atkinson and Australian economist Andrew Leigh, from the Twentieth Century income tax data of five Anglo-Saxon income tax systems: Australia, Canada, New Zealand, the U.K.,  and the U.S. (here):      Tax revenue Atkinson dp4937

Focusing solely on the United States, the French economists Emanuel Saez and Thomas Piketty, together with Stephanie Stantcheva, developed a complex “three elasticity” model, and though they published a revised paper in 2013 (“Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” by Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva, revised March 2013, WP 17617, here), their conclusions remained the same. Although their model was different, and they isolated the U.S. experience, they too estimated an optimal top income tax rate of 83%. Their substantive conclusion (“Taxing the 1%: Why the top tax rate could be over 80%,” by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, VOX CEPR’s Policy Portal, December 8, 2011, here) is unequivocal:

The top 1% of US earners now command a far higher share of the country’s income than they did 40 years ago. This column looks at 18 OECD countries and disputes the claim that low taxes on the rich raise productivity and economic growth. It says the optimal top tax rate could be over 80% and no one but the mega rich would lose out.  


This post provides only a sampling of the ideology generated by neoclassical economics to defend the interests of wealth. The primary threat perceived to wealth, naturally enough, has always been taxation. It is sobering to confront the array of truly bad arguments that have been advanced in the successful effort to oppose the taxation of wealth and top incomes. The “trickle-down” fantasy has been the most successful of these bad ideas, and it controls taxation policy in the United States today.

Unfortunately, as is becoming increasingly apparent each year, the downside of regressive taxation is decline and, ultimately, collapse. Without significant tax reform in the U.S., and in some other major industrialized countries, the U.S. and global economies are not too many years away from a truly disastrous collapse.

JMH – 9/7/2015 

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Postscript: What We Must Do

Wisdom is a strange commodity. Most of the time we don’t recognize it when it infiltrates our addled brains, and it is always hard-won and a long time coming. Yesterday’s post “Krugman v. Stiglitz — Debt v. Taxation” deserves this postscript, for having written it, I have arrived at what I hope readers will agree is a wise epiphany, for the difference between blundering along as the United States government continues to do — feeding the concentration of wealth and income at the top — and finding a way to stop the madness, is the difference that will determine whether our children and grandchildren can ultimately survive. Yes, it’s that serious. Here’s my summary of what I believe I have learned about our current choices on how to proceed:

The Problem:

  • Money is debt, and traditional monetary policy won’t help at all, because by creating more money it will just keep feeding inequality, and inflating debt bubbles;
  • Janet Yellen (apparently)  and Ben Bernanke before her (assuredly) don’t understand this. For his part, Bernanke idolized Milton Friedman’s “free market” philosophy that said, in effect, everything will be fine if we just give free rein to entrepreneurs and corporations, and there is no such thing as “too rich”;
  • John Maynard Keynes, in 1935, provided essential insights with his “General Theory,” which said there are three truly independent variables (independent of each other) in a market economy: (1) the interest rate; (2) society’s propensity to consume; and (3) the “marginal efficiency of capital” or the “cost of capital” (i.e., the present value of all expected future returns on investment). I became intimately familiar with the cost of capital in my career, and affirm that Keynes’s marginal efficiency of capital is identical to the Capital Asset Pricing Model (CAPM) used to estimate the cost of equity capital;
  • The “General Theory” boils down to this — as long as there is enough demand in the population, and enough money to spend, there will be sufficient expectation of future returns on investment to prompt investing in growth and jobs. Changes in the interest rate, in normal times, can make it easier or harder for firms to borrow money needed for additional investment;     
  • But these are not normal times. Now we must abandon the idea that interest rate manipulation can influence the demand for new capital. It won’t work, because there is already far more than enough money out there for new investment, sitting idle, because it came from the former middle class, which no longer has that money to spend;
  • That is true because of all the many trillions of dollars of economic rent extracted from the economy by the top 0.1% and the top 0.01%, as Joseph Stiglitz so ably argues;
  • These trillions of dollars of economic rent stayed at the top because of the tax reductions for the richest Americans and their corporations engineered by the Reagan revolution;    
  • Because income and wealth concentration at the top drastically reduces growth, the U.S. economy will continue to decline, sinking into ever-deeper depression;
  • There is a more immediate problem, however: The federal government already is so deeply in debt that a major fiscal crisis is threatened, and continuing to increase the money supply only exacerbates that problem, inflating more debt bubbles;
  • We now have to worry that a significant increase in the interest rate will provoke another crash, which means that safety requires maintaining a zero interest rate indefinitely.

The Solution:

  • Re-institute very high levels of income taxation at the very top; tax the top 1% or so at a marginal FIT rate of about 70%, the top 0.1% or so at about an 80% rate, and the top 0.01% at a rate of 85-90%, as we did after World War II. That is not just the top priority, it is essential;
  • Use the money, first and foremost, to deflate debt bubbles — retire student debt, vehicle debt, medical debt, mortgage debt, and so forth, in a careful, systematic way;
  • Stimulate consumer demand and growth: increase and enforce the minimum wage, and provide more assistance to the indigent and disabled veterans. Remember, the more money they have, the more they can spend;
  • Use the money as well to improve our dedication to medical care, and institute a single-payer health care system; and to seriously invest in education and a renewed emphasis on scientific thinking and progress;
  • And certainly not least, use the money to invest in infrastructure improvements at home, and in saving the planet from the looming disaster posed by global warming. These priorities will create booming industries and millions of jobs;
  • Enter into international agreements that curb the excesses of the banking and financial industries, and avoid those that lock in advantages for the corporate profiteering.

The Prognosis:

If this sounds like “socialism” that’s because that is exactly what it is. We’ve operated under perverse ideas of “socialism” that demonize labor and work for far too long. Let’s agree to pursue the objective defined by Adam Smith and the classical economists, namely, a society in which the purpose of economic activity is the optimization of the public welfare, not personal gain.

Can this happen overnight, or even at all? We can be certain that corporatism is dedicated to preventing such a development. Two advocates who are not especially optimistic in this regard are Thom Hartmann (The Crash of 2016) and Joseph Stiglitz (The Price of Inequality). I recommend these two books to everyone — put them right at the top of your reading list.

Then do your best, which is all any of us can do. It’s for our children and grandchildren.

JMH – 8/22/2015 



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Krugman v. Stiglitz — Debt v. Taxation

I have noted before that two of America’s best-known economists, Paul Krugman and Joseph Stiglitz, both Nobel Prize winners, are in extreme disagreement on the causes and implications of and remedies for, America’s inequality crisis. Both are politically progressive, but their disagreement is profound and fundamental. Quite literally, it affects what they think about how a modern capitalist market economy like the U.S. economy works and grows. Of course, they agree that our federal government is part of the economy, and that what it does and doesn’t do matters a great deal. Neither of them is intellectually even close to the insensible libertarian economic ideology. But I am prompted to publish this short post today because of Paul Krugman’s Op-ed in this morning’s New York Times (8/21/2015), “Debt is Good” (here). Krugman’s worldview is considerably different from that explained in detail Stiglitz more than two years ago in his book The Price of Inequality, and also more recently in a New York Times Op-ed (4/14/2014): “A Tax System Stacked Against the 99 Percent, (here).

In “Debt is Good,” Krugman re-emphasizes the arguments about public debt he has been making for a long time:

Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

Krugman argues that government debt can do useful things, like pay for needed infrastructure improvements, and that a time of extremely low interest rates is a good time to borrow. Beyond that, he concurs with the idea that “having at least some government debt outstanding helps the economy” because “the debt of stable, reliable governments provides ‘safe assets’ that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.”

Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources. 

But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.

We need to take a close look at this perspective: There is certainly some false ideology behind the view that more government debt is always tolerable, and that centers around the idea, promoted for more than the last one-half century by Paul Samuelson, that the U.S. economy will always grow itself out of decline and, once at full, optimal employment and running on all cylinders, will not have to worry about government debt. That fantasy is based on a lot of assumptions that don’t pan out, like perfect competition, perfect efficiency, continuing full employment, and so on — and notably, it takes no account of the drag on growth caused by the ever-increasing concentration of income and wealth at the top, and the increasing inequality caused by the interest on the debt itself. It further assumes responsible debt management by the government, and that has been lacking since 1980.

Indeed, the debt has grown continuously since 1980, in response to tax cuts at the top of the income ladder. The debt was needed to replace revenues lost due to the tax cuts for the wealthiest taxpayers, and it has effectively financed those cuts. Now, over forty years later, the total of the national debt has grown to over $18 trillion, and the federal government is running deficits every year, so the debt is growing. The holders of the U.S. debt have what is known as a “perpetual annuity,” because none of the principle is being repaid, but they collect continuously accruing interest.

Even though interest rates are low today, the question is, with the national debt at over $18 trillion and growing, and interest obligations on the existing balance compounding exponentially, don’t we have to worry about, at some point, stopping the bleeding? I addressed my concerns in this area in detail in an earlier blog post (“Inequality and Debt, Dysfunctional Forecasting, and the Discomfort Zone on the Left” (here). and in letters to the editor of the Albany Times Union (“Reinstating higher tax levels crucial,” 1/21/2015 (here); “Tell truth about interest on debt,” 8/19/2014 (here). 

The Congressional Budget Office, in its Update to the Budget and Economic Outlook: 2014-2024, August 2014 (here) warned (p. 2):

The persistent and growing deficits that CBO projects would result in increasing amounts of federal debt held by the public. * * * The large and increasing amount of federal debt would have serious negative consequences, including the following: 

* Increasing federal spending for interest payments, 

* Restraining economic growth in the long term,

* Giving policymakers less flexibility to respond to unexpected challenges, and

* Eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt. 

In its February 2014 outlook (here), CBO stated: “Over the next decade, debt held by the public will be significantly greater than at any time since just after World War II. With debt so large, federal spending on interest payments will increase substantially as interest rates return to more typical levels” (p. 7).

CBO’s projections for the growth of debt interest, relative to federal budget items, is alarming: “Net interest,” that is interest paid out by the federal government net of interest collected from various sources, was expected to more than triple from 2014 to 2024, “the result of both projected growth of federal debt and a rise in interest rates.” (February report, p. 3 In the February report, net interest was projected to rise from $233 billion in 2014 to $880 billion in 2024. In the August update, these projections were reduced slightly, from $231 billion to $799 billion.

Leaving aside forecasting issues, and CBO’s failure to model the effect of increasing income and wealth redistribution on growth, the growth of net interest is swamping federal discretionary expenditures. Over the entire period, the defense budget is more than one-half of all discretionary spending, and it was projected in both the initial and revised Outlook to grow from $594 billion in 2014 to $716 billion in 2024. Under the initial projection, net interest would exceed the entire defense budget by 2021, and under the reduced projection of net interest, it would roughly equal the defense budget by 2022.

It is inconceivable, in these circumstances, that the federal debt could be considered “safe assets,” and the CBO’s concerns about a fiscal crisis materializing seem very real. Referring to the Crash off 2008, Krugman said: “When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.” Why should investors apply different standards to U.S. government debt? What would it take, we have to wonder, for the national debt to turn into sludge?

Stiglitz has a much more realistic perspective on all of this. He warns about the dangers of excessive debt, and recommends a series of reforms to halt the redistribution of income and wealth to the top, a process which, after all, has resulted in growing bubbles of student debt, automobile debt, general consumer debt and more home mortgage debt. In his 2014 Op-ed, Stiglitz stated:

What should shock and outrage us is that as the top 1 percent has grown extremely rich, the effective tax rates they pay have markedly decreased. Our tax system is much less progressive than it was for much of the 20th century. The top marginal income tax rate peaked at 94 percent during World War II and remained at 70 percent through the 1960s and 1970s; it is now 39.6 percent. Tax fairness has gotten much worse in the 30 years since the Reagan “revolution” of the 1980s.  

Of course the issue of the progressiveness of America’s taxation, from top to bottom, is more complicated than just the top rate, but the work done by economists Emmanuel Saez, Gabriel Zucman, and Thomas Piketty, among others, has made it clear that income is concentrating very high within the top 1%, and even high within the top 0.1%. Consequently, the top marginal FIT rate has enormous consequences for growth. By 2014, the wealth of the top 1% had increased by more than $20 trillion since the inauguration of the Reagan revolution. All new income produced by any stimulation more federal borrowing might provide, in current circumstances, is simply ending up in the top 1%.

It appears to Krugman, apparently, that we must choose between increasing the money supply even more or increasing the progressiveness of taxation, and noting the intransigence of the wealthy and their GOP spear carriers, he has evidently opted to argue for the former. But the income and wealth is being siphoned off at the top and removed to offshore havens or sunk into expensive mansions, yachts, private airplanes, rare works of art, and real estate, all at rapidly inflating prices. The velocity of money is substantially slowed as it is kept pout of the hands of people who need it and would spend it.

There is no alternative but to reform the tax system significantly, to increase its effective progressiveness. For everyone’s sake, we need to appreciate that taxing the rich is not only the best option, it is the only workable option left.

JMH – 8/21/2015 






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It’s MUCH Worse Than It Looks

In my last post, “Follow the Money,” I argued that the absurd theater of the Fox News-sponsored Republican presidential “debate” of last Thursday really can be traced to the stark reality of American economics. Economist Paul Krugman, in one of the best social commentaries I have seen from him, pointed out that all of today’s Republican candidates are just as extreme as Donald Trump: “If you pay attention to what any one of them is actually saying, as opposed to how he says it, you discover incoherence and extremism every bit as bad as anything Mr. Trump has to offer.” (“From Trump on Down, the Republicans Can’t Be Serious,” here). He argued that today’s Republican Presidential hopefuls are virtually required to buy into nonsense in order to have a chance.

It has long been obvious that the conventions of political reporting and political commentary make it almost impossible to say the obvious — namely, that one of our two major parties has gone off the deep end. Or as the political analysts Thomas Mann and Norman Ornstein put it in their book “It’s Even Worse Than It Looks” (here),  the G.O.P. has become an “insurgent outlier … unpersuaded by conventional understanding of facts, evidence, and science.” It’s a party that has no room for rational positions on many major issues.   

The theme of my post was that the political party of the wealthy has gradually become the political party of the very wealthy since 1980. The interests of extreme wealth are antithetical to the common interests of society, and austerity government and “trickle-down” economics have become rigid tenets of faith. It is equally obvious why this has come to pass: None of the massive accumulation of wealth at the top is workable or justifiable in an economy interested, as was Adam Smith and the Classical Schools of economics, in the general welfare.  It can be prevented, and was prevented after WW II in the United States – until 1980.  But now, we’re in a serious predicament.

I bought the Kindle version of Mann and Ornstein’s book seeing Krugman’s citation, and I’m a little over one-half way through it. These two are experienced political scientists with years of experience with our national political system: Where there analysis dealt directly with economic questions, I was interested in their perception of how the economy works.

There have been two more recent posts, one each from two of my favorite progressive thinkers, that I felt deserved a few brief comments: (1) Paul Krugman continued his assessment of the Republican debates with “G.O.P. Candidates and Obama’s Failure to Fail,” The New York Times, August 10, 2015 (here), and (2) Robert Reich recently published “The Revolt Against the Ruling Class” in his blog, August 2, 2105 (here).

Here’s what’s on my mind: The failure of mainstream economics to recognize the reality about how market economies work over the last 150 years or so, which encompassed the entire period of the development and perfection of the system we know as “capitalism,” has put all economic thinking in a deep hole out of which very talented, gifted thinkers are only starting to climb. And, to borrow a line from Krugman, “this is no accident.”

Confronted with the recent history of the development of economic theory, no trained economist can be expected to see the dividing line between his or her own version of “model-dependent realism” and a better, more unobstructed view of reality — especially since for more than 50 years Paul Samuelson, the discipline’s first recipient of a Nobel Prize, dedicated his work to promoting neoclassicism and cementing its presumptions and mistakes in professional minds. That was a fate I narrowly avoided back in the 1960s, and I have found that many of the impressions of my youth are borne out today by both logic and subsequent experience. The upshot has been remarkable. This is what I have found:

Inequality in the distribution of wealth and incomes is the controlling factor in determining prosperity or stagnation, and the impact of redistribution of money is far more substantial than we have dared to imagine.

Mann and Ornstein

As good as the Mann and Ornstein book is, the authors are constrained by neoclassical economics to miss the full seriousness of their thesis. Thus, while they ably chronical the decline of functional federal government, and the players that made it happen, they are unable to expand on the serious economic implications of some of their major points. For example, in discussing the Republican push for a balanced budget amendment (pp. 177-124), they conclude:

The system, when it was functional, showed that it can do that without changing the Constitution. The argument that government is so out of control that only a nuclear option of this sort will work is entirely bogus. The amendment would not end or reduce the dysfunction. It would diminish the Constitution and render the country less capable of effective self-governance. (It’s Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism, Basic Books. Kindle Edition, 2013, pp. 123-124.)

There’s nothing wrong with this conclusion, as far as it goes. Any such amendment and the draconian levels of austerity it would entail, as the authors suggest (p. 117), would be very dangerous: 

The relationships among taxes, spending, deficits, and economic growth are highly contingent on a host of other factors. It would be foolhardy even to try to restrict or direct economic policy making with a balanced budget requirement in the Constitution. (Id.)

But it would be suicidal, not just foolhardy, and it’s not really as complicated as mainstream economics makes it seem.  The over-riding factor is the capacity of the money supply to absorb such stress. We should have no difficulty agreeing with their conclusion to Part I of the book: “All of the boastful talk of American exceptionalism cannot obscure the growing sense that the country is squandering its economic future and putting itself at risk because of an inability to govern effectively” (p 101).  But our sense of danger is not good enough if we continue to feel that we’re living in a self-correcting economy.  Our economic situation is much worse than it looks.

Thom Hartmann

Thom Hartmann’s recent book “The Crash of 2016: The Plot to Destroy America and What We Can Do the Stoop It” (Hatchett Books, 2013) comes fairly close to sensing the true scope of the danger. In his introduction, he opined:

This crash is coming. It’s inevitable. I may be off a few years plus or minus in my timing, but the realities of the economic fundamentals left to us by thirty-three years of Reaganomics and deregulation have made it a certainty. We are quite simply repeating the mistakes of the 1920s, the 1850s, and the 1760s, and we are so far into them it’s extremely unlikely that anything other than reinflating the recent bubbles to buy a little more time here and there will happen (p. xxvii).

There are some accurate perceptions here: We’re too far along in the scheme of things to just hope for recovery; there are mechanisms of stagnation at work; and the economy is fundamentally unstable. Hartmann can get to these conclusions because he is not the captive of neoclassical, supply-side economic ideology.

A well-known and talented progressive economist, Thomas Piketty, could not see matters from this perspective: Ensnared in the neoclassical “long-run equilibrium” framework, he could only review wealth consolidation in the long run, using theories on the long-run course of wealth accumulation as measured by “capital/income ratios.” Long-run models generate long-run conclusions. Hence, he could only conceive of the U.S. inequality problem as a long-run problem, one that might become serious as soon as “2030?” (Capital in the 21st Century, English ed., Belknap, 2014, Table 7, pp. 247-249). But wealth concentration has been growing in the United States steadily and exponentially since 1980, and the first major inequality crisis was the Crash of 2008.

Robert Reich

Meanwhile, Reich makes these observations:

Yet in the last three decades – when almost all the nation’s economic gains have gone to the top while the wages of most people have gone nowhere – the ruling class has seemed to pad its own pockets at the expense of the rest of America.* * * Along the way, millions of Americans lost their jobs their savings, and their homes.* * * The Game seems rigged – riddled with abuses of power, crony capitalism, and corporate welfare.

It’s unfortunate to see the word “seemed” in this context, as if any of these facts may only be apparent, not real. I suspect that Reich is just holding back as a precaution, however, for his observations are factually accurate. The wealth that accumulates at the top does actually come at the expense of everyone else: Those who acquire more than above-average per capita amounts of the finite supply of wealth can do so only because there are those who acquire below average per capita amounts. Beyond this arithmetic truism, the Quantity Theory of Money establishes that the greater the income and wealth gaps become, the lower will be the rate of growth. Therefore, there is no scenario in which the rich can get richer without the poor also getting poorer — and then some. We’ve already reached the point in the United States where nothing short of reversing the inequality cycle will suffice to save the economy. I fervently hope that this fact becomes well known before our economy falls into another deep depression.

