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)

Posted in Welcome | 3 Comments

The Grizzly Political Cost of Bad Economics

After Thursday night’s debate in Brooklyn between Bernie Sanders and Hillary Clinton, analysis focused mainly on candidate attitude and demeanor. How did each candidate perform? Was Sanders too sarcastic? Was Clinton too evasive? The reality is that strong language, frequent interruptions, and personal attacks are inevitable in the circus atmosphere of presidential debates: With nothing to look at but people standing at microphones, viewers tend to get bored in the absence of combative argumentation. The TV news producers know this. In this debate, personal attacks were invited from the outset when Wolf Blitzer opened by asking Bernie Sanders what he meant when he said Hillary Clinton was not “qualified” to be the president. (Let’s get ready to rummm-bbble!!) Amid a crowd outburst, Sanders emphasized the meaning he had always intended for that poor choice of words – that she has compromised her independence by accepting huge campaign contributions from wealthy donors. There seemed to be audible sighs of disappointment in the muted audience response.

This debate was more informative than some, however, and I have to credit both candidates for doing as well as they could under the circumstances. When it was over, viewers who listened closely had a better sense of differences in many major issue areas, such as foreign policy, immigration, election finance reform, and the minimum wage. I remain extremely concerned, however, that the hard core economic issues, like taxation and banking are so poorly understood – not just by the public in general but also by the media, the economics profession and the candidates themselves – that even if given more time, the candidates would still have left viewers feeling uninformed and perhaps even confused. I sincerely believe that both Democratic candidates have sincere, progressive intentions, and that the opposite is true of all of the Republican presidential hopefuls in this election cycle. The outcome of this election cycle is gravely important, for after 35 unabated years of trickle-down Reaganomics, American prosperity and democracy is rapidly declining, and with it our hopes for an acceptable future.

More and more people are coming to realize the serious implications of the 2016 election. Ironically, for the first time in decades, the New York primary this coming Tuesday will be pivotal for both parties. In today’s Albany Times Union, the paper’s editor Rex Smith has prfesented a near-perfect perspective on the situation in “Curtain rises on New York party shows” (here):

In most years, New York is more a backdrop for political theater than a place where the show gets fully staged. * * * But this election year neither party has gotten its show together as quickly as usual, so the audience here matters, for once. * * *

Polls suggest the frontrunners aren’t likely to be tripped up here Tuesday. A Marist-NBC4 poll released Friday showed Clinton widening her lead over Sanders. And Trump running away from Kasich and Cruz. That means that most of each party’s voters are comfortable with the prospect of autumn’s big nationwide show being a contest between the incremental liberalism of Clinton and the radical authoritarianism of Trump.

If that turns out to be the outcome when Wednesday dawns, it will mean that New York has passed up its chance to truly unsettle American politics, for good or ill. But whatever happens, change is coming.

Wins here would energize the campaigns of Sanders or Cruz, and either as the nominee of his party would unhinge long-standing realities, shifting the fulcrum of American politics to the left or right, with corresponding push-back from the other side.

The notable suggestion here is that New York has an opportunity to “truly unsettle American politics.” I would argue that a Sanders/Trump outcome in New York would reflect a deep seated disturbance that has already taken place and has been growing for a long time: It’s not that change is coming, but that change, driven by economic decline, is well underway. After the Wisconsin primary the New York Times reported that exit polls showed economic issues to be the greatest concern of voters of both parties, and it is the growing seriousness of economic issues that explains the political revolts in both parties.

This post will look beneath the candidate positions and voter concerns on major economic issues to identify the underlying reality at play in each instance. The use of terms like “liberal” versus “conservative,” or “moderate” versus “radical,” often generate conclusions with little more thought, and can generate wildly varying impressions depending upon what they mean to each reader. Thus, I will use he terms “Right” and “Left” as representing relative positions on a continuum of “Lorenz curves” (here), depicting the distribution of income. On the extreme hypothetical “Left,” every household has the same income and wealth. No communist economy ever came close to making such a  high degree of “liberalism” a reality; nor has any communist philosophy, contrary to popular myth, ever aspired to absolute equality. On the extreme “Right,” hypothetically, one household possesses all wealth and everyone in else the society is a serf. That represents no known reality today either, and so far as I know no “authoritarian” rule has ever come close to that reality.

On such a scale, it is generally understood that the American political parties have both shifted toward the Right over the last one-half century. The Republican Party has strenuously opposed all economic policies – such as Social Security, unemployment benefits, Medicare and Medicaid, and Food Stamps – that would effectively move distribution to the Left on the Lorenz Curve. The Democratic Party has also supported corporate welfare (subsidies and tax breaks) that move economic reality to the Right on the Lorenz Curve.

In this election cycle, we are witnessing rank and file Republicans rising up in great numbers to oppose the GOP establishment, supporting Trump because he promises a move to the Left on the Lorenz curve. Although this is fairly obviously a revolt, I offer this view from Chris Collins, a Republican representative from Western New York, from an Op-ed in the April 15 New York Times entitled “The Case for Trump” (here):

Americans are angry. I hear it from the former factory workers who lost their jobs or other countries because of bad trade deals, and veterans who wait months to see a doctor at a Veterans Affairs hospital and the small business owners who are struggling to stay afloat because of the Affordable Care Act’s crippling regulations. The professional politicians they trusted and supported have repeatedly sold out our country in favor of special interests and the status quo. Finally, millions of Americans are saying, “Enough is Enough.”

Although, as Collins observes, Trump endorses the arguments of the Right against Obamacare, and claims there is economic growth and job creation potential (as did Mitt Romney four years ago) in “buying and rebuilding distressed companies,” Collins also points out that Trump acknowledges the need to get our country “back on course and restore the possibility of the American dream for our children and grandchildren.” Trump supporters, he argues, want a chief executive to run the country, not a politician. In that view, of course, achieving growth and prosperity is nothing more than a business management problem. Thus, even as Trump endorses the faulty economics of Republican orthodoxy, it rejects the consequences of that orthodoxy, propelling him inexorably toward the GOP nomination.

Although Collins no doubt fails to see it this way, the rejection of Republican economic orthodoxy amounts to acknowledging a need to move to the Left on the Lorenz Curve. This is almost exactly the same perception of economic reality to which the revolution on the Left is responding in its support for Bernie Sanders. As we shall see, all of the internal inconsistencies and bad economics are on the Republican side, and the progressive economic arguments are correct.

The reason the Democratic Party hasn’t “gotten its show together” yet, as Rex Smith puts it, is that the Sanders supporters do not believe that the “liberal gradualism” of Hillary Clinton will be nearly enough to get us where we need to go. Thus, the Sanders campaign rejects Democratic Party orthodoxy in the same way Trump’s campaign rejects Republican orthodoxy, but again, only the Sanders revolution has the economics right. Clinton’s economics is about one-half correct, but for bad economic reasons her “gradualism” approach remains too far to the Right on the Lorenz Curve. This post intends to make that abundantly clear. Let’s begin with a review of the minimum wage issue.