Paul Krugman

Mann and Ornstein pointed out that a conscious GOP strategy all throughout the Obama presidency was to obstruct his policies and blame him for any policy failures. In his latest Op-ed, Krugman notes that the Republican candidates did not attack Obama’s policy failures in the first “debate.” Krugman has tirelessly supported the success of the Affordable Care Act over the last year or so, but the GOP has forged ahead with their criticisms without regard for the facts. This is politics, and arguably in this first debate Donald Trump’s threat to party unity was a bigger concern.

Krugman accurately characterizes the GOP worldview: “Try to help the unfortunate, support the economy in hard times, or limit pollution, and you will face the wrath of the invisible hand.” The economics discipline’s argument against correcting excessive inequality has never been anything more than Arthur Okun’s alleged tradeoff between inequality and efficiency, which is looking more and more absurd as inequality rises. Arthur Okun, it turns out, based his entire theory on argument of the power of the “invisible hand,” a magical argument based on a misrepresentation of Adam Smith’s arguments way back in 1776.

The difficulty lies in Krugman ‘s last paragraph:

I’m not saying that America is in great shape, because it isn’t. Economic recovery has come too slowly, and is still incomplete; Obamacare isn’t the system anyone would have designed from scratch; and we’re nowhere close to doing enough on climate change. But we’re doing far better than any of those guys in Cleveland will ever admit.

Krugman’s argument that America is recovering, not declining, comes tumbling down, however, if and when there’s another market crash. Bubbles are growing. What will his argument be when the guys in Cleveland come roaring back, in support of more austerity, with this: “You said we were doing all right?”


The overriding flaw of neoclassical economics is that it drastically understates, intentionally or not, the significance of income and wealth distribution. We are not doing all right. More progressive taxation will be needed, and soon. And it’s not Obama that is holding back growth and recovery. It’s the political party of those guys in Cleveland.

JMH – 8/12/2015 (ed. 8/21/2015)

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Follow the Money

I did not watch any of the Republican presidential debate on Thursday night. As luck would have it, I had dental surgery in the morning, and the pain was peaking. The Tylenol that had sufficed for weeks was no longer cutting it, so I found some narcotic pain reliever in the cabinet, and I was lying in bed waiting for it to kick in. My wife, who usually follows politics closely, couldn’t watch it either. For both of us, quite frankly, whole presidential field on the Republican side has become too unworldly, too extreme, and it was not as if we didn’t already know in broad terms what kinds of questions would be asked — and what kind of answers would come back.  


A day later, I found this predictable summary on-line, from CNN Politics (here):

The top 10 candidates for the Republican presidential nomination only had a few minutes each on Thursday to capture the attention of voters tuning in to the first big-league Republican presidential debate.

Donald Trump may have grabbed the most headlines from the right, but the prime-time debate didn’t yield a clear victor. The night did offer a few breakout stars, and no candidate seemed to have sunk their campaign by the end of the night. From the stand-out moments to the blows, here are the night’s top eight takeaways:

1. Donald Trump won’t budge – ‘Trump proved yet again that he’s not going to back down from his bombastic rhetoric’;

2.  Rand Paul: Attack dog – ‘Rand Paul was eager to grab headlines, jumping in even when he wasn’t called on’;

3.  Christie v. Paul – ‘New Jersey Gov. Chris Christie took advantage when given the opportunity to address his beef with Paul over national security’;

4.  Kasich, John Kasich – ‘John Kasich’s main goal was to get his name out,’ and ‘Playing off a home-court advantage, Kasich deftly handled questions on the attacks Democrats would lob at him and took a pass on attacking Trump, insisting that ‘Trump is hitting a nerve in this country”’;

5.  Jeb Bush: Rusty, but working on it – ‘Bush started off his week stumbling in New Hampshire … and teed off the debate Thursday by stumbling through his answers yet again’;

6. Where was Walker? – ‘his responses were drab and he didn’t break out from the rest of the field’;

7. Attacking Trump – ‘Aside from Paul, the rest of the candidates largely avoided attacking Trump’ and ‘it was the second rung of candidates who debated at 5 p.m. who took swings at Trump while he was absent’;

8. Fiorina’s breakout moment – ‘While the prime-time debate didn’t reveal any winners, Florina came away from the earlier debate as the clear victor, generating chatter on social media and buzz among political pundits.’

To me, this summary seems almost beneath superficial. No attention is paid to where candidates purport to stand on substantive issues, or even to identify what those issues are. (CNN did link a “fact check” to this story, here, but when you go there, you find only a small sample of randomly selected assertions “checked” by unnamed checkers, not enough to provide any real perspective on anything.) In this respect, if my experience is any guide, the depth of this coverage accurately reflects the depth of the “debate” itself.

Presidential politics has always been, first and foremost, a popularity contest. Go anywhere else and you will see the same sort of thing. My wife turned on MSNBC Friday morning, and in the few panels I observed the questions were mainly about which candidate most impressed viewers — and which of them, if any, won the debate?

Of course, the average reader will castigate me at this point: “What did you expect?” It’s not what we can expect at this stage of the electoral process that I want to address, however, but whether we can ever expect anything more.

Rex Smith

In this morning’s Albany Times Union, my favorite editor, Rex Smith, published “GOP and Fox whiff at bat in debate,” making some noteworthy observations:

It’s theater. It’s American politics. Do not confuse this with what any candidate will do once burdened with the serious task of governing, which thankfully turns even the most simplistic demagogues into an adult.

The key word there is “serious.” Are we really certain that any Republican in national politics today is anywhere near as serious about running the national government as he/she is about eliminating its domestic effectiveness? Which ones? And which, among our Republican presidents of the past, can we honestly credit with having matured into adulthood in that respect: Richard Nixon? Ronald Reagan? G.W. Bush? So at what point can we honestly expect any candidate to start getting “serious”?

Smith continued:

What was most surprising about the debate, though, was the performance of its presenter, Fox News. Social media feeds suggest that the most conservative of viewers considered the anchors’ questions too hard-hitting. Fox’s regular audience, after all, has come to expect deference to Republican politicians. But led by Megyn Kelly — a graduate of Bethlehem High School and Albany Law School, by the way — the anchors poked at each candidate’s weaknesses, like Kelly calling out Trump for labeling women “fat pigs” and “dogs,” and asking Wisconsin Gov. Scott Walker if his view on abortion was too extreme. “Would you really let a mother die rather than have an abortion?” she asked.

Yes, Megyn Kelly is a neighbor — all of my children are also graduates of Bethlehem High School. It’s hard not to take it just a little bit personally when Donald Trump calls her a “bimbo” (here), but the real question is whether America can tolerate having a man for President who habitually engages in this kind of coarse name-calling and public character assassination. And not far below the surface lurks another, more basic question: Why would anyone resort to name-calling and bullying to put down opposition, if they actually had a message they could present straight-up, and sell?

Smith pointed out that the debate pretty much ignored millennials, then closed with this:

Polls show millennials are overwhelmingly progressive on social issues, like abortion, gun safety,  climate change and renewable energy. Only one of those topics was raised by the debate moderators. Both Fox and the GOP seem to be missing a chance to broaden their base. 

But it was just the first debate. The next one is almost six weeks away, this time with moderators from CNN. Everybody had better get back to rehearsing in front of the mirror. Glory may await.

The key word there was “seem.” What chance? I’ll give Rex Smith a pass on that one: He’s the newspaper’s editor, and he has to tread close to the middle of the road. But millennials are, first and foremost, concerned about economic issues — jobs, mortgages, health care, student debt, and household debt — as are most Americans. For the President of the United States, performance on those issues is, as they say, where the rubber hits the road. Such issues, however, were M.I.A. on Thursday.

Don’t expect a higher level of discourse in this election cycle on economic issues than we’ve had in the past, even though it is ever more urgently needed. Big money buys candidates, and official policy, and the wealthiest among us are continuing to promote and protect the interests of big money. Let us not forget that the GOP is the political party of big money. It has radically changed as income and wealth have concentrated higher on the income and wealth ladder over the last few decades. The moderate Republicans of the past have been squeezed out as their base — second-tier wealth — has gradually declined.

It’s a matter of economics. So, how did this warm-up debate look through the eyes of an accomplished, expert economist?

Paul Krugman

On Friday morning, Paul Krugman weighed in with one of the best social commentaries I have ever seen from him — “From Trump on Down, the Republicans Can’t Be Serious” (here). He began by asking how, despite the supposedly deep field of Republican candidates, Donald Trump ended up leading by such a wide margin:

The answer, according to many of those who didn’t see it coming, is gullibility: People can’t tell the difference between someone who sounds as if he knows what he’s talking about and someone who is actually serious about the issues. And for sure there’s a lot of gullibility out there. But if you ask me, the pundits have been at least as gullible as the public, and still are.

For while it’s true that Mr. Trump is, fundamentally, an absurd figure, so are his rivals. If you pay attention to what any one of them is actually saying, as opposed to how he says it, you discover incoherence and extremism every bit as bad as anything Mr. Trump has to offer. And that’s not an accident: Talking nonsense is what you have to do to get anywhere in today’s Republican Party.

For example, Mr. Trump’s economic views, a sort of mishmash of standard conservative talking points and protectionism, are definitely confused. But is that any worse than Jeb Bush’s deep voodoo, his claim that he could double the underlying growth rate of the American economy? And Mr. Bush’s credibility isn’t helped by his evidence for that claim: the relatively rapid growth Florida experienced during the immense housing bubble that coincided with his time as governor.

Indeed, talking nonsense is exactly what a successful candidate has to do, and we all know why: Making sense is dangerous to the narrow interests of wealth. Krugman sees this problem as running much deeper than just bad economics:

And while Mr. Trump is definitely appealing to know-nothingism, Marco Rubio, climate change denier, has made “I’m not a scientist” his signature line. (Memo to Mr. Rubio: Presidents don’t have to be experts on everything, but they do need to listen to experts, and decide which ones to believe.)

The point is that while media puff pieces have portrayed Mr. Trump’s rivals as serious men — Jeb the moderate, Rand the original thinker, Marco the face of a new generation — their supposed seriousness is all surface. Judge them by positions as opposed to image, and what you have is a lineup of cranks. And as I said, this is no accident.

It has long been obvious that the conventions of political reporting and political commentary make it almost impossible to say the obvious — namely, that one of our two major parties has gone off the deep end. Or as the political analysts Thomas Mann and Norman Ornstein put it in their book “It’s Even Worse Than It Looks” (here), the G.O.P. has become an “insurgent outlier … unpersuaded by conventional understanding of facts, evidence, and science.” It’s a party that has no room for rational positions on many major issues.

Of course Paul Krugman is right, and we all know it: We live in a real world, and in the real world, facts prevail. No amount of fantasizing and obfuscation can do anything but obscure reality. What is more, we know why this is happening: Money controls everything. Profits beget more profits, and conflicts that stand in the way of easy profits — like environmental protections, financial regulations, or any program that might improve the lives of lower-income citizens — are abstracted into fanciful falsification, or simply denied. I’ll bet if we checked we’ll find that none of these candidates supports higher taxation for corporations and the very rich. Most, like Paul Ryan, openly support more tax cuts for them. If we checked, we’d probably find that they all line up with Ryan and Bush in support of “trickle-down” economics.

The Victory of Ignorance

None of this nightmarish charade would be possible if people understood how the economy really works. Almost no one does, however. Even most economists have been brainwashed into believing some very bad ideas, ideas that have been addressed on this blog, that make all the difference in the world. So, “here we are, under the bright lights” (kudos to anyone who recognizes the source of that quotation). Bernie Sanders is campaigning on truth, and he is light-years away from any of these Republican “cranks.” This is no time, he has reminded us, for politics as usual.  

A new SEC regulation (herewill require corporations to reveal the ratio of the top CEO’s pay to average wages. That is certainly a step in the right direction, but the ratios, as startling as they have been, only tell part of the story. In and of themselves, they provide no clue as to the huge amount of income and wealth that has transferred high within the top 1% since 1980.

The top 1%’s net worth, as reported in national net worth accounts, has increased by more than $20 trillion since 1980 (That’s more than $570 billion per year, in current dollars.) These transfers have been taking place at a steady pace, and most of that total took place before the Crash of 2008. Another huge amount (perhaps as much as $8 trillion) has been moved from the U.S. taxing jurisdiction and placed in off-shore accounts around the world. Over time, the percentage of the population that enjoys any growth of wealth or income at all has been gradually shrinking: All growth is now hyperbolically distributed among the top 2-3%.

The stark truth is that the American economy is unstable, locked in an accelerating inequality cycle that is stifling growth and causing accelerating levels of poverty and household debt. This will not, cannot, end well. There was a popular saying in my day: “Nero fiddled while Rome burned” (here). Right now, America is dancing to Nero’s tune. 

JMH — 8/8/2015 (ed. 8/9/2015)

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Inequality, and the Next Crash

Every day articles appear in news media that remind me of the consequences of income and wealth concentration at the top. A front-page article in today’s (6/8/15) New York Times, for example, is entitled: “States Confront Wide Budget Gaps Even After Years of Recovery,” (Julie Bosman, 6/7/2015, here). Illinois, Bosman points out, faces a $3 billion shortfall, and Gov. Bruce Rauner warned that “a major, major restructuring of the government” is around the corner. The article also features the deficits of Kansas and Louisiana. Boseman reports:

Though the national economy is in its sixth year of recovery from the recession, many states are still facing major funding gaps that have locked legislatures in protracted battles with governors. In some states, lawmakers have gone into overtime with unresolved budgets, special sessions and threats of widespread government layoffs.

Why do these serious problems exist? Why the shortage of money?


The problem here is the premise that “The national economy is in its sixth year of recovery from the recession.” It the economy was in recovery, income (and hence tax revenues) would be growing. However, total aggregate income is not growing: In fact so far in 2015 it has declined slightly. There is a shortage of money in the economy, and hence incomes lag, and as I have explained in recent posts, that has everything to do with the Quantity Theory of Money (QTM): As income and wealth concentrate at the top, the velocity of money slows, and incomes decline. This is an automatic, mathematical certainty.

It took some work to make that finding, but I find it to be irrefutable. So far as I am aware, others have not yet arrived at that conclusion. Paul Krugman isn’t there yet. In his Op-ed in today’s New York Times, entitled “Fighting the Derp” (here)  he rails once again against “fear mongering over inflation”:

[E]veryone makes bad predictions now and then. But making the same wrong prediction year after year, never acknowledging past errors or considering the possibility that you have the wrong model of how the economy works – well, that’s derp. * * *

It’s an article of faith on the right that any attempt by the government to fight unemployment must lead to disaster, so the faithful must keep predicting disaster no matter how often it fails to materialize.  

According to Wiktionary, the verb “derp” means “to make a foolish mistake” (here), and Know Your Meme says: “Derp is an expression associated with stupidity” (here).

It definitely is not a stupid mistake to fail to appreciate the overwhelming importance of the distribution of money. So far, practically no one does. I started out several years ago with the premise that mainstream economics, because of all of the failures Krugman is talking about, has been using a faulty model of how the economy works. But the errors lie not only in refusing to understand that cutting taxes on the rich and corporations doesn’t stimulate growth (the trickle-down fantasy) or in believing that cutting government spending will somehow stimulate growth (the austerity doctrine). These two are really derpy ideas. The errors run much deeper than that, however: It’s also derp to continue to insist that we’re recovering from the “Great Recession” more than six years after the Crash of 2008, when we really are not.

It is certainly true, as Krugman points out, that there can be derpy economic ideas on both sides of the political divide:

The first line of defense, I’d argue, is to always be suspicious of people telling you what you want to hear.

Thus, if you’re a conservative opposed to a stronger safety net, you should be extra skeptical about claims that health reform is about to crash and burn, especially coming from people who made the same prediction last year and the year before (Obamacare derp runs almost as deep as inflation derp).

But if you’re a liberal who believes that we should reduce inequality, you should similarly be cautious about studies purporting to show that inequality is responsible for many of our economic ills, from slow growth to financial instability. Those studies might be correct — the fact is that there’s less derp on America’s left than there is on the right — but you nonetheless need to fight the temptation to let political convenience dictate your beliefs.

Fighting the derp can be hard, not least because it can upset friends who want to be reassured in their beliefs. But you should do it anyway: it’s your civic duty.

Okay, Mr. Krugman, I hear that, loud and clear. Unfortunately, I would rather be disabused than reassured of my beliefs on these subjects:  So I feel that it’s my civic duty to point out that the studies which show inequality is responsible for slow growth (and all that goes with it, including declining state, county and local government funding) are correct: It is the proof of the truism that is the QTM. The reason is that money – income and wealth – is continuously concentrating at the top.

The Next Crash

There is a growing awareness of America’s continuing economic decline, and some people, usually not economists or financial analysts, however, are increasingly sensing the relationship of that decline to growing inequality.

            Thom Hartmann

In his latest book, The Crash of 2016: The Plot to Destroy America – and What we Can Do to Stop It (Twelve, New York, NY, 2014) Hartmann relates a realistic new sense of urgency that goes beyond the concerns he expressed a few years ago in Rebooting the American Dream. A broad thesis developed in this new book is the idea that every eighty years or so depression and war come along, following a “Great Forgetting” in which all those who endured the previous crisis have died off. At that point, he argues, the “Economic Royalists” are able to take over government and reestablish the conditions for corporate takeover and depression. Notably, the connection between inequality and depression that mainstream economics denies is mainly just implicit in his perspective:

The Royalists of the 1950s and early 1960s . . . knew that the vigilant spirit FDR had installed in the nation against the forces of plutocracy was waning by the end of the 1960s. Those who were just coming into power with FDR during the last Great Crash in 1929 were, by the late 1960s and early 1970s, retiring and dying off, being replaced by a new generation with little direct memory of why the why the crash had happened, how it had worsened for the long years, and, most important who caused it. And that generation would be teaching the next generation, who had no memory whatsoever of what caused the Great Crash and the war that followed it. (p. 29)

The “Great Forgetting” expresses a meme that resonates deeply with me, because I studied economics in the mid-1960s just as neoclassical economic ideology was asserting its dominance over Keynesian macroeconomics.

Hartmann’s book also impressively stresses the fundamental role of progressive taxation in the development of middle class prosperity. And Hartmann, in my judgment, correctly perceives the seriously advanced stage of the current inequality cycle:

This crash is coming. It’s inevitable. I may be off a few years plus or minus in my timing, but the realities of the economic fundamentals left to us by thirty-three years of Reaganomics and deregulation have made it a certainty. We are quite simply repeating the mistakes of the 1920s, the 1850s, and the 1760s, and we are so far into them it’s extremely unlikely that anything other than reinflating the recent bubbles to buy a little time here and there will happen. (p. xxvii)

Hartmann shows how historical perspectives can lead to conclusions, and sometimes with uncanny accuracy, that a scientific economics unencumbered by politics could and should be objectively reaching.

Inequality growth has been going on for far too long already, and the scary thing is that given our national debt situation and developing private debt bubbles, there could actually be another crash as early as 2016. A diverse group of professionals is now advancing the same warning.

           Harry Dent

Harry Dent, for example, argues from a monetary and financial analysis:              

With each new bubble, we reach higher highs, and then crash to lower lows. It’s such an obvious megaphone pattern that I’m not sure how anyone could miss it.

Central banks continue to stimulate us out of each downturn and crash with free money and zero interest rates. How could that not create a greater bubble and greater crash to follow… unless you really can get something for nothing? (“The Impending Collapse: Most Economists Miss This,” by Harry Dent, Economy & Markets Daily, May 11, 2015, heresee also, “Warning: The Greatest Market Crash of Your Lifetime Is Coming,” Harry Dent, Economy & Markets Daily, here).

          Porter Stansberry

Stansberry Research emphasizes the decline of the dollar and predicts a major currency crisis. Interestingly, in a linked memorandum, Porter Stansberry argues from the commonly known facts of debt accumulation and economic decline:

Our government has embarked on a gross, out-of-control experiment, expanding the money supply 400% in just six years, and more than doubling our national debt since 2006. * * * It took our nation 216 years to rack up the first $8.5 trillion in debt… then just 8 more years to double that amount. * * *

Sometime in the next few years, we will experience a “new” crisis of epic proportions. * * * We’re going to have a major stock market crash – and it will be worse than the one we experienced seven years ago. * * * We’re going to have a currency crisis too – because investors and governments around the world will realize the U.S. dollar is not the safe haven it once was. (“A Multi-millionaire’s Personal Blueprint For Surviving the Coming Currency Collapse: ‘This is what I’m doing to protect my family and my finances – I recommend you do the same,” here).

Stansberry, interestingly enough, backs this financial perspective with basic economic observations:

I know many people see the recovered stock market, the rebound in real estate prices, and want to believe everything is “back to normal.”

But I promise you, nothing is “normal” about what is happening in America today. It is all smoke and mirrors – the result of an out-of-control government experiment with our money supply.

       After all, how can it be “normal” when:

  • Roughly 75% of Americans are living paycheck to paycheck, with essentially zero savings, according to a recent study by Bankrate.
  • The “labor force participation rate” (basically the percentage of able-bodied people who are actually working) has fallen every year since 2007 and is at its lowest level since the 1970s. (Source: The U.S. Bureau of Labor Statistics)
  • How can things really be “normal” in America,when the number of people on food stamps has basically doubled since Barack Obama took office and when HALF of all children born today will be on food stamps at some point in their life?
  • Yes, you read that correctly: Roughly 50% of all children born in America today will be on food stamps at some point in their lifetime. Does that sound “normal” to you?
  • Can our country really be back to “normal” when, according to the most recent numbers from the Census Bureau,an incredible 49% of Americans are receiving benefits from at least one government program EVERY SINGLE month?
  • Or when 52% of all American workers make less than $30,000 a year?
  • Can things really be “normal” in America when at one point, a single U.S. government-controlled agency (the Federal Reserve) was purchasing up to 70% of the bonds issued by the U.S. Treasury – simply by creating money out of thin air?
  • Or when the “too-big-to-fail-banks” that got bailed out in 2007 are actually37% larger than they were back then?
  • And how can things be normal when our country’s money supply has increased by 400% since 2006 – all just printed out of thin air. (Original emphasis)

           Ron Paul

Stansberry Research has enlisted former Congressman Ron Paul in its advertisement of another impending crash. (See Ron Paul’s prediction of collapse from a full-blown currency crisis, here); Stansberry Research in association with Ron Paul has been predicting, imminently, a currency crisis and the collapse of the dollar. (See “Developing Story: Dr. Ron Paul Reveals #1 Step to Prepare for America’s Next Big Crisis, by Michael Palmer, Advertorial, The Crux, April 21, 2015 (here); . see also “Warning: The Greatest Market Crash of Your Lifetime Is Coming,” Harry Dent, Economy & Markets Daily (here).

These folks are in business and hope to profit from their advice, which means that we must be wary of what they are trying to sell us. Still, I find, Dent, Stansberry, and Paul accurately perceive the symptoms of depression. None of them, it must be noted, have perceived the extent to which the concentration of wealth and income aggravates the problems they analyze and, conversely, the degree to which deconcentration can alleviate the threat of the collapse they are forecasting.  

      Eric Janszen

From a mainstream, supply-side perspective, Eirc Jansen, author of The Post-Catastrophe Economy: Rebuilding America and Avoiding the Next Bubble, has been arguing that the current situation is evidence of an an “output gap;” that is, a deficiency in actual output below potential output, and that “policy responses to the existence of the output gap are creating a stagflationary environment” and conflict with “policy measures needed to prevent a future bond and currency crisis.” (“Portfolio Strategy – Section 1, Part II: The Devil’s in the Details,” by Eric Janszen, iTulipp.com, June 14, 2011, here.)

Pursuant to this mainstream analysis, he computed the growth rate needed to overcome the current output gap:

To review, if the U.S. economy grows at a 1% annual rate, it will never recover to a pre-recession level of economic output.

If the U.S. economy grows at a 2% annual rate, it will also never recover to a pre-recession level of economic output.

Even if the U.S. economy grows at a 3% annual rate, it will not recover to a pre-recession level of economic output until 2019. I expect a new recession well before then that will grow the output gap even further.

The U.S. economy has to grow in real terms by 4% per year in order to close the output gap in 2013, before the next recession.

In an earlier post in which he graphed these scenarios, he argued:

The contraction phase of the Great Recession left America with a $1 trillion gap between actual and potential growth. The economy must grow at a rate of at least 4% per year now in order to reach growth potential before the next recession opens the gap further a few years from now. If we fail to meet this deadline, the American political economy will enter a second circle of hell as chronic economic pain from high prices and low wages morphs into a self-destructive cycle of class conflict and political deadlock. (“The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat,” by Eric Janssen, iTulip.com, October 8, 2010, here .)

This is the first mainstream analysis of the post-Crash decline I have seen that regards the situation as a “trap,” the first even to theoretically abandon the idea of an eventual return to full employment. It is noteworthy that he has arrived at a sense of urgency regarding the current U.S. situation from the perspective of a conventional mainstream ideology. Thus, in his 2011 post, he attributed the steady decline of annual growth rate to a “maturing” of the U.S. economy.

In his book, he argued that the American economy – the “FIRE economy” – has moved away from tangible production as it accumulated excessive private and public debt. Consistent with the mainstream perspective, he has assigned no responsibility to the distribution of money, and he opened his review of ”the ruins of the FIRE economy” with this accounting of inequality growth:

At the end of the run-up to the near collapse of the world economy in 2008, what did the legacy of the FIRE economy leave us?

  • Unprecedented distortions in wealth, income, and debt distribution, leading to political divides between rich and poor, creditors and debtors, older and younger generations, and different races that will widen dangerously during the Great Recession, thwarting needed cooperation. * * * (The Post-Catastrophe Economy: Rebuilding America and Avoiding the Next Bubble, Portfolio Penguin, New York, NY, Kindle Ed., 2010, p. 54)

Inequality is seen as effect only, reflecting the mainstream perspective that the distribution of money has no macroeconomic impacts, only political effects. Janszen has many solid arguments based on a great deal of research and thought. However, the supply-side orientation of the mainstream perspective on growth, which underlies his thinking, fatally fails to reflect the influence of demand on growth. The income gap, it has been argued, must be due to social explanations, such as the inability of the lower-income groups to advance their opportunities or their training sufficiently to match the growth rates at the top.

Of course, the entire top 1% has not increased its productivity, i.e., its ability to produce real output by ten percent annually in recent years, while the rest of the population regressed. If that were true, the long decline in the top 1% income share from 23.9% in 1928 to 8.9% in 1976 would have to have reflected a massive increase in bottom 99% productivity while the top 1% lost its ability to produce! I have never seen such a preposterous proposition articulated, but that is what the neoclassical rationale effectively implies. 

Worse, the deeply ingrained neoclassical assertion that growing inequality has no macroeconomic impact causes a serious underestimation of what it will take to close the theoretical output gap. It is like measuring the arduous task of salmon swimming many miles upstream during spawning season without accounting for the added difficulty of having to swim up powerful waterfalls to reach the spawning grounds, a far greater barrier to spawning success.        


America continues to be confused by the continuing decline, and continues to cite inequality only superficially or anecdotally in connection with real factors that continue to cause further decline. For example, if the worst fears about the Trans-Pacific Partnership (TPP) play out, there will be both an enhancement of the suppression of incomes at the bottom and the treasures reaped at the top. But these other factors are only a part of the problem.

But all of these other factors reduce total growth, to everyone’s detriment, including those at the top. Inevitably, this means another crash, and perhaps more after that, will occur. Notably, these conclusions have been reached by analysts even without considering the role of the distribution of money. But only the continuing growth of inequality since 2008 can adequately explain the magnitude of the continuing reduction of income growth: Conventional economic thinking greatly underestimates the scope of the problem.

When we read an article like the piece in today’s New York Times about the state budget crises, it is important to remember that this can all be turned around with more money in circulation. What that necessarily means is taxing the rich at the federal level, and taxing their corporations. A more progressive system of taxation is needed to reverse the concentration of income and wealth that has been taking place since 1980.  

JMH — 6/8/2015 

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Inequality Made Easy: The Basics of Redistribution

In my last post, I set forth what I called “the Quantity Theory of Inequality.” Looking it over, I see that it may seem too technical for many people to focus on, so I decided to summarize how inequality works, and in effect how the economy works, in one post that everyone can understand. I’ll also put this in the historical contest of the development of economic ideas.

This is hard-won information – I did a lot of work to get to this point. Later this year, the book I am writing with all of the necessary proof will be published, one way or another! Meanwhile, here is a straightforward summary of the inequality problem, without citations. It’s a bleak prospect, but all is not lost — yet. The U.S. can correct its economic backslide, but if we keep favoring the rich and corporations, the economy will eventually collapse, and perhaps not too far in the future.

I. Mainstream economics, which subscribes to Paul Samuelson’s “neoclassical synthesis,” has basically everything wrong. Its idea of macroeconomics is an aggregation of microeconomic ideas, fashioned around the goal of maximizing personal gain and satisfaction. It imagines — an idea that came from the creators of the neoclassical tradition, especially Alfred Marshall (1842-1924), A.C. Pigou (1877-1959), and the American J.B. Clark (1847-1938) — that economies are self-correcting and will always return to “full employment” equilibrium. The idea of a naturally stable, efficient economy, popularized by Arthur Okun (1928-1980) and by Milton Friedman (1912-2006) is no more than wishful thinking. Okun expressly and incorrectly attributed the idea to the “invisible hand” metaphor used in 1776 by Adam Smith (1723-1790), and Friedman simply likened the market economy to a lottery in which government regulation and taxation defeats the whole purpose of economic “freedom.” Neoclassicism has never been more than a house of cards.

II. Classical economics were effectively rejected, not enhanced, by neoclassical theory. The best of the early classical philosopher-economists – Adam Smith, T.R. Malthus (1766-1834), David Ricardo (1772-1823) – began their “principles of political economy” texts with discussions of “economic rent” or the charges landowners added to the cost of production without themselves contributing to output. They developed principles of value, and of supply and demand, but they had no illusions about efficiency. Except for Ricardo, who was a wealthy man, they were avowed socialists; and they all regarded the objective of “political economy” to be maximizing the welfare of the entire society. The Ricardian School was perfected by J.S. Mill (1806-1873), who was, with the possible exception of Smith, the most passionately outspoken socialist of the group.

III. Basic classical ideas were extended by three economists – the German Karl Marx (1818-1883), the American Henry George (1839-1897), and the Englishman J.M. Keynes (1883-1946). Marx believed (correctly, it turns out) that inequality would grow in capitalist economies as profits accumulated, and George believed (correctly, it turns out) that the problem of poverty amidst plenty was largely due to rent-taking by landlords. Each had identified a piece of the puzzle. Keynes, however, attributed poverty to unemployment, and developed a full employment model. He had brilliant insights respecting interest and investment, but perhaps his greatest contribution was “the theory of effective demand,” which was a direct refutation of Marshall’s neoclassical ideology. Like the neoclassical economists, however, Keynes failed to account for the distribution of wealth and income, which he considered “arbitrary.”

IV. Another American economist, Irving Fisher (1867-1947), was a contemporary of Keynes who went off in another fruitful direction. He perfected the old concept known as the “Quantity Theory of Money” (QTM). The QTM was expressed in his “equation of exchange”: PY = MV. This is a definitional equality, a tautology, reflecting two sides of the same coin: Over a year, the total of goods and services sold (Y) times the average price level (P) equals the total money supply times the velocity of money. E.g., if M = 50, and PY = 100, then V=2. All money is spent twice in the year. Fisher may be better known for his “Debt-Deflation Theory of Great Depressions.” His debt-deflation model is dubious, at least in current circumstances. As the American economy gradually becomes more stagnant today, it is not proving out: There’s been plenty of debt, and a major housing debt bubble burst in 2009, but where is the deflation? Regardless, just as the neoclassical model and Keynes’s full employment model failed to do, Fishers’s formulation of the QTM failed to take into account distribution, and the growth or decline of inequality. 

V. The QTM holds the key, I suggest, that ties all of these loose ends together. As I attempted to explain in my last post, the average annual amount of money in circulation is exactly correlated with the average price level, as both are reflections of total income (GDP). If we hold everything else equal, hypothetically, it is clear that doubling the money supply simply doubles prices. But it is the corollary of that fact that is critical to understanding how the economy works: If we, hypothetically, hold prices and the money supply constant, and let everything else change, what changes in the QTM is the velocity of money, and what changes in the real economy is the distribution of money. Hence, massive inequality growth, both logically and mathematically, reduces the velocity of money. This means that our perception that inequality depresses growth, which is borne out by the income statistics of the 20th and 21st Centuries, is not merely a statistical observation: It is the direct consequence of the mathematical relationships reflected in the QTM. It is necessarily true.

VI. It can be quickly and easily verified that Friedman’s depression theory, which says that a more aggressive Fed policy could have prevented the Great Depression, was based on the presumption of a constant velocity of money. But that is not true when income inequality is growing rapidly, and wealth is concentrating high on the distribution ladder. Similarly, as I attempted to show in the last post, “monetarism,” or the idea that pumping more money into the money supply can revive a sagging economy, fails if the slowing velocity of the money shuts down the ability of monetary infusions to stimulate recovery or growth. It’s like trying to inflate a leaking balloon.

So here’s the upshot: The wealthiest Americans are making too much money – taking in way too much rent and excess profits – and paying too little in taxes. In fact, this whole thing started in the Reagan Administration when taxes on top incomes were cut, and today they are far too low. Corporations are paying fewer and fewer taxes each year. The interest on the exponentially rising national debt is, in the words of J-B Say (1767-1832) “a perpetual annuity” that in a few years will overrun the federal budget. Because of Reaganomics, we have over $18 trillion of un-repayable debt.

As we approach the next fiscal crisis, America is oblivious to this reality because it does not understand the economics of inequality and the consequences of redistribution dictated by the QTM. It’s not just a matter of “fairness” for the rich to pay more taxes: It’s a matter of payback, and more importantly, a matter of survival. We need to tell Bill Gates and Jeffrey Immelt and other billionaires who want government to pay the common costs without impacting their profiteering that they are on the wrong side of history, along with all of the other mega-billionaires, the GOP, and all of those Representatives and Senators, on both sides of the aisle, who believe the “trickle-down” fantasy that making the rich richer benefits everyone. It is a mathematical certainty that it does not.

My message to anyone who believes the economy can grow back on its own, without a complete reversal of the government policies (especially regressive taxation) that got us in this mess, is this: Don’t believe it.

JMH – 4/2/2015

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The Quantity Theory of Inequality

For the last several years, I have been among a small group of economic professionals arguing that income and wealth inequality is America’s most pressing problem, and beyond that, the way the economy works, that the distribution of income and wealth throughout the population is the primary determinant of prosperity and stagnation. Since 2013, more and more economists are moving in the direction of that conclusion, but I have seen no one else, as yet, put it that bluntly.

All of the evidence has pointed to this conclusion, but the theoretical underpinning has been lacking. The evidence has shown that rising income inequality suppresses overall income growth. When income inequality becomes excessive, slowing growth turns into ever-longer recessions and, eventually, a depression. This perception conflicts with the mainstream theories of growth and depression. It is not, however, a matter of conjecture. Now I have the missing theoretical underpinning, and it is found in “The Quantity Theory of Money.” 

The Evidence

uneven ditribtion of gains

Persuasive evidence was provided several years ago in a report from the Center on Budget and Policy Priorities (CBPP) [“Top 1 Percent of Americans Reaped Two-thirds of Income Gains in Last Economic Expansion,” Avi Feller and Chad Stone, September 9, 2009, here.]

This chart shows the cumulative growth of U.S. aggregate income over two consecutive 30-year periods, 1946-1976 and 1976-2007, as well as the cumulative growth over these periods of the top 1% and the bottom 90% income shares. This comparison reveals a pronounced, inverse relationship between income concentration and the aggregate income level.

The difference in the patterns of U.S. income growth between the two periods is extraordinary: The ability to realize income – to make money – shifted substantially to those higher on the income ladder. In the second of those two periods, in other words, household income had become more “concentrated.” Moreover, the phenomenal cumulative growth of top 1% income in the second period was accompanied by a severely stunted income growth for the bottom 90%. Thus, in the second period the top 1% was claiming so much of the new income growth for itself that very little growth was left for the bottom 99%.

The net effect of this trend was about a 25% lower cumulative growth of aggregate (per capita) income in the second period, and that is the key point: The extraordinary inequality growth since the late 1970s has reduced the overall growth rate, depressing the U.S. economy. All of this, it must be emphasized, took place before the Crash of 2008. The economic changes of the early 1980s abruptly terminated a long period of stable growth, which had been distributed more evenly among the income quintiles, and the economy commenced a gradual but relentless decline toward the Crash of 2008 and an incipient depression.

This reality is only gradually dawning on the mainstream economic community, which is accustomed to thinking of income inequality only from a subjective, qualitative perspective. Neoclassical economics has for more than a century denied that income and wealth distribution has any macroeconomic significance. The relationship of income inequality to growth has gained increasing attention, however, in the years since the Crash of 2008 and the advent of “The Great Recession.” IMF economists published studies in 2011 and 2014 which tested the statistical correlation of income (GDP) growth with income inequality, along with a variety of exogenous variables. [“Redistribution, Inequality, and Growth,” by Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, IMF Staff Discussion Note, February, 2014 , here; and “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” by Andrew G. Berg and Jonathan D. Ostry, International Monetary Fund, IMF Staff Discussion Note, April 8, 2011, here.] Their studies found income inequality to be the most highly correlated factor, and to be a consistently “robust and powerful” determinant of growth. 

A few months later in 2014, Standard & Poor’s (S&P) issued a report unequivocally concluding that “too much inequality can undermine growth.” This report seemed to have been prompted mainly by the IMF studies, but it surveyed other information as well. [“How Increasing Income Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide,” S&P Capital IQ, August 5, 2014, here.] Primarily, firms like S&P rate the earnings prospects and riskiness of securities. It is therefore noteworthy for Wall Street securities analysts to sound such an alarm, especially since it repudiates the neoclassical presumption that distribution lacks macroeconomic significance. That S&P reached this conclusion should not be surprising, however, for there is no other reasonable explanation for the facts. The explosive growth of top 1% real incomes and the steady decline of bottom 90% real income fr more than 30 years necessarily implies a steady transfer of money to the top.

The Dynamics of Redistribution

To date, income inequality has rarely been explained in terms of money transfers. The macroeconomic impacts of inequality cannot be properly understood, however, without taking into account the redistribution of money. It is true that the income gap will vary considerably with changes in qualitative supply-side factors, such as labor union strength, technological change, globalization of markets, trade agreements like NAFTA and the Trans Pacific Partnership (TPP), education, skill development, and so forth. Inequality increases when factors such as these enhance corporate profits, export jobs, or restrain the growth of wages.

Income and wealth inequality by definition, however, are characteristics of the overall distribution of an economy’s money supply throughout the population. These various direct “causes” of inequality determine and direct the flow of an economy’s money, but it is the total redistribution of the money supply in all of these flows which determines whether an economy is growing or declining. The IMF economists phrased it nicely when they suggested that income growth and the redistribution of income are “two sides of the same coin.”

The Quantity Theory of Money (QTM)

Economic historians have traced the QTM back to the 16th Century, and more recently to the Scottish philosopher/economist David Hume (1711-1776) and the British economist Henry Thornton (1760-1815), but more recently the development of the concept has been attributed to the British economist Alfred Marshall (1842-1924) and especially the renowned American economist Irving Fisher (1867-1947). The basic principles are rather straightforward — indeed the fundamental proposition states a tautology. However, major difficulties in its application have led to untenable conclusions, leaving this valuable tool in limbo for many years. An underlying reason for that, I would argue, is the fundamental problem the QTM shares with the neoclassical and Keynesian income models — it has failed to take into account the distribution of wealth and incomes. 