The Minimum Wage

In the Brooklyn debate, the moderators focused much attention on the minimum wage issue, and reduced it to a relatively trivial dispute over each candidate’s past support for a national $15 hourly minimum wage. The current minimum wage in the United States is $7.25, and only seven states and the District of Columbia have enacted minimum wages in excess of $10.00, some of which, including New York’s and California’s $15 minimum wage are to be gradually implemented and fully effective on 12/31/2018 and 1/1/2022, respectively. (NCSL, 2016 Minimum Wage by State, here).

The current $7.25 minimum wage fails, in most instances,  to meet the current minimum poverty threshold computed by the Census Bureau (here). Before taxes, a full 40-hour workweek over 51 weeks would produce a pretax income of $14,790. That is under the poverty threshold for a two person household, even without any children under 18 to support. A $15 minimum wage would produce $30,600 in a year, barely enough (if it was effective in 2015) to meet the poverty threshold for a family of two parents and three children.

Several points should be discussed here: Because of inflation, $15 will be worth less in 2019 or 2020 than today, and so it will not go as far for financially strapped families than as suggested by these computations.

One argument against raising the minimum wage that has been pressed in the states is the claim that employer cost increases will force them to cut back on employment to maintain profit margins, and could cause small businesses to fold. These claims are insubstantial for several reasons:.That would happen only in instances where business prices are so constrained by competition they could not be raised in response to cost increases, but that is rarely the case in today’s market’s. Moreover, competitors typically face the same state-level minimum wage requirement, and all American  employers face the same national requirement.

There are macroeconomic benefits to raising the minimum wage: At either the state or federal level, an increase in the minimum wage will:

  • Reduce reliance on federal aid programs, like food stamps, freeing up tax dollars for other purposes;
  • Reduce subprime dis-saving and associated bad debt;
  • Increase direct spending on goods and services.

The net effect of reducing inequality is demonstrably to increase income growth. Thus, these three factors together would tend to stimulate the economy even if the increase is otherwise neutral in effect, because it would reduce income inequality. Moreover, employers are receive benefits offsetting the higher wage costs, because:

  • The stimulation of effective demand from wage increases in response to an increase in the minimum wage, through all of the above mechanisms, will provide offsetting revenues for employers;
  • Raising wages to meet a higher minimum wage will reduce the pressure for collective bargaining, and help avoid the potential cost of strikes and other labor relations strife.

At the state level, concerns about employers moving away from the state to avoid the minimum wage are unrealistic. Large employers, like Walmart, Lowes, Target, AT&T or Verizon, cannot move and continue to serve the same customer base, nor would they need to move. Smaller businesses have already been largely marginalized by or consolidated into the big companies, and “middle class” business income has significantly declined. An increase in the federal minimum wage eliminates any possible advantage of moving, and the similarity of most state minimum wages today suggests that little advantage currently exists.

Taking income and wealth distribution in effect, therefore, leads to the conclusion that raising the minimum wage will tend to increase business income, benefiting all marginal and small businesses that are struggling to survive. Increasing the minimum wage at the national level would have the greatest positive effect on growth.

Republicans routinely oppose increases in the minimum wage, because their supply-side ideology prevents recognition of the positive income effects I have identified. Instead, they make strained supply-side arguments. Ted Cruz, for example, a few days ago argued that “I think the minimum wage systematically hurts the most vulnerable” (here). His reasoning was that when you order food on an iPad at a fast food restaurant “you’re seeing the minimum wage.” That’s a flawed argument: Although iPad ordering may increase ordering efficiency, it does not necessarily reduce labor requirements at fast food restaurants. Even if technological enhancements reduce labor requirements, there is no priori reason to assume that investing in the more capital intensive approach will likely reduce total cost of output, and that low end labor cost would be a decisive factor.

Donald Trump is the only Republican  candidate for the presidency in the past two years, so far as I am aware, who has ever supported an increase in the minimum wage. However, back in August of 2015 (here), he argued that “having a low minimum wage is not a bad thing for this county.”  He suggested that decisions to locate or relocate were based on differences among the states in the minimum wage, but he quickly backed away from that insensible claim, arguing:”But we are no longer competing against one state against the other. … It’s the United States against other places. Where the taxes are lower, where the wages are lower, where lots of things are” lower.

With “lots of things” driving business out of this country, it would hardly make sense to try to prevent the exodus by holding wages, down. The median income has fallen ten percent over the last eight years, and real incomes of the bottom 80% have been stagnant since 1980. And as higher paying jobs have relocated out of the country, the American work force has had to adjust to taking the available, lower-paying work. Reflecting this shift of the workforce to lower-paying jobs, there has been a steady shift in the “most common” job in the states from “secretaries” in 1978 to “truck, delivery and tractor drivers” in 2014 (here).

Of course, minimum wage requirements apply to secretaries and truck drivers too; but the concentration of truck drivers is increasing because these are all jobs that cannot be exported. None of this provides a basis for not increasing the minimum wage. The GOP claim that an increase in the minimum wage would hurt low income people and business is baseless.

Even though the minimum wage is important as a backstop against increased poverty, and the drift of more and more households toward the poverty threshold, the problem of low and declining real incomes across the board in America is a much bigger problem. More recently, The Guardian (here) reported that Trump “flip-flops” on wages and the minimum wage issue:

Donald Trump, billionaire Republican presidential frontrunner, has changed his mind about wages: Americans aren’t earning enough. He’s also not keen on Wall Street. The shift has Trump on a collision course with Democrat Bernie Sanders – while oddly agreeing with many of his points.

“Wages in are [sic] country are too low, good jobs are too few, and people have lost faith in our leaders. We need smart and strong leadership now!” Trump tweeted on Monday.

The opinion appeared to reverse what the Republican frontrunner said in November during the fourth Republican debate. Asked if he was sympathetic to the protesters demanding a $15-an-hour minimum wage, Trump said: “I can’t be.”

This report falsely conflates the minimum wage with wage levels generally. There is no inconsistency between Trump’s position that the minimum wage is not too low (which as just discussed is not persuasive) and his recognition that American wages in general are too low. The latter argument pits him, as he responds directly to the demands of his middle-aged white working-class support base, squarely against the GOP establishment by admitting that income inequality is a macroeconomic problem.

Increasing the minimum wage will provide modest economic benefits, and slightly reduce the growing number of former middle class income earners that are drifting toward and over the poverty line. Increasing the minimum wage is a good idea, and we should do it, but that won’t begin to counter the damage to lower income groups caused by the forces of growing inequality.