The starting point is the “Equation of Exchange,” today generally attributed to Irving Fisher, which says:

(1)    MV = PY

Where: M is money, V is velocity, P is the average price level, and Y is real income (GDP). [This formulation can be found in the summary of lecture 15, “The Demand for Money,” by Yamin Ahmad, here, Econ 354 – Money and Banking, posted at the University of Wisconsin – Whitewater, 2011 ff., here.] The “equation of exchange” is an expression of the exact correspondence between the value assigned to all transactions in a year (PY) and the nominal value of the money used to compensate for these transactions (MV). This relationship is a tautology, because the value assigned to the transactions is defined as the amount of money expended.

Velocity (V), as Ahmed puts it, is “the number of times per year that a dollar is used in buying the total amount of goods and services produced in the economy”:

(2)   V = P x Y /M

This equation expresses the number of times the money supply “turns over” in a year, as money circulates in exchange for goods and services. Similarly, annual income is expressed as:

(3)   Y = M x V /P

Of course, statistics exist for all four of these variables, and as Fisher opined a century ago, they are fairly precise statistics.  [“The Purchasing Power of Money, its Determination and Relation to Credit, Interest, and Crises,” by Irving Fisher (1911), Preface to the First Edition, the Online Library of Liberty, here.] Despite the tautological, definitional nature of the basic formulation, however, the framing and use of the QTM creates some problems: 

Problem #1

To understand the consequences of the QTM, much depends on what is understood to be the nature of “Y”: I have pointed out in this blog that neoclassical theory is based on the presumption of a long-run “equilibrium” in which all money saved is fully invested and put to use.  To heterodox economists, however, the “long run” never arrives. GDP overstates “goods and services produced in the economy,” because it also includes great quantities of excess profits and economic rent, which are compensation paid above and beyond the real production and capital costs of purchased goods or services. There is never a state of full employment equilibrium, but instead a continuous state of disequilibrium. The implications for the QTM of this perspective are clear: Equation #3 will always produce an inflated impression of how well an economy is actually doing. 

This perspective can be visualized hypothetically: In the extreme hypothetical case that (Y) consists of 90% rent, the result would clearly be the depression from hell. Consumers would only be getting 10% of the goods and services they ostensibly paid for, money would be rushing to the top, and Irving Fisher’s nightmare scenario of a “debt-deflation depression,” if his theory is sound, would be in full swing. [Irving Fisher, Booms and Depressions: Some First Principles, 1st published, Adelphi Company, 1932, Kindle edition, 2011.] Regardless of how the depression played out, in any event, income inequality would have exploded to inconceivable levels. The QTM assumes zero rent, so it would be oblivious to this outcome.   

Problem #2

Sometimes “Y” is denoted as “T,” representing the total “volume of transactions” or, variously, the “number of transactions” [“What is the Quantity Theory of Money?,” by Reem Heakal, Investopedia, here]. This gives rise to a conceptual issue that must be guarded against: It is erroneous to think in terms of anything other than GDP, or other suitable measure of national income, for “Y” in the QTM.  Heakal’s formula is specified as follows:

(1)    MV = PT

Any definition of “T” that represents “the number of transactions,” however, would improperly introduce an index of the number of transactions as a proxy for the dollar amount of all transactions (GDP). Of course, for M, P, and T must all be comparable (measured in dollars) or the formula becomes meaningless. More importantly, specifying the income variable as some sort of index nullifies the velocity factor, reducing the equation to the observation that the purchasing power of the money supply is the reciprocal of the average price level. But that fact is a tautology — true by definition — so the QTM has no explanatory value if the actual velocity of money is factored out. (The velocity of transactions is a meaningless concept.)

Problem # 3

The typical assumption has been that the velocity of the money supply is fairly constant over time. To assume a constant velocity has the same effect as introducing an index of income (T) instead of its actual value (Y): it reduces the formula to the underlying proposition that the price level is directly determined by the volume of money. As Heakal puts it:

The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.  

Basically, I would submit, that part of the QTM is a tautology, a mathematical certainty. This formulation makes no reference to the key variable — velocity; and ignoring the implications of velocity leads immediately to mischief, as Heakal reports:

In its most basic form, the theory assumes that V (velocity of circulation) and T (volume of transactions) are constant in the short term. These assumptions, however, have been criticized, particularly the assumption that V is constant. The arguments point out that the velocity of circulation depends on consumer and business spending impulses, which cannot be constant.

If we presume that velocity is constant, the formula is modified as follows:  

(1)    MV = PY

(2)   Y = M x V /P

                      and, if V = k, then             (3)  Y = k (M/P)

Removing the velocity as a variable makes income a function entirely of the money supply and the price level. Whether it is mainly income or prices that rise in response to increasing the money supply was the “great debate” between the Keynesians and the Austrians (Friedrich Hayek) in the early 20th Century: The Austrians argued that increasing the money supply would increase prices, not income. I always thought the Austrians had a decent argument, but that’s beside the point: Plainly, understanding how the velocity of money changes with changes in the money supply would greatly influence the outcome of that debate. To merely presume a constant velocity of money erroneously over-simplifies the QTM.  

Problem #4

This leads directly to an even bigger problem: The reality is that the velocity of circulation depends upon, and in fact is an inherent characteristic of, income distribution. We get into immediate trouble if we imagine, as Haekal’s discussion implies, that the velocity of money is somehow equivalent to the velocity of an index of transactions. All transactions are not equal in terms of their effect on velocity, and hence, on income. Transactions involving larger amounts of money, by definition, represent higher levels of income: But they also, by definition, create greater increases in the velocity of money. 

The reason it is erroneous to think of the number of events (T) as a proxy for total income (Y) in the QTM,  although perhaps not obvious, is straightforward:

Velocity is determined not just by the number of events, but also by the size of events. And the size of events is integrally related to the distribution of income.

For example, if $3 million is used to purchase 100 new automobiles, its velocity is much greater than if it is only used to purchase 100 cans of soup. Therefore, to compute the aggregate velocity of the money supply it is not enough just to count the number of “events.” 

You might object: “So what? People are always buying soup and cars, and many other things as well: Why isn’t the number of events a reasonable proxy for the total of aggregate economy-wide expenditures?” It probably would be a reasonable approximation if income distribution was more or less constant, but with income transferring to the top, more and more money has been rapidly concentrating in the hands of fewer and fewer people. The assumption made by Irving Fisher and Milton Friedman and others has always been that the velocity of money is relatively constant; but by making that assumption, economists have effectively presumed a reasonably constant distribution of income, thus assuming away the implications for income growth of inequality growth.  

This brings us to a very significant, and (so far as I know) previously overlooked, observation:

The degree of inequality in the distribution of money throughout the population controls the velocity of its circulation, thereby constraining the growth of income and the ultimate allocation of resources and products.

This point can be pinned down to a logical certainty:

  • Varying the amount of money, that is, the size of the money supply, affects the value of the money because the amount of money, all else equal, directly determines the average price level;
  • However, that is the only consequence of varying the amount of money. Doing so does not affect velocity: Hypothetically doubling the money supply while holding all else unchanged simply doubles all prices; and halving of the money supply merely cuts all prices in half. Only the value of money changes, not its velocity;
  • Apart from the volume of money, the money supply’s only other characteristics are its distribution and its velocity;
  • Therefore, if we change the money supply without holding everything else constant, which is what happens in the real world, we are introducing redistribution of the money supply, and changing its velocity;
  • Even if there is no change in the money supply, the velocity of money must be entirely determined by its distribution. Thus, the distribution and velocity of money that are “two sides of the same coin.”

Put another way, a changing money supply not only changes the amount in circulation, but also redistributes money among the population; and it is that redistribution of money that determines the velocity of money, as well as the nature and the amount of human activity. 

Distribution, it should now be clear, is the controlling factor in an economy’s performance. Statistically, growing income inequality has been consistently shown to depress growth. Now we know why: The properly specified QTM shows that result to be a mathematical certainty. The more any given amount of money is distributed among lower-income groups, the faster its velocity necessarily becomes: For example, $1 million dollars in the possession of one thousand people, each with $1,000, will tend to circulate more quickly than $1 million dollars in the hands of a single individual, for it can be spent one thousand times more quickly on goods and services within comparable price ranges, necessarily increasing the growth of aggregate income. Conversely, government policies that enhance corporate profits and redistribute money to the top necessarily reduce the velocity of money and reduce income growth.

Correctly specified, the QTM shows that these conclusions can no longer be considered a matter of conjecture: Of course, an example can be constructed of a few individuals that are circulating money more quickly than a different, larger group of people; but for the entire population and the entire money supply, such a result would be mathematically impossible.

The fact that redistribution of the money supply changes its velocity can reasonably be understood to be the core macroeconomic trait of income distribution.

More Evidence

As discussed above, the QTM requires that any increase in the concentration of income at the top will reduce the velocity of money and the growth of income. Following the Crash of 2008, the data shows, the velocity of the active money supply declined significantly. This graph from the St. Louis Fed shows the trends in the velocity of M2 money since 1950. [“The Velocity of Money In The U.S. Falls To An All-Time Record Low,” By Michael Snyder, The Economic Collapse, June 1, 2014, here.]


The M2 category includes most liquid forms of money, including cash and checking deposits (M1) plus “near money,” which includes savings deposits, money market mutual funds, and other time deposits, which can be quickly converted into cash or checking deposits. [“Definition of ‘M2,” Investopedia, here.]  As shown in the next graph from the Fed Board of Governors, the upward trend in the supply of M2 was scarcely affected, implying from the QTM equation that rate of income growth was substantially curtailed in the years following the 2008 Crash:


Another graph from the same period showing the “monetary base” reveals the relative futility of the monetary policy that has followed in the years after the crash. [“Monetary Base Definition,” by Tejvan Pettinger, Economics Help, August 16, 2011, here.]


As Pettinger explains: “The Federal Reserve created money to buy bonds from commercial banks. Banks saw a rise in their reserves. However, commercial banks didn’t really lend this money out. Therefore the growth of the broader money supply didn’t change much.” So long as inequality continues to rise, the velocity of money will continue to decline as will the growth of income.


A proper understanding of the QTM substantially changes everything:

(1) Milton Friedman’s theory that the Great Depression was the result of the Fed failing to pump enough money into the economy soon enough must be thoroughly reconsidered in light of its failure to reflect the declining velocity of money and the depression’s increased income inequality;

(2) The failure of the QTM to perform as expected since the 1980s, which caused its abandonment by monetarists, now has a rational explanation;

(3) No longer will opponents of the trickle-down mythology be limited to arguing, a la Hillary Clinton, “We tried that and it didn’t work.” Cutting taxes at the top necessarily increases inequality and reduces growth;

(4) The 2015 Republican budget plans would destroy what is left of our economic growth, ensuring the collapse of the federal government and the economy, and possibly not too far into the future;

(5) Taxes must be quickly raised on the highest incomes, on the largest estates, and on all forms of economic rent, and the revenues productively recirculated down into the economy, if we want to recover and grow properly. 

And so forth. We already knew, or at least suspected, many or most of these things. The QTM tells us that they are a mathematical certainty.

JMH – 3/28/2015 (revised 3/29/2015)

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Profitability and Progress: Capitalism’s Achilles Heel

“Blowing the Roof off the Twenty-first Century: Media, Politics, and the Struggle for Post-Capitalist Democracy,” the latest book by Robert W. McChesney, the Gutsgell Endowed Professor in the Department of Communication at the University of Illinois, is a must read for those of us concerned about our ability to survive the crises of economics and democracy now plaguing the United States. More than most writers, in my view, McChesney grasps the true nature of the economic mechanisms that constrain us. None of us, as yet, appreciates the full gravity of the distributional effects of those mechanisms, and the full impact of the growing inequality problem: That is a gap in our knowledge I am working on and endeavoring to fill. McChesney does, however, display an accurate perception of the history of inequality growth, and a sensational appreciation of the overriding importance of economic factors and ideas in shaping our democracy, our culture, and our world.

McChesney describes his perspective as “radical,” but his ideas are reality-based, and radical only in the sense that they contradict conventional wisdom. As I have been arguing, the conventional wisdom about neoclassical, mainstream economics is contrived and mostly wrong, and designed to serve the interests of the rich and powerful. To my way of thinking, what is truly radical is the increasing tendency of conventional wisdom to ignore the facts of the real world. 

McChesney’s message is certainly straight-forward: “In the coming decades we are going to see a society the likes of which has never existed, and can scarcely be imagined. I argue in this book that if the new society is going to be one in which we want to live, it will require fundamental change in the political economy.” (p. 15) McChesney defines himself as a “socialist,” and he explains what he means by that as follows:

I prefer the term post-capitalist democracy to the term socialism, though for me they point essentially the same direction. I have considered myself a socialist since I was eighteen or nineteen years old, and I still do. The term has always signified to me the creation of genuine political democracy, its extension into the economic realm, and having the wealth created by society directed to social needs. (pp. 21-22) 

In short, I propose post-capitalist democracy as a big tent to cover everyone who wants democracy and leaves out only those who put their blind faith in the wealthy, giant corporations, and the profit motive regardless of the evidence or social costs. There are a lot more people in group A than group B, fortunately. (p. 23)

The Profit Motive

Mainstream, neoclassical economics, as I have explained in previous posts, is a paradigm designed to explain how society can maximize its profits. We rarely stop and really think through how much the pursuit of profits determines the allocation of society’s resources and the balance between the satisfaction of common needs and private desires. We are becoming increasingly aware of the circumstances in which the profit motive follows perverse incentives, contrary to the broader public interest, in such areas as private law enforcement, privatized detention and prison systems, privatized health care and health insurance, private control of public communications systems, and privatized secondary education. Ownership confers privilege, and there is nothing radical about recognizing that the monopolization of the essential economic and social aspects of our existence leads to inequality and economic injustice.

There is major evidence of the conflict between public and private agendas in news reports every day. I chose today to write this short post on the distortions created by the “free” market because of several news reports in the last two days, and in particular two reports in today’s paper which I will get to shortly, that illustrate the key difference between a “capitalist” approach to solving the problems of civilization and the “socialist” approach.

Reviewing this post on Wednesday morning, I feel compelled to add this paragraph: As the world’s habitable environment becomes increasingly saturated with the growing human population, resource scarcity and environmental impacts are, in my view, the two most serious issues civilization faces. There is an urgent need to reduce our reliance on fossil fuels as the impacts of extracting marginal supplies increase, and the global warming caused by burning fossil fuels is now approaching the point of no return. Planning for an eventual obsolescence of internal combustion engines and the use of fossil fuels to generate electricity are high priorities. In the interest of maintaining their high level of profitability, however, giant energy companies keep us moving in the wrong direction.  

Energy, Pollution, and Climate Change

There is no mystery about the enormity of the cost of environmental externalities caused by economic activities: oil spills in the Gulf of Mexico and off the coast of Alaska; polluted water supplies in Montana and West Virginia; the long history of air pollution caused by the use of fossil fuels to generate electricity, and so on. It costs a great deal to prevent accidents and minimize pollution, and when producers must pay these costs, it eats into their profits. They cannot always recover such costs through higher prices, even for price-inelastic services like electricity. Huge corporations like BP fight hard against potential liabilities, settle adverse claims, then gloss over the adverse impacts of their activities with public relations campaigns and TV advertising that avers a staunch commitment to the environment. What we do not typically see from energy companies, however, are policies designed to minimize the initial damage.

Oil producers are not backing off on the hell-bent removal of oil from the tar sands of North Dakota and Canada, and there will no doubt be such a high environmental cost that, some day soon, a serious question will be raised about whether the corporate profits involved come even close to offsetting the enormous environmental costs, and whether corporate profits in, say, solar or wind power might be far more consistent with the public interest. There have been months of controversy over the Keystone Pipeline project, intended to move vast quantities of tar sands oil from Alberta right across America’s breadbasket states, and the critical mid-western aquifers. Alleged societal benefits boil down to the assertion that the economy will benefit from temporary construction jobs.

The alternative is moving this oil by rail. Just yesterday we were alerted to extremely disturbing predictions from the U.S. Department of Transportation, predictions made last July and only now being revealed:

According to federal authorities’ own predictions, potentially deadly oil train accidents are likely to be commonplace in the United States over the next two decades, with derailments expected to occur an average of 10 times a year, costing billions of dollars in damage, and putting a large number of lives at risk. The grim projection was revealed exclusively by the Associated Press, which cites a previously unreported analysis by the Department of Transportation from last July. The disclosure comes in the wake of two explosive crude-by-rail disasters in the U.S. and Canada this month alone, including wrecks and explosions in West Virginia and Ontario. (“Get Used to It: DOT Predicts Oil Train Derailments Will Be Commonplace Over Next Two Decades,” by Sarah Lazare, Common Dreams, February 23, 2015, here; see also “More Oil Train Crashes Predicted, AP, Albany Times Union, February 22, 2015, here.)

The avoidance of potentially 200 oil train derailments and the incalculable total cost in lives and environmental damage they would entail, it should go without saying, requires society to abandon the project entirely and throw its resources into “green” energy resource development, especially  since not removing the tar sands and other costly shale oil from the ground will avoid the impact that burning it would have on the pace of global warming.

I do not believe the full costs of global warming can, as yet, be appreciated; but the information available so far is alarming. Reports warn of irreversible damage to ecosystems, including (almost unbelievably) the end of life in the oceans in less than a half century. (See “Death of the Oceans – Horizon – Discovery Science History Nature” (full documentary), YouTube, September 5, 2014, here“The Disaster We’ve Wrought on the World’s Oceans May Be Irrevocable,” by Alex Renton, Newsweek, July 2, 2014, here). Yet it is climate change deniers like Oklahoma’s Senator Inhofe who control our public policy debates and determinations:

Inhofe claimed in 2003 that global warming might help humanity. It’s also important to question whether global warming is even a problem for human existence. Thus far no one has seriously demonstrated any scientific proof that increased global temperatures would lead to the catastrophes predicted by alarmists. In fact, it appears that just the opposite is true: that increases in global temperatures may have a beneficial effect on how we live our lives.”  (“Congratulations, Voters. You Just Made This Climate Denier the Most Powerful Senator on the Environment,” by Rebecca Leber, New Republic, November 5, 2014, here.)

This is anything but an objective view, and in the scientific community it is an extreme minority view. For example, as reported by Skeptical Science (Copyright 2015, by John Cook, here):

  • That humans are causing global warming is the position of the Academies of Science from 80 countries plus many scientific organizations that study climate science. More specifically, around 95% of active climate researchers actively publishing climate papers endorse the consensus position;
  • Surveys of the peer-reviewed scientific literature and the opinions of experts consistently show a 97–98% consensus that humans are causing global warming. 

Just a few days ago, moreover, the New York Times reported that one of the minority scientists most cited by global warming deniers, Wei-Hock Soon of the Harvard-Smithson-ian Center for Astrophysics, “has accepted more than $1.2 million in money from the fossil-fuel industry over the last decade while failing to disclose that conflict of interest in most of his scientific papers.” (“Deeper Ties to Corporate Cash for Doubtful Climate Researcher,” by Justin Gillis and John Schwartz, The New York Times, February 21, 2015here.)

The profit motive, clearly, lacks the heart, soul, and conscience of humanity. It is capable of driving people into the most myopic frames of mind, and presiding over the demise of, yes, even the planet.

Which reminds me: How much longer can democracy survive under the horrendous Citizens United holding that corporations are people, too, entitled to the First Amendment’s protection of free speech, and that spending money is equivalent to speech? As McChesney aptly put it:

When you compare the resources of progressives to the resources of the largest corporations and their allies, you feel like you are lining up for the Indianapolis 500 on a tricycle. (McChesney, supra, p. 26)

I would add that this metaphor may even be conservative, for the ratio of the top speed of a tricycle to the top speed of an Indy car may be considerably less than the ratio of the trillions of dollars of excess profits available to corporations and their principals for influencing elections to the savings available to progressives; and “progressives” in this instance should be interpreted as the broad category of people interested in saving the planet.

The American Energy Innovation Council

This brings me to today’s news. As we know, billionaires are people too, and many have a social consciousness that their for-profit corporations lack. According to an article in today’s New York Times, there is a small group of very wealthy business leaders who appear to meet that definition of “progressive”:

The government is spending far too little money on energy research, putting at risk the long-term goals of reducing carbon emissions and alleviating energy poverty, some of the country’s top business leaders found in a new report.

The American Energy Innovation Council, a group of six executives that includes the Microsoft co-founder Bill Gates and the General Electric chief Jeffrey R. Immelt, urged Congress and the White House to make expanded energy research a strategic national priority.

The leaders pointed out that the United States had fallen behind a slew of other countries in the percentage of economic output being spent on energy research, among them China, Japan, France and South Korea. Their report urged leaders of both political parties to start increasing funds to ultimately triple today’s level of research spending, about $5 billion a year. (“Bill Gates and Other Business Leaders Urge U.S. to Increase Energy Research,” by Justin Gillis, The New York Times, February 23, 2015, here).

Stressing the importance of new technologies to America’s “economic growth, competitiveness, and environment,” the Introduction to this report (February 2015, here) argues:

Since 2010, support for government energy research, development, and demonstration has languished, with appropriations remaining depressed when adjusted for inflation. In essence, we have been eating the seed corn of decades past. This matters because, even amid a surge in domestic production, the country’s energy challenges are more critical today than ever: though oil and gas prices have declined recently, affordable energy is out of reach for many households and businesses; oil and gas development requires renewed focus on sustainability; the electric grid is at risk from physical and cyber attacks and faces greater pressures to integrate growing renewable and distributed sources, even as demand growth is flat; global energy market volatility makes diversification from existing sources much harder; and climate change and international competition for energy resources become more threatening with each passing day. The provision of safe, clean, affordable, and sustainable energy is one of the most important missions for the United States. Fortunately, the nation’s opportunities are vast—if we invest in them.    

These are certainly worthy objectives, but unfortunately, climate change is not nearly high enough on the list of cited concerns. Some initial observations seem mandatory: These are leaders whose companies are not in the energy sector, and their appeal for progress is not to the energy sector itself, but to the government. There is no reason to assume that they are not thinking along the lines of the government support for corporations that has made them and the CEOs of major energy companies very wealthy. Does Bill Gates, possibly the wealthiest man in the world, look to the American taxpayers (who will soon be borrowing nearly $1 trillion per year to balance the federal budget) to fund these programs? Here is what they say:

The council’s fundamental finding is this: the scale of federal energy R&D investment is still just one-third of what is necessary. Federal funding remains the only viable avenue of support for energy technology research and large-scale demonstration projects.

But there is no hint in this Introduction of proposals for tax increases for the most wealthy Americans, such as themselves, or for corporations. The national debt has reached $18 trillion, and these wealthy leaders are content, apparently, to keep on doing what our government has been doing for decades, namely subsidizing corporations and enabling their empires to flourish.

And here is an equally important, if not more important, point. On p. 12 of the report we find this quotation from Bill Gates:

To solve the world’s energy and climate challenges we need hundreds of new ideas and hundreds of companies working on them. That is not going to happen without the U.S. government’s continued tradition of leadership in R&D.  Everyone has a role to play — from the private sector, to philanthropy, to the academy — but we will not be able to find the type of energy miracle we need without investing in the programs that support that innovation.  

Leaving philanthropy aside, his vision seems clear: Companies must have the incentive to work on and implement the “new ideas.” In short, the private sector must see the potential for profit, or they cannot be expected to invest in solving any of the cited concerns. This group is not interested in “socialism” in the sense we have been discussing it here, as a system concerned with the interests of society, but only in “socializing” the continuing advance of capitalism. The question is, what conviction would these business moguls need that the future of the planet is seriously threatened by global warming before they would recommend even the slightest modification to the economic system that enabled their enormous success?

And I feel compelled to make this additional Wednesday morning addition: What will it take to persuade these gentlemen that the threat of deep depression is real, and that growing economic inequality threatens their own empires? How do they expect companies like Microsoft and General Electric to survive after the push for profits, especially energy profits, has siphoned so much wealth to the top that our bankrupt federal government will be forced to default on the national debt? How do they justify continuing to support the robust growth of energy company profits, and the continuing avoidance of taxation by large corporations? At this point, their narrow focus on research and development suggests that they harbor the desperate hope that the miracle of innovation will suffice, all by itself, to sustain progress and prosperity and to protect their interests.   

Implementing “Green” Energy

President Obama has expressed a firm commitment to doing everything possible to reduce greenhouse gas emission and slow the pace of global warming. The U.S. and China reached a historic accord last November on pollution limits:

The landmark agreement, jointly announced here by President Obama and President Xi Jinping, includes new targets for carbon emissions reductions by the United States and a first-ever commitment by China to stop its emissions from growing by 2030. Administration officials said the agreement, which was worked out quietly between the United States and China over nine months and included a letter from Mr. Obama to Mr. Xi proposing a joint approach, could galvanize efforts to negotiate a new global climate agreement by 2015.

A climate deal between China and the United States, the world’s No. 1 and No. 2 carbon polluters, is viewed as essential to concluding a new global accord. Unless Beijing and Washington can resolve their differences, climate experts say, few other countries will agree to mandatory cuts in emissions, and any meaningful worldwide pact will be likely to founder. (“U.S. and China Reach Climate Accord After Months of Talks,” by Mark Landler, The New York Times, November 11, 2014, here.)

Of course, in order to reduce carbon emissions, there must be an increase in conservation and green energy in both countries. Here in the U.S., this will entail more than just lip service to the idea from the energy producers. But it also requires commitments from state governments to subsidize green energy that is not yet fully competitive with fossil-fuel sources on electric grids, and from the general population to adopt conservation measures and alternative energy sources. Also in today’s news was a report warning that changes in New York State’s government policies could threaten the growth of already commercial green power:

Advocates are warning Gov. Andrew Cuomo that two sudden changes in policy could undermine state efforts to promote clean solar energy and energy efficiency. Changes made in December by the state Public Service Commission and New York State Energy Research and Development Authority, cut how some large solar farms are paid for power and imposed income guidelines for property owners to qualify for state-subsidized clean energy loans. The changes prompted 30 alternative energy companies and advocates from across the state to write to the governor last week.

The changes “are undermining the growing clean energy market at a critical time by reducing incentives far too rapidly … and leave most large-scale solar projects upstate not financially viable,” the letter stated. “These actions regarding large-scale solar are undermining your signature policy of assistance to boost the upstate economy by hampering the development of well-paying green jobs.” (“Curb in Aid Hurts Solar,” by Brian Nearing, Albany Times Union, February 23, 2015, here.)

The specific issues here involve NYSERDA’s recently announced cutback on its five-year-old Green Jobs-Green New York subsidized loan program that helps property owners pay for alternative energy like solar panels, or energy efficiency retrofit programs. “Starting this year, NYSERDA will impose income guidelines on residential property owners, and bar apartments, small businesses, and not-for-profit groups from qualifying.” This means that potential investors in solar alternatives will have to borrow at market interest rates. Simply put, profitability to lenders will take precedence over the social objective of reducing carbon emissions.

The issue involving the PSC, my former agency, involves premiums paid by utilities for solar energy:

In the Capital Region, the owners of Rensselaer-based Monolith Solar said changes imposed by the PSC in December to end a premium that utilities pay for power produced by certain types of solar farms could threaten hundreds of its projects. The change would affect off-site solar farms for universities, school districts and municipalities, which can make money selling power back into the grid in a practice called remote net metering.

Melissa Kemp, of Renovus Energy, an alternative energy installation firm from Ithaca, said that change could cost a solar farm a third of its annual revenue. The PSC is scheduled to decide Thursday on whether to revisit its decision. Groups urging the PSC to reverse course include three major solar industry associations, Cornell and Binghamton universities, and Wal-Mart.

As income and wealth inequality grows, it becomes increasingly difficult for state governments and their agencies to accomplish green energy goals. Thus, it’s not just a question of increasing R&D efforts and finding new technologies, as maintained by the American Energy Innovation Council.


An economic system owing its allegiance to the profit motive, i.e., a “capitalist” system, is loaded with perverse incentives, and leads to badly allocated resources. It leads as well to denial of the facts of reality, when necessary to promote opportunities for profit. The result has been to prevent timely action to prevent global warming and its dire consequences, including mass extinctions, and the possibility of the death of ocean life.    

This post has focused on the energy sector. There is enough here, I suggest, to verify McChesney’s argument that “if the new society is going to be one in which we want to live, it will require fundamental change in the political economy.” We will have to step back from our all-out commitment to an economic philosophy of promoting personal gain and profit maximization and seriously consider other means of providing for the common good.

Bill Gates and Jeffrey Immelt must live here on this planet with the rest of us, and are just as reliant on interdependent economic systems as everybody else.  The sooner they realize that, the better.

News flash: Today President Obama vetoed the Keystone Pipeline! I can’t wait to read about it tomorrow.

JMH – 2/24/2015 (ed. 2/25/2015)

Postscript (added 2/27): Yesterday at its regularly scheduled session, the New York Public Service Commission (PSC) responded favorably to the complaint of Monolith Solar, and other solar energy producers that eliminating the premium utilities pay them for their excess power — for resale to electricity consumers — would threaten “the future of hundreds of large-scale projects across the state.” (“PSC lifts solar shadow,” by Larry Rulson, Albany Times Union, 2/26/2015, here)  This was the lead story in today’s paper.

The PSC is on the horns of a dilemma. I know very little about Audrey Zibelman, the PSC’s new Chairman, who arrived a decade after my retirement from the agency: She appears to be an effective leader, sensitive to the conflict between reducing the amount of fossil fuel generation on the electric grid and protecting consumers from exorbitant rates (the traditional role of the PSC) by keeping the price of electricity as low as possible. As today’s article explains, eliminating the 30% price premium paid by utilities for solar power will be delayed, under yesterday’s decision, to avoid harming the budding solar industry.   

In the long haul, it seems to me, New York should consider using public authorities such as the New York Power Authority (NYPA) and Long Island Power Authority (LIPA) to manage the development and distribution of solar and wind power. NYPA has provided clean, inexpensive hydroelectric power for decades (here). Before I retired, a big part of my job was presiding over proceedings for the certification of new power plants, at the time mostly natural gas-fueled plants, with a minimum of adverse environmental consequences. Perhaps the effectiveness of that approach has waned.   

If we are going to respond effectively to the urgent need to reduce carbon emissions,  and avoid the drastically increased environmental harm discussed above, it might well be best (maybe even essential) to return to public provision of green power, rather than leaving our future up to the arbitrariness of profitability. Note that Gates and Immelt have already concluded that public investment in R&D is the most effective avenue for progress. If the private sector cannot get the job done on its own, perhaps public ownership of a significant share of this segment of the means of production is the answer. The use of public authorities has been a time-honored tradition in the United States, always considered an acceptable form of “socialism.”  




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Dynamic Scoring: Delusion, Danger, and Disaster

On the very first day of the 114th Congress, U.S. House leadership adopted a new, hyper-partisan and hyper-political rule that has the potential to add billions on top of billions to the federal deficit with every bill that passes.

So-called “dynamic scoring” completely invents a future where unlimited and unpaid-for tax cuts and loopholes for large corporations and the very wealthy create a more prosperous environment for us all — simply to circumvent the nonpartisan Congressional Budget Office that Republican and Democratic majorities in Congress have used since 1974. This rule passed with only Republican support, 234-172.

This strategy gives complete leeway to the Republican House majority to “pretend-then-spend.” They’re allowing the author of any bill for at least the next two years to invent an outcome where massive giveaways to special interests help everyone — with no budgetary, economic or historic evidence to back up their claims. When you couple this strategy of dynamic scoring with recent laws and Supreme Court cases that allow big corporations and the nation’s wealthiest to flood Washington with money to get their way, we are entering very dangerous territory.  — U.S. Congressman Paul Tonko, 20th Congressional District, New York (“Viewpoint,” Albany Times Union, January 14, 2015, here).

On this blog in recent months I have followed the federal budget situation with growing alarm, and attempted to clarify the extreme danger it poses to our country and its economy. Rep. Tonko has accurately described the problem posed by the new “dynamic scoring” rule: The rule further enables the dangerous Republican agenda. The continuous deficit spending since the Reagan Administration, interrupted only by brief surpluses in the Clinton Administration, has finally brought the country to the brink of economic disaster, and this is indeed “very dangerous territory.”

Dynamic Scoring

The dynamic scoring rule requires the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to include “the economic effects of legislation . . . in a bill’s official cost to the Treasury” (“House Republicans Change Rules on Calculating Economic Impact of Bills,” by Jonathan Weisman, The New York Times, January 6, 2015, here). This rule underscores the fact that only the proposed amounts of changes in budget proposals are normally accounted for. CBO produces a ten-year “forecast,” but the forecast is not changed to reflect the estimated effects of legislation, as I have verified in my recent posts on CBO “forecasts.”   

The official argument for dynamic scoring is this: “To predict the budgetary impact of a major federal policy accurately, analysts should take into account the policy’s potential macroeconomic effects.” (“Accurate Budget Scores Require Dynamic Analysis,” by Salim Furth, The Heritage Foundation, December 30, 2014, here.)  That sounds sensible, but as the Center on Budget and Policy Priorities (CBPP) points out:

In reality, however, the House would be asking CBO and JCT [Joint Committee on Taxation]  for less information, not more, and the new rule could facilitate congressional passage of tax cuts that are revenue-neutral only on paper.

CBO and JCT already provide macroeconomic analyses of some proposed bills as a supplement to the official cost estimates they produce.  These analyses typically present a range of estimates of the legislation’s impact on the economy.

The new House rule, in contrast, asks for an official cost estimate that only reflects a single estimate of the bill’s supposed impact on the economy and the resulting revenue impact. (House “Dynamic Scoring” Rule Likely Will Mean More Tax Cuts — Not More Information” (PDF), by Chye-Ching Huang and Paul N. Van de Water, January 5, 2015, here.)

The concern is that this rule will be used to enable a one-sided point of view on the potential effects of legislation:

If highly optimistic economic and fiscal assumptions . . . are included in official cost estimates but then fail to materialize, the result will be higher deficits and debt.  And as CBO, JCT, and other analysts have warned, tax cuts that ultimately expand deficits can slow economic growth, rather than increase it, because the higher deficits can create a drag on saving and investment (Id.).

And CBPP adds this understated caveat:

Dynamic scoring could facilitate congressional passage of large rate cuts in tax reform by making the rate cuts appear — on paper — less expensive than under a traditional cost estimate.  That’s because some of the models of the economy and related assumptions used to produce a dynamic cost estimate might show some tax reform packages boosting economic growth and thereby generating additional revenue (Id.).

But these objections state the case far too mildly, and far too politely. Alas, this polite conversation about how dynamic scoring is really about trying to enable more tax cuts, which might lead to higher deficits and debt, simply avoids a very unpleasant truth: Our plutocrats have used our government to enrich themselves, and a close look reveals that the well has nearly run dry — but they keep scraping and gouging for more. It does not appear that they have made a calculation of when, if ever, they will have to stop. 

The Delusion

Unfortunately, the “trickle-down” idea that tax cuts will even partially pay for themselves is entirely wrong-headed, and it is traceable, ultimately, to the rejection by mainstream economics of the Keynesian principle of effective demand. So is the “austerity doctrine,” which posits that cuts in government spending will create growth to make up for the lost revenues caused by reduced taxation. I won’t go back over my discussions of the disproof of the austerity doctrine accomplished by the correction of the Reinhart/Rogoff study “Growth in a Time of Debt” (GITD), which had been Paul Ryan’s sole “economic” support for the claim that the massive spending cuts in his 2012 and 2013 budget proposals would, somehow, stimulate growth and produce deficit-reducing tax revenues. (See “Reinhart, Rogoff, and Reality,” May 30, 2013, here; “Reinhart, Rogoff, and Ideology,” June 6, 2013, here; and “Reinhart, Rogoff, and Redistribution,” June 30, 2013, here.)

The bottom line is that reduced government spending is a direct contraction of the economy, the exact opposite of growth. Doing that to reduce budget deficits, instead of increasing taxation of corporations and the wealthiest Americans, has exactly the wrong macroeconomic result: It reduces growth, instead of increasing it.

Similarly, the “trickle-down” notion that still more tax cuts for the wealthiest Americans and corporations will somehow stimulate growth and increase tax revenues has been repeatedly disproved. The incredible idea that such tax reductions might even somehow pay for themselves is, quite frankly, absurd. In an earlier post (“Amygdalas Economicus: Perspectives on Taxation,” originally posted January 24, 2013, here) I included a report on the Heritage Foundation’s delusional trickle-down forecast for the “dynamic” effects of the Bush tax cuts:

In their April 27, 2001 report “The Economic Impact of President Bush’s Tax Relief Plan” (The Heritage Foundation, Center for Data Analysis Report #0101, April 27, 2001, here), D. Mark Wilson and William Beach predicted that the Bush plan would significantly increase economic growth and family income while “substantially reducing federal debt.” In fact, they predicted, the Bush plan would greatly increase government revenue, so much so that “the national debt would effectively be paid off by FY 2010.” In other words, they argued that the Bush tax cuts would more than pay for themselves, by an incredible amount.

What actually happened, however, is that the federal debt, which was at about $6 trillion in 2001, increased to about $13.6 trillion by the end of 2010 (Treasury Direct, here).  The Heritage Foundation’s estimate of supply-side “stimulation” was off by almost $14 trillion, nearly one year’s GDP.  In those years the economy suffered stagnation, not growth, climaxing with the Crash of 2008 and the Great Recession.  So, whatever the actual isolated effects of the Bush tax cuts were, the Heritage Foundation’s prediction that they would more than “pay for themselves” was pure fantasy.

It is alarming to see this same Heritage Foundation, only a few years later, arguing for dynamic scoring on the ground that we need to improve the accuracy of macroeconomic predictions. The Republican agenda of massive tax cuts for the rich and corporations hasn’t changed, and neither has the nature of reality. Whatever the Heritage Foundation’s agenda for the future of America and its economy may be, it does not depend on the accuracy of macroeconomic projections.

The underlying problem lies in the gimmicky, static nature of supply-side forecasting, which is based in neoclassical supply-and-demand economics. The CBO and other mainstream forecasters can not realistically predict growth based solely on supply-side forecasting, because it only attempts to emulate optimal productive capacity. That is essentially a “static” model, completely ignoring the effects of demand on growth; so trying to make it more “dynamic” is like putting lipstick on the proverbial pig. To put it more politely: It involves nothing but subjective guesswork; it is a fertile field for biases and fantasies.

Demand factors, which create drags on growth, are excluded from direct consideration in supply-side models, and are unlikely to be considered in any supplemental macroeconomic analyses.  The biggest deficiency of forecasting at this point is the failure to comprehend, much less reflect, the continuously growing inequality of incomes and concentration of wealth in America. Any serious “dynamic scoring” would have to reflect the effects on growth and tax revenues of the continuous concentration of wealth at the top, a concentration that has averaged more than $500 billion annually since 1979-80. It is now apparent that the demand-side effects of inequality growth materially depress the rate of income growth:

Of course, CBO’s underlying forecast does largely incorporate these effects, as experienced so far, by predicting only about 2.1% annual growth through 2025 — although it remains on the optimistic side, for growth since the crash has averaged less than 2% per year. 

Moreover, given that the high level of inequality growth is a consequence of the tax cuts on top incomes and corporate earnings that created the national debt — now over $18 trillion (Information Station, December 5, 2014, here; Economic Research, Federal Reserve Bank of St, Louis, here) — any accurate scoring of proposed additional tax cuts would have to include a careful analysis of the resulting increase in wealth transfers to the top. Wealth concentration is an ongoing, dynamic process, continuously reducing the growth of tax revenues, and increasing deficits. In other words, the negative effects of failed trickle-down policy would have to be taken into account. The current dynamic scoring proposal is a one-sided affair which, as Congressman Tonko properly points out, only further obscures our perception of danger.  

The Danger    

The national debt now exceeds $18 trillion. If it were increasing only by the amount of the interest payments on the outstanding balances, the debt would simply be naturally compounding, in an exponential growth. However, the debt is growing even more rapidly than that, because tax revenues remain insufficient not only to cover the interest payments, but also to cover current expenses. 