Breaking Up the Big Banks

A more significant issue addressed in the Brooklyn debate is the question of breaking up the big banks. Hillary Clinton argued that Sanders was remiss in not explaining how he would break up the big banks and leaving it to the banks to work out, but then, curiously, she pointed out that the banks have been charged in the Dodd-Frank legislation with working out their own plans for dissolution in the case of another banking crisis. Sanders correctly argued that developing the details of dissolution must be left to the big banks in the first instance.

Clinton attempted to minimize the danger of a big bank failure, arguing as Krugman did in his recent Op-ed “Sanders Over the Edge” (here) that it was the smaller “shadow” banks, not the big banks, that were “really at the heart of the financial crisis.” Incredibly, Krugman has missed the point: It is the big banks who were bailed out by U.S. taxpayers to prevent economic collapse, and the burden of the bailout fell disproportionately on low income groups. The reporter Matt Taibbi immediately, and correctly, shredded Krugman’s Op-ed in a Rolling Stone article “Why the Banks Should Be Broken Up” (here).

Clinton argued she would definitely act, should the need arise, to prevent a recurrence of that cataclysmic event. Sanders responded that this wait and see approach is inadequate and the banks simply must be broken up now. He reacted sarcastically to Clinton’s argument that she has “called out” the big banks in the past. The media argued that chiding Clinton in this way was inappropriate, but there is a serious point here: The concern of the Sanders campaign about the big donations Clinton is getting from Wall Street corporations, and her unwillingness to release the transcripts of private speeches she has given at Wall Street gatherings (a point she waffled on when Dana Bash pressed her about it) cannot be easily dismissed in connection with enforcing Wall Street reform.

Regardless, Sanders is correct on the issue of breaking up the big banks. Dana Bash pointed out in her question that the Federal Reserve and FDIC had just jointly announced (here) that 5 of the 6 largest banks are still too big to fail (The New York Times, here): Eight years after passage of the Dodd-Frank Wall Street reform legislation, these banks still had not developed adequate “living will” provisions for dissolving in the case of another crisis in a way that would prevent the need for taxpayer bailouts to avoid catastrophe.The danger of another such event is growing with significant debt bubbles inflating that could burst at any time. It is common knowledge that regulators and economists did not see the 2008 crash coming, and it is irresponsible to ignore that risk now, knowing how dangerous it would be to put “living will” provisions to the test in an emergency.

In the debate, Sanders appropriately held firm to his commitment to break up the big banks now, rather than wait for another disaster to take place. The media characterize Sanders’s positions as “radical” but there is nothing radical about avoiding an extremely debilitating crash that would likely hasten the onset of another Great Depression. The “living will” approach, quite frankly, was a stop-gap measure that avoided dealing immediately with the “to big to fail” problem, preserving the high profitability of the  private banking system.

Of course, the GOP will never support tampering with its money-making machine. There is no difference between Trump and Cruz in this regard. Given the general media ignorance of the banking issue, the political advantage falls to the GOP: An unwary public is being misled into ignoring a very dangerous situation.

Inequality and Growth

The same can be said about the popular perspectives on inequality and growth, and the role of taxation in controlling both, that has permeated federal policy and infected the political atmosphere in every election cycle. Because of the long-term dominance of economic thinking by “neoclassical” economics, almost everyone is blinded to the extent of the danger we face from inequality growth. I have written a thorough account of the failure of the economics profession and of the disastrous consequences the “neoclassical synthesis” has had for the U.S. and world economies. Hopefully, it will soon be published, but I have been blogging my thesis here for several years, so I’ll just summarize the basic points here:

  • As income inequality grows, “economic” (i.e., income) growth declines, substantially and, over time, exponentially. This is consistently proved over the entire century of income tax records, and theoretically required by the quantity theory of money;
  • U.S. inequality has grown since 1980 because the wealthiest Americans and their corporations have been allowed to take in too much money (profit and rent) for the value they provide, and have been allowed (through reduced taxation) to keep too much of it as accumulated wealth;
  • This has led to steady decline, and will lead eventually to depression and collapse; after 35 years of the Reagan Revolution we have already suffered one collapse (the Crash of 2008) and we can expect more as our depression worsens.

The officially unrecognized signs of this debilitating process are everywhere, but it has advanced to the point where economic factors have caused a political revolution that is ripping apart both political party establishments. Consider the following evidence which is becoming increasingly apparent over the last two years:

  • Income growth has been gradually declining for several decades, as inequality has grown, and recently aggregate growth has fallen to one percent or less. Because aggregate growth includes the high income growth going to the top, lower incomes are necessarily declining;
  • The median income has fallen 10% since the Crash of 2008; and the number of households living in poverty or near poverty is increasing rapidly as below median incomes decline ever faster;
  • Interests rates have been near zero for several years, an unprecedented failure of the monetary system which means the demand for capital remains very low;
  • The low demand for capital is explained by the gradual shrinking of the economy. According to EPI estimates, between 1983 and 2009, 40.9% of all wealth gains went to the top 1%, and 81.7% of all wealth gains went to the top 5%. Meanwhile, the bottom 60% lost 7.5% of its wealth. Growth in the level of economic activity therefore continues to decline;
  • Meanwhile, wealth is accumulating at the top. Corporations increasingly buy back outstanding shares of their stock, reducing their payout obligations, a clear sign of economic contraction, and as the demand for investment funds in the U.S. shrinks, several trillions of dollars have been removed to offshore accounts.

Clearly, the GOP narrative that income growth is merely a business management problem is false: The “supply-side” neoclassical economics that sustains that narrative fails to address the need for effective consumer demand to promote growth.


Ever since the Reagan Revolution began, its cornerstone policy has been reducing the income tax burden on the wealthy and their corporations. This point, thoroughly addressed in previous posts, will only to be highlighted here: The top income tax rate on ordinary income was reduced from 71% to 35% since 1980, and the top marginal capital gains tax rate has been kept considerably lower. The justification for this systematic tax avoidance has been the supply-side claim that lower taxation of the wealthy encourages increased investment and job creation, and promotes income growth. That “trickle-down” argument is just the opposite of the truth, as is finally becoming abundantly clear. It remains the official economic policy of Republican orthodoxy, nonetheless, and every GOP presidential candidate this year has promoted more tax decreases for the rich and more tax relief for  corporations, even as they profess a desire to promote growth. On February 22, 2016, Jackie Calmes reported in the New York Times (here):

The tax plans of the Republican presidential candidates would cut federal revenues as much as $12 trillion over a decade, a post-World War II record eclipsing the deep tax cuts of George W. Bush, Ronald Reagan and John F. Kennedy. And they would come just as America faces the costs of its aging baby-boom generation.