The consequences were fully displayed in CBO’s February 2014 presentation of “The Budget and Economic Outlook: 2014 to 2024″ (here), which was extended through 2039 in the “Long-term Budget Outlook,” July, 2014, (here). The February 2014 report revealed a rapidly increasing danger posed by the exponential growth of the interest on the national debt.  Here is CBO’s table from that report, showing that debt held by the public is projected to grow from $12.7 trillion in 2014 to $21.3 trillion in 2024, nearly doubling (government-held “internal” debt, e.g., the Social Security balance, will also grow, but the interest it accrues is not immediately payable): 

CBO budget outlook 45010-Outlook2014_Feb

This $8.6 trillion increase in debt held by the public is the accumulation of annual deficits which are projected by CBO to grow to $1 trillion per year by 2024, as reported by The Wall Street Journal (“Deficit Forecast Trimmed as Rates Stay Low,” by Damian Paletta, WSJ, August 27, 2014, here):

federal deficit projections 8-27-14 wsj- cbo

As the debt grows, the interest increases commensurately; the following table from the February 2014 report shows the CBO projections of interest costs, along with all other federal outlays,  over the next decade:

CBO budget outlook 45010- outlays

These data reveal how much faster debt interest is projected to grow than any other expense category through 2024:

  • Total mandatory outlays are projected to increase from $2.1 trillion in 2014 to $3.7 trillion in 2024, a 77% increase;
  • Total discretionary outlays are projected to increase from $1.2 trillion in 2014 to $1.4 trillion in 2024, a 16% increase;
  • The defense budget portion of discretionary outlays is projected to increase from $604 billion in 2014 to $719 billion in 2024, a 19% increase;
  • Interest on the national debt is projected to increase from $233 billion in 2014 to $880 billion in 2024, a 278% increase.

Growing debt interest is steadily swamping the entire budget. Stunningly, debt interest is projected to surpass the entire defense budget by 2021, at which point defense spending is projected to be 52% of all discretionary spending. And by 2024, interest paid on publicly-held debt is projected to have grown to $880 billion, an incredible 39% of the total of interest and all discretionary spending ($1.383 trillion)! And, of course, inter-governmental debt is also growing and accruing interest, a major unresolved problem. A default on the national debt would crush Social Security, Medicaid, and Medicare, the so-called “entitlement” programs, the contributions to which have been replaced with interest-bearing government debt.    

It’s a Distributional Problem

CBO has casually stated from time to time that this trend cannot be allowed to continue indefinitely. It has failed to evaluate, however, how much longer the U.S. government might be capable of continuing on with these perpetual deficits, and paying out debt interest as a perpetual annuity to bond holders. CBO blandly charts budget trends out to 2039, as if somehow it might be possible to get that far.

Wikipedia gives us this common, and commonly understood, definition of “bankruptcy”:

Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

By this legal standard, our federal government has been bankrupt for many years, unable to generate enough revenue from its taxpaying “customers.” But the creditors in this instance, at least those on this side of the Pacific Ocean, are not interested in repayment. They are content with a perpetual annuity paid for by those U.S. taxpayers who do not own government bonds.

This munificence has not been voluntarily permitted by taxpayers; it is enforced by the plutocrats that run our government.  No corporation would dream of continuing on such a basis. A few days ago, for example, Target announced that it was shutting down its entire Canadian operations, closing 133 stores, having lost $2 billion in less than two years of Canadian operations. (Kavita Kumar, The Star Tribune, January 15, 2015, here). American taxpayers have no such easy way to cut their losses. 

Tragically, the debt itself is a major benefit to the plutocracy, because with its unduly low tax burden, it is allowed to keep its ever more highly concentrating wealth. The wealthy elite that has requested “dynamic scoring” is not interested in being more precise about macroeconomic impacts. Rather, its financial interest lies in continuing to increase the debt as much as possible, because interest is paid on the debt in a perpetual annuity. That is why they perpetuate the “trickle-down” myth; and that is why, given the expanded opportunity offered by “dynamic scoring” to imagine that there will be fantasy growth from Republican austerity and tax cut proposals, they can be counted on to attempt to use this device to its fullest advantage.      

Of course, the federal banking system has in the past been able to print more money when needed to feed this insatiable desire. But the $18 trillion of debt is the cost to all Americans of money “printed” so far to finance the increasing net worth of the wealthiest Americans. Including off-shore accounts, as I estimated more than a year ago, the net worth of the top 1% of America’s wealthiest households has increased by some $22-25 trillion since 1980, indicating that the economy is structured to reduce the wealth and incomes of lower income and wealth classifications.  

That is where the money went, and that is why we have an intractable inequality problem. Our plutocrats have used our government to enrich themselves, and it does not appear that they have made a calculation about when, if ever, to stop. We can only wonder how much longer the rest of the world will tolerate this continuing abuse of its prime currency, the U.S. dollar, and when the next major collapse of the dollar will come. Obviously, the well has nearly run dry, and our nation has nothing to show for it but vast inequality, a rising depression, and a hopelessly bankrupt government. 

JMH -1/19/2015 (ed. 1/21/2015)

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Inequality and Growth: Two Sides of the Same Coin

[Note – This article was originally published on 3/29/2014.]  


In a cogent and extremely relevant article posted on January 16, 2014 (here), Neil Buchanan asked: Where Have the Academic Experts Been Hiding? Here’s the part I want to talk about:

The Role of Scholars in Economics in Downplaying Inequality

What is surprising is that, especially among economists (even nominally liberal economists), there has long been a tendency to treat inequality as an unworthy subject of discussion. This is not a matter of the conversation simply being hijacked by academic conservatives.  There are plenty of conservative economists in top-tier economics departments.  (Harvard’s Economics Department alone is the home to four of the most high-profile conservative economists in the world.)  The interesting dynamic has been the complicity of mainstream economists in taking inequality off of the agenda of “respectable” research.

Why would they do this?  The innocent (and, I think, mostly accurate) explanation is that economists, after the 1970’s, wanted to focus on how to get the economy as a whole to grow.  At that point, distribution of wealth and income was not much of an issue, as described above, because it seemed that the fruits of growth would automatically be spread widely. The analytical move by academic economists was to say that growth and equality were simply different issues, and that the issue driving the conversation should be how to maximize growth.  That did not require that the conversation would never return to the question of inequality, but that is the way it turned out.

I certainly observed many situations, among both economists and legal scholars whose research is modeled on mainstream economic reasoning, in which anyone who even raised the question of equality was all but laughed out of the room.  The mockery was not always (or even most of the time) an attack on someone for caring about inequality; rather, it was instead a condescending statement that the offending party “just doesn’t get it.” In other words, the ideologically neutral form of the conversation was, “Let’s talk about growth, and set inequality aside to discuss later, in a different conversation.”  Unfortunately, that quickly became “You’re talking about the wrong thing if you try to talk about inequality,” and then, “Talking about inequality is not allowed.”

In short, even the non-conservative parts of academia have helped to feed the “centrist” obsession with repressing any discussion about inequality and redistribution.  Happily, that has started to change over the last few years, with more and more economists and legal scholars noting that the growth/distribution divide never made all that much sense, and that the social problems that are associated with gross inequality have reached crisis proportions.  (Emphasis added)

The ideological problems are far deeper than Buchanan’s discussion reveals. The issue of whether and how inequality is related to growth is itself deeply steeped in ideology (let’s call it “level 1” or “L1” mythology), and our difficulty understanding the full extent of the problem, or even with understanding how the economy works, is almost entirely due to our failure to understand that fundamental point. If you are conservative, as opposed to “non-conservative,” you extend your ideology to a more extreme, and more obviously faulty level (which I’ll call “level 2” or “L2” mythology). This post will explain the difference between these two levels of ideology.   

Level 1 Mythology

I have been saying ever since I began to focus extensively on inequality, about three years ago, that growth and inequality are “two sides of the same coin.” For most of the that time, it seemed like only Robert Reich, among the few economists who were speaking up about inequality, shared that perspective. Then, in July of 2012, Joseph Stiglitz published his book The Price of Inequality, and I had another ally. Highly unequal societies are highly unstable, he has been saying, and that is exactly what “unstable” means: Inequality depresses growth. 

Most economists, among them notably Paul Krugman, didn’t agree. This disparity of views is explained by a difference in perspective: Today’s mainstream economists are raised in the “neoclassical” school of economics, and those in the mainstream like Krugman who consider themselves Keynesians are actually to a large extent “neo-Keynesians,” which is considerably different from the true Keynesian perspective. The neo-Keynesian perspective emphasizes Keynesian theory in connection with policy matters, but is locked into the neoclassical perspective of how the economy works, a very awkward position to be in. Together, the neoclassical and neo-Keynesian schools of economics constitute the vast bulk of what Buchanan refers to as “mainstream economics” today, and that includes nearly all of the economics taught since I learned economic theory in the early 1960s.

Both of these schools are based on solely on an ideology — the L1 mythology — which is fundamentally wrong (by 180 degrees) about how market economies work. Put simply, it is bottomed on a “supply-side” vantage point in its conception of growth: Make it, this point of view insists, and people will buy it. But this perspective turns out to depend on a whole host of assumptions (e.g., perfect competition, perfect knowledge, perfect efficiency, full employment equilibrium) that are not, and have never been, true. Thus, the argument that growth results from expanding investment is like the argument that you can push a piece of string in a straight line across a table. It confuses cause and effect.

Consequently, forecasts or retrospective analyses of growth designed to reflect supply-side assumptions, as frequently discussed on this blog, are fraught with confusion and contradiction. I have reviewed reports on studies involving growth or inequality as I learn about them, and I have routinely found timidity and candid admissions of confusion from the analysts that the studies did not produce the results they expected.   

John Maynard Keynes taught us that investment responds to demand. Keynes’ “demand-side” perspective, put simply, reminds us that people need money (from income, wealth, or debt) before they can buy anything. A piece of string must be pulled across the table. Conceptually, this understanding was the basis of his General Theory of Employment, Interest and Money (1935). It was all but abandoned by mainstream economics after the 1960s, however, because it implied that instability and decline were natural developments in market economies, and therefore that central governments would have to step in and stimulate demand throughout the economy. The L1 myth developed around a rejection of Keynes’s General Theory.

The Keynesian Logic

The General Theory focused on how much demand would be generated by a given (initial) level of “income” (GDP), defined essentially as the total of all transactions, including all payments for labor, capital or consumption. Keynes specified three independent variables in his model: The interest rate, the propensity to consume, and the marginal efficiency of capital. These three factors, acting independently, Keynes argued, determine income and growth. The cyclical level of economic activity revolves initially around the propensity to consume; i.e., as people decide to reduce current spending and increase deferred spending (saving) current economic activity declines, resulting in an initial decline of GDP, compounded (as money circulates) by a bounded multiplier effect.    

This was Keynes’s major contribution to theory. Classical (hence neoclassical) theory ignored the demand function, and therefore had no way to explain growth or decline. The neoclassical model (as developed via Ricardo, Walrus, Marshall and eventually Paul Samuelson, among others) erred by assuming that “supply creates its own demand,” essentially treating the economy as a static aggregation of transactions. Because the interest rate is independent of the other two variables and is not an equilibrium of the supply and demand for money, and because a decline in current consumption does not automatically imply an increase in future consumption, Keynes famously reasoned, an increase in saving, instead of resulting in more investment, results in increased unemployment. No, this was not intuitively obvious to many, though Keynes said it was, which is why it was such a major theoretical development. The upshot, however, is that a market economy is inherently unstable, and that because investment depends on expectations of future demand, an economy’s current level of demand must be stabilized as it rumbles along by infusions of government spending.

The point is that the entire basis for neoclassical economics is itself a myth: As James Galbraith has pointed out, most economists take it as a matter of faith that economies will return on their own to full employment after brief down periods, that is without the stimulation Keynes demonstrated was necessary; but when an economy is always declining, that cannot happen, and eventual collapse into deep depression is inevitable. That is the ultimate reality revealed by Keynesian demand-side economics.

Mainstream academic economics was destined to be controlled, however, not by science but by philosophy; in particular, the philosophy of Milton Friedman, who wanted to keep government from interfering with the “free” economy. So he argued that economies will grow and prosper even while wealthy people are making and keeping as much money as a “free” market will allow. Ignoring considerations of social utility, Friedman made it clear that he opposed interference with the natural distribution of wealth and income established by the free market, which he analogized to the operation of a lottery:

Consider a group of individuals who initially have equal endowments and who all agree voluntarily to enter a lottery with very unequal prizes. The resultant inequality of income is surely required to permit the individuals in question to make the most of their initial equality. Redistribution of the income after the event is equivalent to denying them the opportunity to enter the lottery. (Capitalism and Freedom, U. Chicago Press, 1962, 2002 ed. p. 162)

Note that, from the outset, the underlying issue was distribution, and a separate elaborate line of argument was subsequently constructed by the “conservative” economic community to the effect that income and wealth distribution has no macroeconomic significance, and should be ignored. That line of argument forms the basis of L2 mythology.

Level 2 Mythology

The best example of that argument, “Reducing poverty, not inequality” (here) was offered in 1999 (here) by the former chairman of Ronald Reagan’s Counsel of Economic advisers, Harvard professor Martin Feldstein, who asked us to imagine that a “magic bird” made a small award that would not affect anyone else’s “material well-being.” The truth, however, is that many trillions of dollars of wealth have transferred to the top 1% over the last 30-40 years, both from the bottom 99% and the proceeds of America’s escalating national debt. So the “material well-being” of the bottom 99% has been drastically reduced by redistribution:

productivity veresus inflation-adjusted-wagesThis chart, published by Gus Lubin (November 12, 2013, here), shows that since the advent of the Reagan Revolution presided over by Martin Feldstein and other ideologues, America’s productivity continued to grow, but the gains have remained with the producers while median wages have fallen.   

By now, nearly all informed Americans should be clear on the bankruptcy of the “magic bird” myth. Paul Krugman is getting more serious recently in attacking this issue (“That Old-time Whistle,” New York Times, March 17, 2014, here):

But over the past 40 years good jobs for ordinary workers have disappeared, not just from inner cities but everywhere: adjusted for inflation, wages have fallen for 60 percent of working American men. And as economic opportunity has shriveled for half the population, many behaviors that used to be held up as demonstrations of black cultural breakdown — the breakdown of marriage, drug abuse, and so on — have spread among working-class whites too.  

Meanwhile, media reports continue to amaze us. Detroit is in bankruptcy, its residents wallowing in third-world poverty. Syracuse, NY and many other cities face intractable fiscal problems. Just yesterday, I heard a PBS radio news report that a hospital in northern Massachusetts actually shut its doors because it cannot afford to stay open; sufficient funding could not even be found to keep the ER open. It is becoming increasingly evident that America’s economic woes are attributable to a fundamental shortage of money in the active money supply available to the bottom 99%. This is the stuff of stagnation, of depression.

The “Invisible Hand”

The sum and substance of the L1 mythology, finding no support in scientific economics, was eventually propped up by “the doctrine of the invisible hand,” a mythical and wholly false attribution of Friedman’s alleged “free market” philosophy to Adam Smith. (See my post “The Cult of the Invisible Hand,” December 22, 2013, here.)

Hang on to your hats: The fallacies behind the L2 myth (that distribution is macroeconomically insignificant) and the L1 myth (that an economy will always return to full employment “equilibrium” on its own) are virtually identical. L1 is like believing in the tooth fairy: the money needed for growth will magically appear under our pillow, as needed. L2 is the converse: growing income and wealth concentration does not have a negative impact on the active money supply, or put another way, the lottery winners can gather in money without restraint without hurting anyone else, without violating the so-called “Pareto Principle.” The latter idea has been stretched into the “trickle-down” argument, an idea that may have even pre-dated Adam Smith: This is the claim that the more money concentrates at the top, the better off those below will be; growth at the top causes growth at the bottom. 

In all these instances, when money is needed, it’s simply assumed to be there. That’s a fraud – the money supply is finite, so people really are hurt by inequality growth. Joseph Stiglitz recently weighed in on this point in his excellent discussion of the globalization of inequality (“On the Wrong Side of Globalization,” Opinionator, March 15, 2014, here):

In this series, I have repeatedly made two points: The first is that the high level of inequality in the United States today, and its enormous increase during the past 30 years, is the cumulative result of an array of policies, programs and laws. Given that the president himself has emphasized that inequality should be the country’s top priority, every new policy, program or law should be examined from the perspective of its impact on inequality. * * * And this brings me to the second point that I have repeatedly emphasized: Trickle-down economics is a myth. 

Here’s the real kicker: The impacts of redistribution on growth are vastly more significant than changes in Keynes’s propensity to save, the relatively minor trade-off between current and future consumption. Distribution of wealth and income  encompasses the entire money supply. We now know that since the Reagan Revolution began, the rate of growth was depressed in all five income quintiles, so growing inequality, while it was demolishing the bottom 80%, on a net basis even reduced the rate of growth of the top 20%. Worse, there has been no income growth, Thomas Piketty and Emmanuel Saez have demonstrated, outside of the top 5%. The problem has been consistently getting worse for decades, and now 95% of all income growth is going to the top 1%. The middle class and small businesses are evaporating. 

Needless to say, the “invisible hand” has been called into service to justify, and lend an appearance of inevitability to, the perpetuation of inequality. In fact, it was so used almost from the start, I have been surprised to learn, dooming Adam Smith to eternal misinterpretation just because he chose to use a religious metaphor once in Wealth of Nations, and once in The Theory of Moral Sentiments. 

Okun’s “Efficiency” Argument 

Here’s an important case in point: Back when Friedman and Feldstein were in their heyday forty years ago, another highly respected economist, Arthur Okun, who was Chairman of Lyndon Johnson’s CEA, floated the proposition that trying to correct inequality would likely reduce growth, not increase it, because it would decrease economic “efficiency,” or the ability of the economy to produce (Equality and Efficiency: The Big Tradeoff, The Brookings Institution, 1975). That could be rephrased: Trying to increase incomes of working people is likely to reduce total work. If that sounds absurd, don’t be alarmed: it is a real beauty. (In fact, the idea is apparently inconsistent, in a demand-side universe anyway, with his own more sensible “Okun’s Law,” the assertion he reportedly made of “a clear relationship between unemployment and national output, in which lowered unemployment results in higher national output.”)

According to Paul Krugman (“Liberty, Equality, Efficiency,” The New York Times, March 9, 2014, here) most economists have believed in “the big tradeoff” ever since:

Almost 40 years ago Arthur Okun, chief economic adviser to President Lyndon Johnson, published a classic book titled “Equality and Efficiency: The Big Tradeoff,” arguing that redistributing income from the rich to the poor takes a toll on economic growth. Okun’s book set the terms for almost all the debate that followed: liberals might argue that the efficiency costs of redistribution were small, while conservatives argued that they were large, but everybody knew that doing anything to reduce inequality would have at least some negative impact on G.D.P.

But it appears that what everyone knew isn’t true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.

There’s no “probably” about it. We’re in a bottom 99% depression, not just a post-recession depression-like period as described by Krugman in his last book. 

Two Sides of the Same Coin

The relationship between inequality and growth is gradually sinking in with the economics profession, but understanding it requires jettisoning the supply-side world view that dominates the discipline. Both growth and inequality are statistics representing measures of income. The annual rate of growth is reflected in the amount of reported income accumulating over a year. Inequality is a measure of the distribution of that income. The factors that increase income and wealth concentration also reduce growth. So growth and distribution are literally two sides of the same coin.

It’s a bit more complicated than this, but here are the two main factors:

1. The demand-side factor: This one is easy for Keynesians, and both Reich and Stiglitz have emphasized it.  People with top incomes have a lower propensity to consume (percentage of income spent on consumption) than middle class people, or poorer people, who can save little or nothing and, at or near the bottom, are running up debt. So, as wages and jobs decline and income shifts to the top, the aggregate consumption (spending, GDP) is by definition declining. Two sides of the same coin by definition;

2. The supply-side factor: All profit is a form of economic rent, payment above and beyond the cost of production. As a career regulator of utility rates, I am intimately familiar with this one. The task of rate-setting is to prohibit the taking of monopoly rents by big corporations providing essential services. Most prices in the economy, even for essential products and services like health care, vehicle fuel, food, shelter, and clothing, are set under conditions of monopolistic control by huge corporations. Thus, these prices not only gradually reduce real incomes through inflation, they also attempt to maximize profit, which entails limiting supply below the point where the price would clear market demand. This too simultaneously compresses growth and increases inequality, compared to the result under competition.   