The combination of the tax cuts’ size and timing has many tax and budget policy analysts questioning their viability. The Republican rivals routinely denounce the current $14 trillion debt, but none has said how he would offset the revenues lost to his tax cuts, beyond unspecified cuts to domestic programs and repeals of some existing tax breaks.

Each candidate has said his tax cuts are needed to promote work, saving, investment and faster economic growth.

“I believe by cutting taxes and simplifying the tax code, we will grow our economy and create more taxpayers rather than more taxes,” Senator Marco Rubio of Florida has said.

Tax policy groups agree generally, but only if the revenue losses are offset by budget savings that avoid piling up more debt that would be counterproductive to spurring the economy.

Tax policy groups generally agree, we are told, with trickle-down economics. Thus, the prevalent mainstream belief is that trickle-down works in the long run, so long as we avoid too much additional short-run debt accumulation by cutting government spending. This caveat is the so-called “austerity doctrine” which has proved unworkable at home and abroad for decades. Both ideas are dead wrong: Income and wealth do not trickle back down, but accumulate and concentrate at the top, as just discussed.

Both Hillary Clinton and Bernie Sanders advocate higher taxes for the rich, but the Clinton “liberal gradualism” as described by Rex Smith (and that was just today endorsed by his newspaper, the Albany Times Union, here) ignores the continuing drag on economic growth and concentration of income and wealth at the top resulting from the tax decreases at the top that created this problem to begin with. That’s a frame of mind I call “partial trickle-down.”

            Paul Krugman’s “Partial Trickle-down”

            This remaining difference between Sanders an Clinton will prove to be the most significant of all, and it can be traced back to Paul Krugman’s belief that inequality is just a “political” problem. As I have pointed out countless times, he fails to recognize the concentration of income at the top and the associated transfers of wealth. This perspective has led him, somehow, to recognize that reducing taxes on top incomes will not stimulate growth but to deny or overlook the fact that those tax cuts actually reduced growth. From that erroneous perspective, it is easy to deny that restoring the previous levels of taxation would restore the previous level of growth and, more to the point, that doing so is needed to restore that growth. In short, Krugman misses the entire mechanism of income redistribution associated with income inequality growth.

This is no trivial problem – it is a problem with major dimensions. Not only can we not rely on increasing the minimum wage to provide any significant stimulus, but nothing else is available to stop the huge decline. Fiscal and monetary policy are no longer available to influence growth. Fiscal policy only works if you eventually pay back the loans. However, we now have over $18 trillion of national debt that can never be paid off under the current tax structure, and the top 1% has gained roughly $25 trillion of additional wealth since 1980, about one-half of that concentrated in the top 0.1% of wealth holders. Inequality is our most serious economic problem, and to prevent the accelerating slide toward a collapse into another Great Depression there is no alternative to greatly increasing the taxation at the top.

As I have pointed out, the Congressional Budget Office has projected that by 2021 the interest on the national debt will exceed the entire defense budget, the nation’s largest discretionary budget item, and that projection was made without taking into account the drag on growth created by the ever-growing inequality. Our government is effectively bankrupt, because it cannot repay its existing debt, and it must borrow to pay the interest on that debt. It is not at all clear that the dollar can be sustained long enough to get through the first term of the next presidency.

It is their perception of the gravity of the situation, and the extensive evidence of decline, that led Oregon Senator Jeff Merkley to become the first U.S. Senator to announce his support for Bernie Sanders on April 13 (here), and Alison McLean Lane, an Albany County Legislator, to support Sanders in a letter to the Times Union published April 14 (here). In support of their endorsements, both offered their observations of the continuing long-term decline they have experienced. Lane offered this explanation:

The school district my 4-year-old twins will attend this fall has a student body of which 11 percent are homeless and 36 percent live in poverty. If I sent my children today to the same university I attended, it would bankrupt us.

Here are three more alarming statistics that explain why this epidemic is in this legislative district: In 1980, 11.7 percent of the entire income of New York went to the top 1 percent; in 2015, that number soared to 30.2 percent; yet, America’s suburban poverty rate is 11.8 percent, the highest since 1967. Our entire state should be screaming from the rafters over statistics like this.

We live in the world’s wealthiest nation, yet our country has one of the highest poverty rates of any developed nation. We have homeless veterans and children, but our nation spent $2 billion a day on two wars. We could have housed, fed and clothed these vulnerable populations.

Merkley offered a similar assessment:

I grew up in working-class Oregon. On a single income, my parents could buy a home, take a vacation and help pay for college. My father worked with his hands as a millwright and built a middle-class life for us.

My parents believed in education and they believed in the United States. When I was young, my father took me to the grade school and told me that if I went through those doors, and worked hard, I could do just about anything because we lived in America. My dad was right.

Years later, my family and I still live in the same working-class community I grew up in. But America has gone off track, and the outlook for the kids growing up there is a lot gloomier today than 40 years ago.

Many middle-class Americans are working longer for less income than decades ago, even while big-ticket expenses like housing, health care and college have relentlessly pushed higher.

I have discussed in earlier posts how neoclassical economics, especially the “neoclassical synthesis” promoted by Paul Samuelson (Paul Krugman’s PhD faculty adviser) over the last 60 years, has perverted the thinking of mainstream economists. That perverted thinking insists that our economy will continue to grow, and to thrive “in the long run” despite continuous evidence that the alleged pendulum forces (a la Alfred Marshall, circa 1880) and the forces of the “rocking horse” (a la Paul Samuelson, circa 1953) are just fantasies. Now, at last, enough evidence has accumulated for people to seriously question the very foundations of modern mainstream economics.

That is what I have done. No one will take my word for the advanced degree of the neoclassical perversion, however, so I have written it up in a 500-page book that I am seeking to publish as soon as possible. This election cycle makes this summary of my findings essential.


In the general election, it will be crucial to elect the democratic presidential candidate, and to restore a democratic majority to both houses of Congress. If Hillary Clinton is the nominee, Bernie Sanders (as his wife Jane has already announced, in the April 13 interview with Jane Sanders entitled “The need for party unity,” here) will vote for her, and we can expect Sanders to do everything in his power to dissuade his supporters from defecting, and to encourage them to vote for Clinton, and for Democrats across the board. This, by the way, was a revealing caution from Jane Sanders, given that her husband is still in the race and has won seven of the last eight primary caucuses.

If Sanders does not get the nomination, we must fervently hope that Clinton wins and that what she has learned in this election cycle has informed her natural progressive tendencies sufficiently that she will be able to avoid the major catastrophe that looms ahead in the not-too-distant future. Basic elements of the Sanders economic plan should be adopted for the Democratic Party’s platform in the fall.

JMH – 4/17/2016

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Economic Decline and the Failure of Politics in 2016

I’m over seventy years old, and in my view the 2016 election cycle is easily the strangest, and probably the most historically significant, of my lifetime.  The U.S and world economic and political situation is more dangerous today than it has been at any time since World War II. Economic issues always control elections, but economic issues are so important this year that they are causing radical changes in political orthodoxy. Both of the major political parties in this primary cycle face revolution as voters mount a major revolt against their party establishment’s perspectives and positions.

In the GOP, great numbers of voters are turning to Donald Trump, and many Democratic voters are turning to Bernie Sanders. This year, the New York State primaries are pivotal for both parties, and both of these candidates were campaigning yesterday (April 11) in my home area of Albany, New York. The political firestorm that raced through my home town reaffirmed my impression of the disintegration of “politics as usual” in this campaign cycle.

The new political revolution is bottomed on the failure of the economy. Lurking in the background, however, is the failure of the economics profession, both political parties, the media, and the voting population to fully grasp the danger posed by growing inequality. This has given the contentiousness in the debates of both parties a bizarre character. The Democratic race has been especially unpredictable, because the two candidates agree on the goals but convey a very different sense  of urgency about meeting them.

Despite its overwhelming importance in our lives, everyone avoids the topic of “economics” like the plague. The reason economics is regarded as such a “dismal” topic is that almost no one understands how the economy actually works.  This is not a new problem: In every election cycle, enormous public ignorance and confusion have invited an endless parade of distortions, false claims and misrepresentations by politicians. In an atmosphere in which exaggeration and falsehood are expected, even the most objective media analysts have steered away from directly addressing the factual substance of economic issues: In the heart of any campaign season, it is so much easier for broadcast media chit-chat to focus on voter preferences and delegate counts, and the candidates’ positions on issues are routinely reduced to slogans and sound bites.

This campaign cycle has been no exception, but the result in 2016 has been extremely surreal. The Republican Party is virtually dissolving before our eyes, and the Democratic party is also in a major crisis. The current state of political confusion, and the class warfare that perpetuates it, has resulted in what is shaping up to be the ugliest presidential campaign season since WW II. The reason, I submit, is the gradual decline of our economy over many years and the rebellion, at long last, of the victimized middle- and lower-class income earners against the economic establishment.

The GOP and the Trump Conundrum

The primaries have narrowed the race for the Republican presidential nomination down to a choice between two candidates, Donald Trump and Ted Cruz. The field has narrowed substantially in the last two months, and Cruz, who eked out a victory in the Iowa caucus on February 1 after Trump boycotted the Fox News debate before the caucus, is now the only viable Trump opponent still standing. Cruz easily won the Wisconsin primary on April 5 when Trump’s popularity began to fade in light of Mitt Romney’s blistering repudiation in early March (here), and the outrage that followed Trump’s interview with MSNBC’s Chris Matthews on the eve of the primary, where he argued for punishment of women who get illegal abortions.Trump has also aroused concern about his fitness for the presidency, for reasons like his cavalier support for a nuclear arms race among smaller countries and his argument for the potential offensive use of nuclear weapons.

Both Ted Cruz and Donald Trump passed through New York’s Capital District in recent days, as did Ohio Governor John Kasich, who is staying in the race in case of a deadlocked convention. The Albany Times Union extensively reported yesterday’s events, including the “3 cases for change” presented by Kasich, Sanders, and Trump. The newspaper’s “Election 2016 pages reported attendance of 500 at the Kasich rally in Troy, 4,000 at the Sanders rally in Albany, and 15,000 at the Trump rally in Albany. Whatever his prospects for winning the Republican nomination may actually be, Donald Trump is still drawing large crowds to his rallies.  

Ted Cruz passed through the area about a week ago, holding a rally in Scotia (here). Cruz has never been near the top of the GOP preferred list of presidential candidates. He is an extremely right-wing “tea party” libertarian, highly unpopular within his own party, who would think nothing of shutting down the government, come hell or high water. He is a religious fanatic who supports government by biblical law (here). From his perspective, federal taxes on the wealthy and corporations cannot be too low, and his stump speech in Scotia reiterated his proposal for a regressive flat tax. Regardless, some Republican voters see Cruz as the only viable alternative at this point. An attendee at the Scotia rally from Clifton Park, Rich Rivetz, was quoted as saying: “Trump is psychotic and Kasich doesn’t have a chance, so there you have it.”

Donald Trump’s popularity in this primary season, despite his many drawbacks, has an anti-establishment  economic explanation: As the GOP establishment disintegrates, the middle-aged, working-class, white male segment of its base, the locus of the party’s racists, malcontents, and misogynists, has gravitated to Trump and, until recently, Trump’s supporters have been impervious to his lack of political maturity. These voters are hearing from Trump what they have been waiting for someone to say, namely, that the GOP establishment has sold them out, pandering for their support while reneging on its promise to create jobs and raise incomes. They are hurting economically, and as their incomes and standard of living steadily decline they are, at long last, starting to see themselves as victims of the corporate oligarchy that runs the GOP and the country. Consider this succinct summary by Michael Maiello in “The Republican Civil War Has Begun,” Rolling Stone, March 25, 2016 (here):

The conservative intelligentsia – the collection of free traders, tax cutters and government shrinkers who have dictated the Republican Party’s agenda since the Eighties – have had it with the losers of globalization who make up a significant portion of the party’s base: the white males of modest education who have been most full-throated in their support of Donald Trump.

In the mainstream organs like the op-ed pages of The New York Times or the editorials of The Wall Street Journal, right-wing columnists might support using the Republican convention process to deny Trump the nomination, but they discuss it in language that offers some respect to the legitimate anger of Trump’s supporters. Last week, David Brooks tried to play nice (here), writing, “Well, some respect is in order. Trump voters are a coalition of the dispossessed. They have suffered lost jobs, lost wages, lost dreams.”

Brooks’ niceties will prove too weak a dam to hold back the anger that conservative intellectuals indulge with every Trump victory. The Trump supporters might register Republican and have been counted on to vote the party’s way in past elections (flirting for a while with Pat Buchanan in 1992 and 1996, then voting for George H.W. Bush and Robert Dole against the hated Bill Clinton in the general) but they are, from the point of view of right-leaning think tanks, pretty lousy conservatives.

Trump’s appeal, remarkably, seems to extend across the entire base of Republican and Independent voters, despite his obvious shortcomings: Economic adversity is not limited to middle-aged white male voters, and Trump is likely gaining broad support for his attack on the undemocratic nature of the primary delegate selection process. The Democratic Party faces the same problem, of course: In American politics, there never has been a guarantee that a party’s most popular candidate will get the party’s nomination.

The GOP Strategy for Success

But there is a more fundamental explanation for Trump’s popularity. The GOP is a minority party: Gallup figures released in January 2015 (here) revealed that in 2014 a record 43% of voters identified as Independent, with 30% identifying as Democrat and 26% as Republican.Because it represents and promotes the interests of only about 1% of voters, it is remarkable that the GOP has been able to control the U.S. Congress as much as it has over the years.