These two factors alone, together with the clear history of substantially reduced growth since the Reagan Revolution began, really should be dispositive of this issue.  Still, supply-siders don’t get it. Krugman’s article reported two recent studies by IMF economists trying by statistical correlation to test the relationship between growth and income inequality, both as against other social factors and across countries. (“Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” by Andrew G. Berg and Jonathan D. Ostry, International Monetary Fund, IMF Staff Discussion Note, April 8, 2011 (here), and “Redistribution, Inequality, and Growth,” by Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, IMF Staff Discussion Note, February, 2014 (here).) 

Note that these researchers had an inkling of the true nature of their variables, as they revealed in the subtitle for their initial 2011 study. Nonetheless, their supply-side perspective cautioned timidity and restraint. In their first study, although they found inequality to be “one of the most robust and important factors associated with growth duration,” (pp. 13-14)  they timidly concluded: “The main contribution of this note may be to push slightly the balance of considerations towards the view that attention to inequality may serve both equity and growth at the same time.” (p. 18) The report on the second study led them to acknowledge a significant connection between inequality and growth. Still, they showed continued supply-side influence in a report that revealed more surprise than timidity:

First, inequality continues to be a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers. Thus, the conclusions from Berg and Ostry (2011) would seem to be robust, even strengthened. It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable.

And second, there is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level. (pp. 25-26)

These two studies turned out to provide substantial corroboration of the fact that income inequality and growth are two sides of the same coin, despite a relatively poor potential correlation among the variables actually tested, yet the surprise these analysts professed was only that their results did not validate Okun’s big tradeoff.  

I checked to see what Okun himself had said: After extolling the virtues of capitalism as compared to state socialism (communism), he presented the source of his efficiency argument:

The case for the efficiency of capitalism rests on the theory of the “invisible hand,” which Adam Smith first set forth two centuries ago. Through the market, greed is harnessed to serve social purposes in an impersonal and seemingly automatic way. (p. 50)  

That was it: His “authority” was the falsely alleged viewpont of Adam Smith. Of course now we know for sure that trickle-down is a myth: Greed is not harnessed to serve social purposes; greed avoids social responsibility. In fact, greed has successfully avoided progressive taxation, which by definition is taxation that stops the further concentration of income and wealth.  The basic point of trickle-down, of course, is to avoid paying taxes. I’ll include again the Piketty/Saez graph charting the top 1% income share, along with capital gains, together with the top income tax and capital gains rates.


The wealthy classes today steadfastly avoid discussing the issue of increasing their taxes, occasionally advancing the Laffer curve argument that even attempting to increase taxes on top incomes would be counter-productive (disproved by Piketty/Saez/Stantcheva’s 2010 study of the income elasticity of the top income tax rate), while their spear-carriers in Congress continue to propose further reducing their already wholly inadequate tax contributions.  

We must now add Arthur Okun to the list of those who, like Milton Friedman and Martin Feldstein, wanted an economy that served only the rich. He was opposed to progressive taxation, but in 1975 he freely admitted, having no reason to try to deny it, that “[t]he progressive income tax is the center ring in the redistributive arena, as it has been for generations.” (p. 101) 

Coincidentally, in his latest Op-ed (“America’s Taxation Tradition,” New York Times, March, March 27, 2014, here), Paul Krugman has begun to develop this point, quoting Teddy Roosevelt’s famous 1910 “New Nationalism” speech, where Roosevelt argued that “[t]he absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power” and called for “a graduated inheritance tax on big fortunes … increasing rapidly in amount with the size of the estate.” Krugman added:

The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes.

Of course, estate taxation and income taxation are both crucially involved, because great wealth accumulates from excessive incomes. However, the larger point is that there is really no mystery here anymore: We’re facing the same old class warfare, and the entire “science” of “neoclassical” economics has sunk ever more deeply into an age-old mythology tailored only to serve the interests of wealth. 

The American economy will require much reform to survive, but first and foremost progressive taxation of incomes and wealth must be reinstated. Will that happen? I worry that corporations, because they are not really people, probably lack a survival instinct. Mankind has painted itself into a seriously dangerous corner.

JMH – 3/29/2014 (ed. 3/30/2014)   Reposted 12/18/2014


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Saez and Zucman: Telling the Truth About Wealth Inequality

It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality. — “Wealth Inequality In the United States Since 1913: Evidence From Capitalized Income Tax Data,” by Emmanuel Saez and Gabriel Zucman, NBER Working Paper No. 20625, October 2014 (here)

The Saez/Zucman working paper is easily, in my opinion, the most significant development in inequality economics this year. Income inequality has been suggestive of a major problem for about a decade, and the best information we have on that score has been presented by Saez and fellow French economist Thomas Piketty. The problem with income inequality has been that it is far too easily rationalized away, and it has been. The proof of the problem lies in wealth inequality, which is the consequence of transfers of wealth to the top from lower down.

To be sure, they do not quite come right out and say that: There are allusions in this report to the inadequacy of taxation. But the political climate in America right now is extremely destructive. Mr. Zucman is with the London School of Economics and Mr. Piketty is with the Paris School of Economics, but Mr. Saez is on the faculty at Berkeley, and may face some uniquely American constraints. The findings of this study challenge some core underpinnings of “neoclassical” economics, which has been the mainstream ideology in the United States for over a century. He and Zucman are sensibly building a body of scientific evidence that will make the macroeconomic impacts of growing inequality undeniable. They are not contesting ultimate or political conclusions.

With this study, these two are pointing the way to real progress. Piketty published Capital in the 21st Century early in 2014, but unfortunately he could not overcome the constraints of supply-side modeling. He unveiled two “fundamental laws of capitalism” which revived outmoded production function-based growth models that, as he acknowledged, required a long-run equilibrium of savings and investment (a circumstance that never occurs) to be true. His paradigm was subjected to a great deal of criticism, but at least he deserves much credit for calling public attention to the problem of wealth inequality and for his discussion of income inequality in the United States. (See my three posts on Piketty, the second of which analyses the “laws of capitalism” from the perspective of Gardner Ackley, author of Macroeconomic Theory, the leading textbook in the early 1960s, here).

One thing seems certain: The details of this paper will be under attack by the powerful top 0.1% of wealth holders, whose wealth concentration is determined to be of paramount importance. They continue to hold fast to the trickle-down illusion with which they have misled nearly everyone (and by now, most likely, fooled themselves) into believing that their own tax avoidance is good for the economy.

The latest evidence of this is in this morning’s New York Times under the byline “Wall Street Wonders about Hillary Clinton,” and also on-line as “Hillary Clinton’s Comment About Corporations and Job Creation Raises Wall St.’s Eyebrows,” by Andrew Ross Sorkin, New York Times, October 27, 2014 (here). On the campaign trail in Boston, Ms. Clinton said this:

Don’t let anybody tell you that it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly.

She also said: “I love watching Elizabeth give it to those who deserve to get it.” Sorkin’s reaction:

Mrs. Clinton didn’t explicitly say who deserved to get it, but she appeared to be directing her ire at Ms. Warren’s favorite target, Wall Street banks. Within the world of finance, Mrs. Clinton has long been seen as a friend of Wall Street — or at least not an enemy. She has rarely engaged in the kind of vitriol that has made Senator Warren a hero of the progressive left.

Just about every time I hear an Elizabeth Warren speech, I hear her declare that trickle-down is a myth. It has, in fact, been repeatedly disproved since 1912. So, when people like Sorkin maintain that arguing for correct economics is “vitriol” and makes you an “enemy of Wall Street,” to me that reflects the powerful lock that economic ideology has on American politics and minds, and certainly on the mainstream media.

This is the atmosphere into which Saez and Zucman have published their NBER Working Paper for peer review and NBER approval. I looked for, but did not find, media coverage of the release. Frankly, without a free and open internet on which studies like this can be posted for people like me to find, important truths about our world might never be revealed. One of the main things this study does, in spades, is provide still more (and overwhelmingly conclusive) refutation of the trickle-down theory.

The 20th Century Growth of Wealth Concentration

Here is Figure 9 in the Saez/Zucman Appendix:

one percent 90 percent smallThere has been a common misconception that wealth inequality has not been growing much. However, Saez and Zucman concluded:

On the basis of new, annual, long-run series, we find that wealth inequality has considerably increased at the top over the last three decades. By our estimates, almost all of this increase is due to the rise of the share of wealth owned by the 0.1% richest families, from 7% in 1978 to 22% in 2012, a level comparable to that of the early twentieth century (Figure 1). The top 0.1% . . . includes about 160,000 families with net assets above $20 million in 2012.

The huge reduction in lower 90% wealth share after the crash of 2008 reflects the huge drop of home values, which constitute the largest portion of lower 90% wealth. Since then, there has been rapid growth of top 1% wealth while bottom 90% real average wealth has declined.  

This chart traces the growth of top 1% (not top 0.1%) wealth, but I want to make a few points based on this fractile share. First, compare the growth of top 1% income over the same period (“Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, NBER Working Paper 17616, November 2011, here) :


The income inequality comparison is with the bottom 99%, not the bottom 90%, but the similarity between the two charts is striking: The trends have nearly identical turning and crossover points. This underscores the fact that wealth accumulates fairly quickly from income, as well as from the compounding of existing wealth. Saez and Zucman reached this conclusion:

Rising income inequality does matter a lot for the dynamics of the top 1% wealth share. The share of income earned by families in the top 1% of the wealth distribution has doubled since the late 1970s, to about 16% in recent years. This increase is slightly larger (in relative terms) than the increase in the top 1% wealth share, suggesting that the main driver of the increase in the top 1% wealth share is the upsurge of their income. (p. 31)

There may be a major effort to discredit the Saez/Zucman study, both its approach and results, once it gets more publicity. Their basic approach was to develop savings estimates from “capitalized income” data, instead of relying on wealth survey data, such as the Survey of Consumer Finances. They needed to do this, they explained, because the dependability of survey data breaks down  in the case of very wealthy people, like the top 0.01 percent and the top 0.001%. They compared their results to survey results for SCF data, which showed considerably lower concentrations for the top 0.1%, both baseline and adjusted, since 2002.

From the standpoint of macroeconomic impacts, however, it is the the magnitude of the wealth transfers into the top 1% that is important, not how far up into the top 0.1% the highest concentration extends. My own study of that issue provides additional corroboration of the accuracy of the Seaz/Zucman approach:

my graph 1952-1982 c

My estimation of wealth transfers into the top 1%, shown in this graph (the purple line) which I prepared almost a year ago (see “Inequality and the National Debt.” posted April 9, 2014, here), is based on the application of Edward Wolff’s wealth distribution factors to the Census Bureau’s wealth (net worth) data. The trend line is nearly identical to the Saez/Zucman trend line, and that provides important corroboration for both of our results, which were based on different sources of wealth estimates.

There is an important difference between their estimate of the growth of total top 1% wealth and mine since 1980. My estimate is that top 1% wealth grew from $4 trillion in 1980 to $20 trillion in 2012, which is the last year of available data. I added a conservatively estimated $2-5 trillion of unreported offshore American wealth, based on the following:

There was an estimated $21-32 trillion of global wealth held in offshore accounts in 2012 (Tax Justice Network). U.S. GDP was $16.7 trillion, almost 20% of the Gross World Product (GWP) of $85 trillion, so a reasonable estimate of the amount of off-shore money coming from U.S. depositors would be $4-6 trillion. (“Inequality and the National Debt,” April 9, 2014, here)

I further adjusted my estimate of wealth transfers to the top 1% to account for massive wealth transfers to the to 1% in the first half of 2013. (Aggregate net worth had grown by $3 trillion in the first half of 2013, according to the Census Bureau, and Saez had reported that 95% of income growth was going into the top 1%, so most of the 2013 net worth growth, I reasoned, must have gone to the top 1%.) For comparability to the Saez/Zucman data, that adjustment must be excluded here.

The reported Top 1% net worth in 2012 was  $20 trillion in 2005 dollars (about $21.8 trillion in current dollars), according to Edward Wolff’s wealth distribution figures and the Census Bureau’s net worth data.  A rough estimate in 2010 dollars would be $21 trillion plus $2-5 trillion offshore wealth, resulting in a range of wealth of $23-26 trillion for 2012, or a growth from 1980 of $19-22 trillion.

The Saez/Zucman graph above presented estimates of the average wealth of individual taxpayers, not total wealth levels. To convert the 2012 amounts to total top 1% wealth, I’ll use the 2010 estimate of about 116.7 million households. This generates a figure for top 1% wealth in 2012 of $16.3 trillion; the 1980 population was 226.5 million, so we can estimate (on the assumption that the ratio of households to population remained the same between 1980 and 2010, there were 85 million households in 1980) that the total top 1% wealth implied by the Seaz and Zucman average was $3.4 trillion in 1980. The end result is a rough estimate of about $12.9 trillion increase in top 1% wealth from 1980 to 2012, compared to my estimate of top 1% wealth growth of $19-22 trillion.

Obviously a lot of work needs to be done here. One explanation for the difference may be in the Census Bureau’s use of households, rather than taxpayers, and my understanding is that converting the Census-based estimate to a taxpayer-based estimate would reduce the range to about $15.2-17.6 trillion, but I am uncertain about that. Beyond that, it may be important that Saez and Zucman, as I understand it, only capitalized income from revenue producing assets, and excluded from their definition of wealth a number of categories of assets into which income can be invested. (For example, they excluded wealth from non-profit institutions, “which amount to about 10% of household wealth” – p. 4.) Piketty and Saez, moreover, have acknowledged that their U.S. income database may have significantly understated top incomes. In any event, a thorough review will be needed to explain the discrepancy with the Census Bureau’s published net worth data. It is no easy matter to gather wealth data, and it is possible that all of these numbers are understated. The fact remains that all sources of “earned” income, as well as all money generated by preexisting assets, can be saved and converted into wealth. 

What would ultimately be useful are figures for per capita growth of top 1% wealth over this period. Why is this important? We know a few things for sure about the macroeconomic implications of these wealth increases at the top:

(1) Even the low estimate of a $13 trillion increase in top 1% wealth since 1979 is an unimaginably huge amount, representing more than $41,000 for every man, woman, and child in the entire U.S. population;

(2) That wealth did not just materialize out of thin air. It was generated by reduced incomes and savings in the bottom 99%, and from money created by federal borrowing to compensate for the tax reductions that allowed the top 1% to save so much more of its income; and

(3) the top 1% is continuing to evade its former tax responsibility, so the public debt burden continues to grow, income and wealth continue to concentrate, and the bottom 99% economy continues to decline.

The whole truth about the cost of inequality may well be a bit too frightening for a population used to thinking in ideological terms to absorb. Many will simply turn away and bury their heads in the sand. But we should all grab at least one piece of low-hanging fruit:


The wealth has stayed up, in numbers far greater than Hillary Clinton or Elizabeth Warren or other “progressives” on the “left” have so far even dared to imagine. The minions of the right, when this is all over (and it will end, sooner rather than later) will be known as “radicals,” not “conservatives.”      


The Saez/Zucman paper is far more sophisticated than my brief report reveals. The authors develop “synthetic savings rates” from the income data. Joseph Stiglitz and Robert Reich are among those who have (correctly) argued the Keynesian point that inequality reduces growth because rich people save much more than others, idling money that would be spent if left in the hands of those below them. That point is fully borne out by this study:

These results underscore that the key drivers of the rise in wealth inequality have been the surge in income inequality combined to an increase in saving rate inequality — and in particular the collapse of the saving rate of the bottom 90%. (p. 31)

And they explain further:

First, saving rates tend to rise with wealth. Bottom 90% wealth holders save around 3% of their income on average, the next 9% save about 15% of their income, while the top 1% save about 20-25% of their income. The main exception is the decade 1930-1939: during the Great Depression the top 1% saving rate was negative, because corporations had zero (or even negative) profits yet still paid out dividends, so that they had large negative saving. This decade of negative saving at the top greatly contributed to the fall in top wealth shares during the 1930s (see below). . . . [T]he fact that saving rates sharply rise with wealth implies that long-run top wealth shares will be substantially higher than long-run top income shares (when ranking individuals by wealth).

Second, saving rate inequality has increased in recent decades. The saving rate of bottom 90% families has sharply fallen since the 1970s, while it has remained roughly stable for the top 1%. The bottom panel of Figure 11 zooms in on the annual saving rate of the bottom 90%, which fell from around 5%-10% in the late 1970s and early 1980s to around -5% in the mid-2000s, and bounced back to about 0% after the Great Recession. The long period of negative saving rate for 90% of the population from 1998 to 2008, due to massive increases in debt (in particular mortgages) fueled by an unprecedented rise in housing prices (see e.g. Mian and Su_, 2014), is particularly striking. Even more striking is the fact that while bottom 99% saving fell a lot in the years preceding the Great Recession, top 1% families continued to save at a high rate. (pp. 29-30)

figure 11 savings

Figure 11 shows, in the top panel, how much more the top 1% is saving relative to the next 9% — the former middle class — and the bottom 90%. The alarming bottom panel shows that the bottom 90% has been accumulating debt since 1996. The interest on that debt just enriches the top 1%, exacerbating inequality, and creates debt “bubbles,” which like the housing bubble in 2008 eventually burst. This chart does not show the elimination of bottom bottom 90% negative savings because of an actual rise in saving or income; rather, the debt was wiped out by the loss of assets — their homes. Positive savings will not be established, even in the top 10-1%, with the expanding student debt bubble.


There is much more in this study that I could discuss here, but my purpose was to alert readers to this major development. Readers would do well to go directly to the working paper and reach their own conclusions. Those who do will find much more there than first meets the eye. My perspectives on the mechanisms of inequality growth, and the bases for my conclusion that income and wealth distribution are the primary factors determining prosperity or decline, are set forth in my recent article “The Economics of Inequality,” published in The Torch Magazine, Fall 2014  (here).

Wealth concentration is an inevitable, persistent, long-run phenomenon. John Maynard Keynes once famously said, “In the long run we are all dead.” True enough, but it’s also true that for wealth concentration, the long run is much shorter than Keynes might have imagined, as Saez and Zucman reveal. We have an inequality cycle that has become critical in just over three decades. It will likely take longer for economic research to catch up than there is time available. We must act immediately to enact sufficiently progressive taxation to avoid a major collapse.

It is a hopeful sign that Emmanuel Saez and Gabriel Zucman are working hard to uncover the truth, but the mountain that rises before them is high and steep. A new scientific understanding of how market economies work is badly needed, and much work remains to be done. This new study of wealth inequality in the United States, the first of its kind, is a welcome and important step in the right direction.

The mid-term elections are just a week away. In the worst case scenario, the powers of ideology will take complete control of Congress, and the ultimate disaster will be that much closer at hand. Emmanuel Saez and Gabriel Zucman will keep working hard, I am certain, and we all must do the same.

JMH — October 28, 2014 (ed. October 29, 2014)

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Climate Change and the Economy: Facing Reality

(Canada Geese – Eric Kraft)

I denied climate change for longer than I care to admit. I knew it was happening, sure. But I stayed pretty hazy on the details and only skimmed most news stories. I told myself the science was too complicated and the environmentalists were dealing with it. * * *

A great many of us engage in this kind of denial. We look for a split second and then we look away. Or maybe we do really look, but then we forget. We engage in this odd form of on-again-off-again ecological amnesia for perfectly rational reasons. We deny because we fear that letting in the full reality of this crisis will change everything.

And we are right. If we continue on our current path of allowing emissions to rise year after year, major cities will drown, ancient cultures will be swallowed by the seas; our children will spend much of their lives fleeing and recovering from vicious storms and extreme droughts. Yet we continue all the same.