In the days of monarchies, when political power was inherited, economic inequality could be imposed by force. In a “democracy,” however, the masses must be swindled into supporting policies against their own interests. The GOP has accomplished that feat with a combination of strategies, including deflection away from economic issues, and catering to all forms of social and religious prejudice and discontent, such as racial bigotry and opposition to women’s rights. On issues where facts are important but reality gets in the way, such as climate change, the GOP has been known for its lies and hypocrisy.Since the Reagan Administration, there has been a persistent GOP call for lower taxes on the rich and their corporations. Republicans have used a perversion of economics known as “voodoo economics” – a “trickle-down” fantasy supporting ever more tax reductions at the top. Every Republican candidate for the presidency this year supports lower taxes for the rich and for corporations.

Controlling U.S. taxation has not been enough to satisfy the ultra-rich, however. In the last few years substantial evidence has emerged of tax avoidance on a massive scale, totaling many trillions of dollars, as corporations have moved their legal residences out of the country, and massive sums are secretly placed in off-shore accounts (See, e.g., “Don’t Blame Panama. Tax Evasion is a Global Problem,” by Juan Carlos Varela, President of Panama, here).

The help of mainstream economics has been enlisted to persuade people that the wealthy can get wealthier without limit, with no harm to anyone else. Only the widespread aversion to the “dismal science” has permitted this fairly obvious falsehood to go unrecognized. But even ordinary people with no background in economics are beginning to see clearly that the oligarchy has gone too far. Inequality growth is way out of control, and people are enduring its effects. The wonder is not that the GOP is losing the support of the base it has betrayed, but that it has taken this long for the political revolution to take place.

The Democratic Dilemma

A Salada tea bag I have seen several times, the latest being on a work break today, says that: “Among economists, the real world is often a special case.” That puts it mildly: We’ve been deeply misled, for more than 120 years, by an elitist ideology called “neoclassical” economics, an ideology in which assumptions and presumptions are routinely substituted for real world evidence. I’ve been researching, writing, and blogging about this problem, and about the enormous threat posed by income inequality, for more than four years. Our popular attachment to bad ideology has been so profound that, I fear, that realistic, fact-based perspectives on how the economy really works will not coalesce rapidly enough to avoid the collapse of the U.S. economy into an even deeper depression. The forces that create inequality are still at work, unabated, and the process is accelerating. The collapse of our political orthodoxy is a symptom of that process.

With the GOP disintegrating, the Democratic Party ought to have a reasonable opportunity not only to win the Presidency in November, but also to regain control of both houses of Congress. Then the United States might be able to moonwalk back from the brink of economic disaster. However, there have been recent signs of discord and confusion within the Democratic party as well.

It is fair to say that before the primaries began, Hillary Clinton expected to win the Democratic nomination fairly easily, and that the enormous success of the Sanders campaign has been as unexpected as the success of the Trump campaign. Sanders, who lost narrowly in the Iowa caucuses, has won most of the primaries since Super Tuesday. He won in Michigan on March 8, and he won five straight primaries before winning by a large margin in Wisconsin on April 5 (here). A breakdown of the voting in Wisconsin reported by the New York Times helps understand why:

  • The Wisconsin voters cited the economy as their top concern
  • On the issues, voters significantly favored Sanders who were most concerned about income inequality (66%/34%), the economy and jobs (54%/46%), and health care (53%/47%), as did those who were concerned about the effect of international trade on U.S. jobs (54%/45%). Voters who were most afraid about terrorist attacks leaned toward Clinton (56%/43%), as did those who felt the U.S. role in world affairs should increase (55%/44%). Those who want the U.S. to be less active in world affairs favored Sanders (74%/25%).
  • Age was a huge factor. The youngest reported age group, 18-29, overwhelmingly supported Sanders (81%/18%), as did the 30-44 age group (66%/33%), while the 45-64 age group leaned toward Clinton (54%/46%) and the 65 and older group overwhelmingly supported Clinton (63%/37%).
  • Women favored Clinton 50%/49%, but men favored Sanders 63%/36%.

Clinton was stung by the extent of her loss to Sanders in Wisconsin, and with a new sense of desperation, her campaign developed a plan to win the primary contest in her adoptive home state of New York which was reported by CNN on April 6 in this report: “Clinton plan: Defeat Sanders, then unify Democratic party.” According to the report:

The Clinton campaign has been watching these Wisconsin results come in, and the delegate race of course is tight there, but the reality is they’re running out of patience. So they’re going to begin deploying a new strategy, it’s going to be called disqualify him, defeat him and then they can unify the party later. Disqualify him, defeat him, and unify the party later.

            The Gun Control Issue

As reported in the Albany Times Union  on April 7, The AP reported on the initial thrust of this strategy:

Armed with a blistering tabloid cover, Hillary Clinton is pitting Bernie Sanders against the parents of children murdered in Sandy Hook, part of an effort to punch her way into the critical New York primary.

The inflammatory rhetoric underscores the importance of the April 19 New York contest to her campaign and the mounting frustration of Clinton and her husband, former President Bill Clinton, with the lingering primary battle.

That irritation spilled out into the public arena Wednesday, when Clinton released a flurry of attacks on Sanders, questioning his truthfulness, preparedness for the presidency and loyalty to Democratic party principles.

The Sandy Hook massacre was used in an attempt to characterize Sanders as opposed to gun control and unsympathetic to victims of gun violence. The AP article continued:

During an appearance on MSNBC Wednesday morning, Clinton pointed to a New York Daily News cover criticizing Sanders for saying he did not think victims of a gun crime should be able to sue the manufacturer. His comments came when the newspaper’s editorial board asked him about a wrongful death lawsuit against a rifle maker over the 2012 massacre at Sandy Hook Elementary School in Newtown, Conn. “That he would place gun manufacturers’ rights and immunity from liability against the parents of the children killed at Sandy Hook is just unimaginable to me,” said Clinton, who has long sought to highlight the candidates’ differences on guns.

In the interview with the Daily News editorial board, Sanders said he did not think gun crime victims should be able to sue gun manufacturers. But he did say people should be able to sue dealers and manufacturers who sell when they know “guns are going to the hands of wrong people.” He also said he supported a ban on assault weapons.

This article correctly reported Sanders’ reaction. In my opinion, this was a cheap shot by the Daily News on behalf of the Clinton campaign. I watched the interview, and the Daily News editorial staff was clearly gunning for Sanders, looking for a sound bite that could be used to suggest that Sanders was opposed to gun control.  In response to a question about his views on gun control, Sanders replied that his gun control agenda is the same as Obama’s: He supports efforts to strengthen and expand background checks, to do away with the gun show loophole, and to eliminate the ability to buy a gun legally and sell it to someone who is a criminal.