What is wrong with us? I think the answer is far more simple than many have led us to believe: we have not done the things needed to cut emissions because those things fundamentally conflict with deregulated capitalism, the reigning ideology for the entire period we have struggled to find a way out of this crisis. We are stuck, because the actions that would give us the best chance of averting catastrophe – and benefit the vast majority – are threatening to an elite minority with a stranglehold over our economy, political process and media. — Naomi Klein, “The hypocracy behind the big business climate change battle,” The Guardian,  September 12, 2014 (here).

Naomi Klein is a potent force in economic journalism. In The Shock Doctrine (2007), she provided a detailed account of how predatory “disaster capitalists,” tied to Milton Friedman’s “Chicago School,” have taken advantage of natural disasters like Hurricane Katrina and conflicts like the war in Iraq, and even engineered man-made disasters such as revolution in Chile, for privatization and profit. Now her new book, This Changes Everything: Capitalism vs. the Climate, is justifiably making headlines. In this book, I suspect, Klein chronicles the record of corporate opposition to the fight against global warming.  

She published another article a week after this one (The Guardian, September 20, 2014, here,), on the eve of the climate demonstrations in New York City and around the world, which was head-noted with this:

The truth about our planet is horrifying, but the true leaders aren’t the ones at the UN – they’re in the streets. This is why the People’s Climate March matters.

This is a more direct answer to Klein’s question, “What is wrong with us?”: Many of us who are not in denial about science, or even about economics, still find the reality of climate change hard to confront because the truth about global warming, and the pace of extinctions, is indeed quite terrifying. And the bad news keeps getting worse. In today’s New York Times, the article “Global Rise Reported in 2013 Greenhouse Gas Emissions,” by Justin Gillis, September 21, 201 4 (here) reported:

Global emissions of greenhouse gases jumped 2.3 percent in 2013 to record levels, scientists reported Sunday, in the latest indication that the world remains far off track in its efforts to control global warming.

Over the last decade, Gillis reports, emission growth has averaged 2.5 percent annually. So what this means is that greenhouse gas emissions are more than 130% of the level they were at just a decade ago. This is a perilous trend, certainly, but what does this imply about the amount of danger we face and how quickly we need to take decisive action? According to Secretary of State John Kerry, in today’s opening remarks at NYC Climate Week (U.S. Department of State, September 22, 2014, here) :

When we began this discussion a number of years ago, we were warned by the scientists that you had to keep the greenhouse gas levels about 450 parts per million in order to be able to hold to the 2 degree centigrade possible allowable warming taking place. Then, because of the rate at which it was happening, the scientists revised that estimate and they told us, “No, no, no, you can’t do 450 anymore. It’s got to be 350 or we’re not going to meet the standard.” And I, unfortunately, tell you that today not only are we above 450 parts per million, but we are on track to warm – having already warmed at 1 degree – we’ve got 1 degree left – we’re on track to warm at at least 4 degrees over the course of the next 20, 30, 40 years, and by the century, even more.

So this is pretty real. And what is so disturbing about it is that the worst impacts can be prevented still – there is still time – if we make the right set of choices. It’s within our reach. But it is absolutely imperative that we decide to move and to act now. You don’t have to take my word for it. You don’t have to take Al Gore’s word for it. You don’t have to take the IPCC’s word and the Framework Convention, all those people who are sounding the alarm bells. You can just wake up pretty much any day and listen to Mother Nature, who is screaming at us about it.

As Klein reminds us, there are deniers and, critically, “the actions that would give us the best chance of averting catastrophe – and benefit the vast majority – are threatening to an elite minority with a stranglehold over our economy, political process and media.”  Actually, no one can escape this fate, not even them, if we don’t prevent it. So what does this imply about the economic interests that are in denial? Doesn’t the survival of the planet matter to everyone?

The interests most directly involved, of course, are the giant conglomerates hugely benefiting from the extraction and sale of carbon from the ground (e.g., Exxon/Mobil, BP, Koch Industries). It is utter insanity not to be on the safe side, if we are concerned about the survival of human civilization, but the evidence shows we are no longer on the safe side. There will be significant damage. Only corporations, for which profit is their sole objective, could be in denial about the extent of this threat, intransigent in the face of overwhelming evidence. Corporate charters rule, and corporations will not necessarily act even to save themselves and, although our Supreme Court has declared them to have the constitutional protections and freedoms of actual human “people,” this lack of human judgment and conscience is a critical difference, especially when their executives take on the responsibility of fighting against anything that threatens the corporate interest.

So I would be a bit more precise than Klein: Many of us are simply in denial about the reality of global warming because we cannot face the terror of it. But “we” are not in denial about the corporate deniers or their reasons for blocking corrective action. About them, we are dismayed and angry, and we feel helpless — but we are not in denial.

That distinction is important because there is something else that nearly all of us are actually still in denial about, and that is that unfettered capitalism threatens not only the future of the planet, but independently threatens itself as well. This blog has explained in detail how inequality grows in market economies, and how the inequality reduces income growth, in a vicious cycle of decline that can only end one way. Since 1980, income concentration in the top 1% has increased by over 20%, and the wealth (net worth) of the top 1% has increased by well over $20 trillion. Average annual aggregate income growth has fallen from 4% in the post-WW II prosperity era to about 1.5% over the past decade. 

Naomi Kelin, like the rest of us, is as yet unaware of the full implications of the facts of inequality, and that is because mainstream “neoclassical” economics has been in denial about them for over a century. Some argue that the neoclassical “denial” is actually hypocracy, designed to protect the interests of wealth. Intentional or not, that is exactly what it has done.

It may well be that, as Kerry asserts, we can all see the effects of global warming in our daily lives. My wife and I think so. But there is substantial evidence as well that we are feeling the effects of growing inequality and economic decline, especially as America learns the facts about income and wealth distribution. Today’s news stories are informative on that score as well:

(1) Today. the editorial board of the Albany Times Union, my hometown newspaper, formally rejected “trickle-down” ideology and put the blame for shrinking state and local tax revenues squarely where it belongs, on the lack of a nationwide system of progressive taxation. This is the first time, so far as I am aware, that the TU editorial board has reached this important conclusion. (“Tax Policies Need Review,” the TU Editorial Board, Albany Times Union, September 22, 2014, here);

(2) A new Siena poll was released indicating that a majority of New Yorkers, as did most Americans last year, believe the economy is getting worse, not better. It is becoming clearer that people are retiring later, taking fewer vacations, and generally spending less in order to have enough money to sustain themselves in retirement. (“Stagnant outlook tarnishing the golden years, Siena poll finds,” Albany Times  Union,  September 22, 2014, here).

(3) In  “Those Lazy Jobless” (The New York Times, Op-ed, September 22, 2014, here) Paul Krugman  discussed Speaker of the House John Boehner’s recent claim, in a speech to the American Enterprise Institute, that “laziness” is holding back employment in America:

People, he said, have “this idea” that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.” Holy 47 percent, Batman!

It’s hardly the first time a prominent conservative has said something along these lines. Ever since a financial crisis plunged us into recession it has been a nonstop refrain on the right that the unemployed aren’t trying hard enough, that they are taking it easy thanks to generous unemployment benefits, which are constantly characterized as “paying people not to work.” And the urge to blame the victims of a depressed economy has proved impervious to logic and evidence.

This argument, Krugman continues, overlooks that: “Benefits, especially for the long-term unemployed, have been slashed or eliminated.” While “there are still almost three million Americans who have been out of work for more than six months, the usual maximum duration of unemployment insurance,” and “extended benefits for the long-term unemployed have been eliminated — and in some states the duration of benefits has been slashed even further”: 

Only 26 percent of jobless Americans are receiving any kind of unemployment benefit, the lowest level in many decades. The total value of unemployment benefits is less than 0.25 percent of G.D.P., half what it was in 2003, when the unemployment rate was roughly the same as it is now. It’s not hyperbole to say that America has abandoned its out-of-work citizens.

And that’s just what I found skimming today’s news!  


Denial of climate science has prevented appropriate action to counter impending global climate disaster. But as we fight to preserve a future for humanity on this planet, we should consider that unfettered capitalism, and the unrestrained pursuit of profits, routinely interferes with that future, and is destroying any prospects for it.

All of us, moreover, have been in denial about the true nature of market economies, and misled about how they work, grow and decline, for far too long. Now we need to learn, and remember as well, that market economies are unstable, and that unfettered capitalism contains the seeds of its own destruction and is slowly failing.

Although there will, in all likelihood, still be human life on this planet in 2100, continuing to survive along with a severely reduced number of other animal and plant species, sufficient economic prosperity and the social determination needed to conduct the required battle against climate change may well not make it through another decade. In that eventuality, the world one hundred years from now will be far less hospitable than otherwise.

The appearance of Naomi Klein’s book at this time is important. Whatever else she is right or wrong about, she is correct that climate change raises the stakes, drastically and forever. Our struggle with and within ourselves is much deeper and more critical than we have yet dared to imagine.

JMH – 9/22/2014 (ed. 9/23/2014)





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Labor Day Blues – Mourning the Death of Economics

I had other plans for this morning, but today’s newspapers had stories that hit me hard. I have known I needed to improve upon my own recent efforts to clarify the true nature of our economic situation, and to provide a view of the basics from 5,000 feet. Three articles launched my determination to write about it this morning: 

Labor Suppression

The first was a front page article in the New York Times, by Steven Greenhouse, “More workers are claiming wage theft” (here) . Greenhouse reported on a growing number of lawsuits claiming violations of minimum wage and overtime pay laws, including a major suit brought against a west coast trucking company. My initial reaction: This is not news. Who among us old folks has not, at some point or another, been cheated out of wages or commissions by an unscrupulous employer? On the larger scale of things, we recall John Steinbeck’s The Grapes of Wrath, and Upton Sinclair’s The Jungle, and we know about a broad history of repression of labor.

Wage theft is nothing new, and it goes back no doubt for millennia. For as long as it has existed, I am certain, money has been stolen. But each generation must learn history’s lessons all over again. Today’s darling author is Ayn Rand, whose book Atlas Shrugged preached the glories of unfettered capitalism. It is easy for today’s quasi-prosperous youth to ignore the dark side of human nature, just as today’s economists by and large ignore the dark side of capitalism. But with every month that passes, the dark side is becoming harder to ignore.       

Trickle-down Thinking

The second was a syndicated Op-ed by Charles Krauthammer, appearing in my home-town Albany Times Union, entitled “Lower Corporate Tax Rates Now” (here). Krauthammer argues that minimizing corporate taxation is not unpatriotic, because corporations have an “indisputable fiduciary responsibility” to protect shareholder interests. The appeal to liberals, he says, is economic fairness, so why not eliminate loopholes for a “level playing field”? In his view, the amount of tax revenues doesn’t matter, because “lowering rates stimulates the economy,” and if we had an aggressive president, he’d “address corporate tax reform with a serious revenue-neutral proposal to Congress:”

We might end up with something like the historic bipartisan tax reform of 1986 that helped launch two decades of nearly uninterrupted economic growth.

All over America today, and around the world, people are reading Krauthammer’s words and thinking he’s knowledgeable and authoritative. Actually, his proposal is the worst thing we could do: Lowering rates at the top (corporate profits and top incomes) reduces the progressiveness of taxation and depresses the economy. As I have detailed in recent posts, the “historic bipartisan tax reform of 1986” launched nearly three decades of steadily declining economic growth, coupled with rapidly rising income and wealth inequality. The facts are fully detailed in my recent post “Inequality Suppresses Growth: A Serious Problem?” (here). 

As a visual reminder, here is the Piketty/Saez graph of distributed (1%/99%) income over the last century, together with the top income tax rate:


On this Labor Day, I wonder: how many people have actually seen this graph, and has Krauthammer seen it? Sadly, These realities are not presented in the mainstream newspapers I follow: We only get to read Krauthammer’s trickle-down misconceptions. When the trickle-down anesthesia wears off, the deep pain will not have been cured — it will be worse. Today’s liberals have indeed been thinking mostly in terms of “fairness,” but they should be thinking about the threat to our survival.

The Federal Debt

The third piece that set me to this task was Paul Krugman’s Op-ed “The Medicare Miracle” in The New York Times (here).  Here’s his intro:

The story so far: We’ve all seen projections of giant federal deficits over the next few decades, and there’s a whole industry devoted to issuing dire warnings about the budget and demanding cuts in Socialsecuritymedicareandmedicaid. Policy wonks have long known, however, that there’s no such program, and that health care, rather than retirement, was driving those scary projections.  

Once again, there is no mention of taxation, and there never has been with Krugman, even if we go all the way back to his policy recommendations in his 2012 book End This Depression Now!  In fact, though he frequently maintains there is no evidence that reducing taxation of the wealthy and corporations will increase growth, the Krauthammer version of trickle-down ideology, he inexplicably endorses the claim that increasing their taxes can (and has) reduced growth.

This is untenable: Trickle-down in any formulation is nothing but pure fantasy. The debt itself, along with lower growth and higher inequality, was the direct consequence of the tax reductions shown in the graph, and our greatest growth took place during decades of highly progressive taxation. I do not know how to deal with this huge blind spot in Krugman’s thinking. I do know, however, that his reputation as a leading populist allows the Krauthammers of the world to surf in his wake, posing as equally “liberal” while asking the bottom 99% to hand over to the top 1% the keys to the treasury.   

The View from 5,000 Feet

Here’s an overview of the major relevant points, the factual proof of which can be found on this blog. The first is really a “philosophical” point.

Liberal v. Conservative

Political ideas, I believe, have colored our perceptions of the real world. For example, when I was young, maintaining a balanced budget, living within your means, and paying your debts, was generally considered a “conservative” attitude. In politics, however, conservative has come to mean what is good for wealth. Hence the economics of conservatives consists of the ideologies that argue what is good for wealth is good for everyone. And the traditional “conservative” idea that governments should balance their budgets is downplayed in favor of ever-expanding government debt. The same is true of “left” vs. “right.” These designations are tendentious and meaningless. If there is a useful, scientific dichotomy, it is “wrong” vs. “right.”

The Failure of “Economics”

Economics as a “science” got derailed with the development of market capitalism over 150 years ago. In the late 19th Century, theorists like A. Marshall, A. C. Pigou, V. Pareto, and L. Walras in Europe, and in the United States J.B. Clark and P. Samuelson, gradually generalized theories of individual or firm behavior into explanations of aggregate economic outcomes. This trend involved what logicians call the “fallacy of composition.” Per Wikipedia:

The fallacy of composition arises when one implies that something is true of the whole from the fact that it is true of some part of the whole.

The “trickle-down” myth is an excellent example: Although a successful industry or firm will grow or flourish with more money at its disposal, it is untrue that an entire economy will flourish when more money is put to the disposal of specific firms or industries.

There is a finite money supply — not fixed, but finite. Everything depends on the availability of money. Keynes realized that within the constraints of a given supply of money, allocating relatively more of it to saving and investment meant reducing the amount used for current consumption, and vice-versa. New money is created, here in the U.S., when banks extend credit. If I buy a house, the money loaned to me is new money, and it begins to circulate as soon as I spend it. Economy-wide, this is the process of income growth, and it takes place reflecting a growth in the population.

Keynes argued that there could be too little consumption at times, and that this would effectively reduce future investment and production. As I pointed out, it was a “dynamic” perspective that he traced all the way back to T.R. Malthus. This introduces an element of instability, and central government plays a central role in controlling the business cycle by borrowing for stimulation (fiscal policy) and making credit for expansion easier by controlling the prime interest rate (monetary policy).

Responsibilities to shareholders, as Krauthammer has pointed out, require minimizing corporate tax responsibility.  Business interests, perhaps realizing that government debts would have to be repaid and that tax increases would eventually be required if tax rates were not already high enough to generate government surpluses, floated the fallacious idea that an economy can grow just as fast, perhaps faster, if the wealthy business segment reduced its contribution to society’s common costs. Today, it is this false “trickle-down” perspective that dominates economic thinking.

 Income and Wealth Distribution

We are beginning to understand, but only in recent years, that there is a tight, causal relationship between effective demand (consumption from income), taxation, and income and wealth distribution. Thus, when  taxes were greatly reduced on corporations and the wealthiest households in the 1980s, a cycle of income and wealth inequality began. Government replaced revenues lost because of these tax reductions by borrowing money.

So, while as illustrated in this second Piketty/Saez graph, the lower taxes continued to drive up the top 1% share of income, the federal debt grew to its current level of about $17.6 trillion:

DP8675aGovernment borrowing had increased the money supply, but as we have seen, over the past 30-40 years an ever-increasing proportion of this new money ended up in the top 1% as incomes concentrated at the top. 

The market competition assumed in the neoclassical model to provide an “efficient” allocation of resources has all but disappeared in our modern economy of huge nationwide and international corporations. Thus, the ability of these top corporations to make excess profits has increased enormously. By my estimates, the top 1% has increased its net worth (both reported in U.S. accounts and estimated in off-shore accounts) by $22-25 trillion since 1980, and the wealth transfers and sequestration of this money necessarily both absorbed the expansion from federal borrowing and reduced the savings of the middle and lower classes.    

The Federal Debt Crisis

There apparently was never any expectation or impetus to pay back the federal debt — which has financed so very much increased wealth at the top — at least among those continuously benefiting from this continuing process of wealth concentration. The Crash of 2008 raised the stakes considerably, markedly reducing overall income growth and increasing unemployment. The effect on government financing has become increasingly catastrophic.

The “conservative” position, promoted by the Congressional Budget Office (CBO) and Paul Krugman, is that we’re doing fine: there will be growth in the future, enough to reduce the budget deficits for at least a few years, before they start climbing again. From this morning’s Op-ed, here’s Krugman’s position in a nutshell:

First, our supposed fiscal crisis has been postponed, perhaps indefinitely. The federal government is still running deficits, but they’re way down. True, the red ink is still likely to swell again in a few years, if only because more baby boomers will retire and start collecting benefits; but, these days, projections of federal debt as a percentage of G.D.P. show it creeping up rather than soaring. We’ll probably have to raise more revenue eventually, but the long-term fiscal gap now looks much more manageable than the deficit scolds would have you believe.

What??  Federal deficits are not way down, as shown in this graph from the Wall Street Journal I recently posted. They only slightly decline before rising again significantly to $1 trillion per year, and from now on they will be consistently worse than any year before Crash of 2008: 

federal deficit projections 8-27-14 wsj- cbo

Worse, CBO has projected that interest on the debt will increase, between now and 2024, at about 17 times the rate of all discretionary government expenditures, and nearly 4 times the rate of the mandatory programs Krugman discusses today. As I emphasized, by 2021 the interest on the debt will exceed the entire defense budget! Clearly, government operations are severely limited by this rapidly developing crisis.

Worse still, this “forecast” is considerably over-optimistic, by an uncertain amount: CBO projected GDP (income) to grow at 2.1% annually, even though it has grown only 1.4% annually over the last decade, according to Standard & Poor’s. This lower growth reflects the past effects of growing inequality and wealth concentration, the future growth of which, according to data from Piketty/Saez, is not only continuing but accelerating.

There is no basis in these facts for finding that the fiscal crisis has been stalled “perhaps indefinitely,” or even at all. And Krugman’s hopeful expectation that this exponentially increasing debt is only creeping up relative to GDP requires a liberal application of the trickle-down assumption that growth in income and consumption can take place without the distribution of more money throughout the system.    

Remember, inequality reduces income growth, and interest on the debt is paid to wealthy people, so growing interest automatically concentrates income and wealth, reducing aggregate growth still further. This is a “mini” vicious cycle, operating within the broader inequality-driven cycle of decay.

Paul Krugman ignores these Keynesian dynamics and related implications of inequality growth: It does not seem unlikely that another bubble will burst (the student debt bubble?) before 2020; and there is no apparent  basis for Krugman’s apparent perception that that we can coast beyond 2020 without a significant increase in tax revenues from top incomes and corporations.    

As I argued in my last post, Republican strategies in this election year rely on keeping people convinced of the validity of trickle-down “economics.” It is not really surprising, then, to see the New York Times on Labor Day doubling down on this strategy in its major economics column. So, yes, count me as a “deficit scold.” But I am one of those on the “Left” who want to reduce inequality and increase growth and prosperity, not one of those on the “Right” who want to reduce government.

JMH – 9/1/2014 (ed. 9/2/2014)

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