Sanders was then asked about the Connecticut lawsuit in which the families of the victims of the Sandy Hook massacre are attempting to sue the manufacturer of the assault rifle used in the massacre. After Sanders clarified that the precise question he was asked was whether he believes victims of gun violence should “be able to sue” gun manufacturers, he said “No, I do not.” At that point the interviewer, having obtained his desired sound bite, tried to move on: “I know we’re short on time – two quick questions. Your website talks about…” But Sanders continued, finishing his answer: “But I do believe that gun manufacturers and gun dealers should be able to be sued when they should know that guns are going into the hands of the wrong people. So somebody walks in and says, ‘I’d like ten thousand rounds of ammunition, you know, there might be grounds for that suit. But if you sell me a legal product — what you’re really saying…” The interviewer interrupted at that point, asking whether the AR-15 assault rifle “should never have been in the hands of the public to begin with.” Sanders answered unequivocally, “I do not support the sale of assault weapons in the United States.”

Sander’s record on gun control has been thoroughly vetted, as the Daily News editors must have known. In the CNN Democratic Primary debate in Las Vegas on October 13, 2015, for example, Sanders said: “Bernie Sanders has a D-minus voting rating from the NRA. Back in 1988, when I first ran for Congress, I supported a ban on assault weapons,” and he lost that election.

For me, this episode with irresponsible journalism by the Daily News editorial board marked a low point in the Democratic primaries. Shortly thereafter, Sanders made his now famous statement that Hillary Clinton is not “qualified” to be president. That unfortunate comment was made with reference to the big donations her PAC receives from corporate donors, but nonetheless, it was a very poor choice of words. Sanders has since retracted that statement.

Although there are signs in the last few days that the solidarity the Democratic Party needs to win in November may be repairing, the New York primary is crucial to both candidates, and we’ll have to see how the Clinton/Sanders debate goes Friday evening in Brooklyn.

The Crucial Economic Issues

Paul Krugman, Hillary Clinton’s economic adviser, has dangerously contributed to this divisiveness, hawking for the Clinton campaign.  In “Sanders Over the Edge,” New York Times, April 8, 2016 (here) Krugman harshly condemned Sanders:

On many major issues — including the signature issues of his campaign, especially financial reform — he seemed to go for easy slogans over hard thinking. And his political theory of change, his waving away of limits, seemed utterly unrealistic.

In my last post on this blog, I pointed out how Krugman teamed and other mainstream economists in the Democratic Party establishment to improperly attribute an unrealistic Congressional Budget Office economic growth projection to Gerald Friedman, the Sanders campaign’s economic adviser. The argument was that Sanders is making promises that cannot be kept, and that the Clinton plan – which is essentially to move slowly on economic reforms – is the sensible approach to take. That was an erroneous critique, however, and it seriously misrepresented the Sanders economic report. Krugman appears to be alluding to that critique here with his argument that Sanders is “waving away” limits.

In this article, Krugman lashes out at the proposal to break up the big banks with a dubious argument that the crisis in the Crash of 2008 centered on “shadow banks” that “weren’t necessarily that big.” Krugman says that “pounding the table about big banks misses the point.” Frankly, Krugman has missed the point about the growth of income inequality all along, claiming in his 2012 book that inequality is just a “political” problem. And it was not the smaller shadow banks that had to be bailed out by taxpayers after the Crash of 2008. The wealthy investment class recovered their losses after the Crash, but lower-income classes, which lost an estimated $7 trillion, have not recovered. The cost to taxpayers is a major point that Krugman is missing, and it is a big reason for the success so far of the Sanders and Trump campaigns against the respective party establishments.

The Krugman piece goes downhill from there. He argues:

[T]he way Mr. Sanders is now campaigning raises serious character and values issues. It’s one thing for the Sanders campaign to point to Hillary Clinton’s Wall Street connections, which are real, although the question should be whether they have distorted her positions, a case the campaign has never even tried to make.

Seriously? It is up to Hillary Clinton to demonstrate that her Wall Street connections have not conflicted her abilities and judgments as president. Big donors always expect to have influence, whether they are giving to presidential or Congressional campaigns. There is no mystery about that.

Krugman ends his rant with an irresponsible suggestion that Bernie Sanders might “join the ‘Bernie or bust’ crowd, walking away and possibly helping put Donald Trump or Ted Cruz in the White House.” What “Bernie or bust” crowd? This is a figment of Krugman’s imagination, and a petulant insult to Sanders and his supporters, and it seems to be a part of the campaign to “disqualify” Sanders and unify the party later: No one who wants economic improvement would ever vote for a Republican and for more trickle-down economic policy.

Hillary Clinton does understand that trickle-down doesn’t work, but she and her economic adviser need to know a lot more about the economics of inequality. Wealth is transferring to the top by the hundreds of billions each of dollars year, and well over $20 trillion has transferred to the top since 1980. This continuing inequality growth trend means that any benefit that might be achieved by raising the minimum wage will be swamped by the growth wealth and income losses from increased inequality.

I realize that this distributional perspective on economics is still relatively new, but Paul Krugman has had plenty of time to learn about the effects of inequality. When he was interviewed by the BBC three years ago, he refused to offer any explanation for his disagreement with Joseph Stiglitz on the issue. In my view, a true progressive would have shown more sympathy with the victims of inequality all along.

Attacking inequality is what the Sanders campaign is all about, and as I argued recently in a short letter to the editor of the Albany Times Union, (here) that should be the salient issue in this campaign. Hillary Clinton, should she win the nomination and go on to be President of the United States, will discover the truth about inequality economics soon enough, after a great deal more economic damage has been done. It is Paul Krugman, not Bernie Sanders, who is behaving irresponsibly.

JMH – 4/13/2016




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Phony Progressives? The Fraudulent Attack on the Sanders Economic Plan

In my last post I argued that Hillary Clinton, under the acknowledged influence of Paul Krugman, wrongly attacks the Sanders campaign on the ground that a hard line stand against inequality is bad “political strategy.” That’s Krugman the politician talking, and he’s serving up bad economics. Inequality is a fundamental and debilitating economic problem that must be addressed by reforming capitalism, not by gradually pursuing a political solution. I have been dismayed by Krugman’s seeming inability to understand even the simple, basic impacts of inequality growth.

Now I’m getting apoplectic: In Friday’s Op-ed (“Varieties of Voodoo,” New York Times, February 19, 2016, here), Krugman attacked the projections of the Sanders economic team, headed by Gerald Friedman, claiming they are making unrealistic projections of the income growth under the Sanders economic plan. Krugman implies that Sanders and Friedman are, somehow, lost in an “economic fantasy” comparable to the GOP’s trickle-down fantasy:

America’s two big political parties are very different from each other, and one difference involves the willingness to indulge economic fantasies.

Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much. * * *

But is all that about to change?

On Wednesday four former Democratic chairmen and chairwomen of the president’s Council of Economic Advisers — three who served under Barack Obama, one who served under Bill Clinton — released a stinging open letter to Bernie Sanders and Gerald Friedman, a University of Massachusetts professor who has been a major source of the Sanders campaign’s numbers. The economists called out the campaign for citing “extreme claims” by Mr. Friedman that “exceed even the most grandiose predictions by Republicans” and could “undermine the credibility of the progressive economic agenda.”

The open letter (“An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman,” February 17, 2016, signed by Alan Krueger, Austan Goolsbee, Christina Romer, and Laura D’Andrea Tyson, here),  did indeed contain a stinging rebuke of the Sanders campaign and Gerald Friedman:

We are former Chairs of the Council of Economic Advisors for President Barack Obama and Bill Clinton. For many years, we have worked to make the Democratic Party the party of evidence-based economic policy. When Republicans have proposed large tax cuts for the wealthy and asserted that those tax cuts would pay for themselves, for example, we have shown that the economic facts do not support these fantastical claims. * * *

We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan – claims that cannot be supported by the economic evidence. Friedman asserts that your plan will have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax proposals. 

These four economists have literally taken Friedman and Sanders to the woodshed, and two days later Paul Krugman – Hillary Clinton’s adviser – made sure the whole world knew about it! I’m going to be adamant about this: This is a false, politically motivated attack, based on a superficial reading of Friedman‘s January 28 report (“What would Sanders do? Estimating the economic impact of Sanders programs,” here). The letter and Krugman’s immediate endorsement of it were serious lapses of political judgment, indiscretions that can only harm the progressive objectives Hillary Clinton insists she joins Bernie Sanders in pursuing. I see four major problems with this attack:

First, it is obviously politically motivated. A challenge in a primary campaign to the credibility of economic forecasts of a fellow progressive is bizarre, and especially one coming from Paul Krugman, who has publicly admitted that the economics profession’s “dirty secret” is its inability to forecast growth. Krugman’s longstanding conviction has been that inequality is just a “political” problem lacking economic consequences, and these four former CEA chairs appear to agree, for they launch a broadside attack on an obvious attempt to relieve those consequences. If they were really concerned about the impacts of inequality, one would think, all five of them would be more cautious in critiquing proposals to counter those effects.

Second, in this letter the former CEA chairs make no distinction between “grandiose predictions” of the trickle-down effects of income tax cuts on top incomes and predictions of income growth from increasing the taxes at the top. As all five of these economists must be aware, there is a huge difference between supply-side trickle-down fantasies and demand side stimulus proposals: It is one thing to make the trickle-down claim that tax cuts on top incomes will increase tax revenues (or even, incredibly, pay for themselves), and quite another to claim that tax increases on these same taxpayers will raise more revenues and stimulate the economy. The trickle-down claim is false, and the stimulus claim is true.

I am quite dismayed by the posturing of these five economists: My question for them is this: Where have you been? For several years Paul Ryan has been proposing massive tax cuts for the wealthy in proposals he calls “The Path to Prosperity.” None of them, so far as I know, publicly called him out for claiming, as he has, that these tax cuts will pay for themselves. Nor to my knowledge did they publically challenge the Heritage Foundation when, in 2002, it predicted that the Bush tax cuts would eliminate federal debt by 2010. Challenging that kind of absurdity is a no-brainer: Why haven’t they been actively calling them out the way they are now going after the Sanders campaign, on a completely different, non-controversial, and far less serious point?

Third, why strenuously attack any progressive proposal at this point on forecasting uncertainty grounds, given that the Clinton and Sanders campaigns have agreed on economic objectives?  So far as I know, none of these five economists have publically challenged CBO’s overly optimistic growth projections in recent years. CBO has declined to change its ten-year outlook even in the face of inequality-induced decline, and despite several recent quarters of zero or near-zero growth, and the Fed has been fitfully unable to raise interest rates. Lately, there has even been talk of negative interest rates.

The economic future as seen through the collective eyes of mainstream economists is so uncertain, in fact, that on the very day this blistering letter to Sanders and Friedman was published, it was reported that Fed Officials, for the first time in over a decade, refused to even issue an economic outlook statement after its most recent policy meeting:

Federal Reserve officials threw up their hands in January, deciding that they could not decide whether market turmoil would impede domestic economic growth.

The Fed in recent years has issued an assessment of its economic outlook after each meeting of its policy-making committee, but that assessment was missing from the statement after the most recent meeting in January. An official account, published on Wednesday after a standard three-week delay, makes clear that Fed officials simply did not know what to say.

 * * * It was the first time since March 2003 that the Fed declined to characterize the risks to its outlook, according to Michael Feroli, chief United States economist at JPMorgan Chase. (See “Fed Officials, at Meeting, Found Economic Outlook Cloudy,” by Binyamin Appelbaum, The New York Times, February 17, 2016, here).

Fourth, the high growth expectations these five economists find so offensive simply cannot be attributed to Sanders and Friedman. Although the letter gave no specifics, Krugman did: “Mr. Friedman outdoes the G.O.P. by claiming that the Sanders plan would produce 5.3 percent growth a year over the next decade.” Of course there is no way the economy can grow at 5.3 percent a year for ten years, with the population growing at less than one percent per year! Indeed, lately annual GDP has scarcely been growing at all.

Even a cursory examination of the Friedman summary reveals that the Sanders proposals are built on CBO’s nominal base case forecast for 2015-2025. The CBO projections are the source of any and all growth expectations over this period. The average annual growth rate of CBO’s base case projection for the ten year 2014-2024 period (“The 2015 Long-term Budget Outlook,” June 2015, p. 18) is 4.5%, not much below the 5.3% Sanders figure. I checked the claim about Friedman’s exaggeration of growth, and found that the 5.3% growth rate Krugman cites merely builds on the CBO baseline forecast, factoring in the changes from the proposed Sanders plan. (“What would Sanders do,” p. 10.)

It is not, as implied in the Krugman column, a claim that growth will be increased by 5.3%. Rather, it is the claim that, given the CBO baseline 4.5% growth projection, the Sanders proposal will stimulate growth an additional 0.8% to 5.3%. Thus, the “fantastical claims” and the offense to “evidence-based economic policy” cited by the former CEA chiefs must be credited to CBO, not to the Sanders campaign or the Gerald Friedman. I need to be clear about this: Sanders is claiming only that his proposals will increase growth by 0.8% above the CBO base case. CBO owns its base case.

Here is another question for these five incensed economists: Why, in these uncertain times, if you find the 5.3% ten-year projection you attribute to Friedman to be so offensive, have you been mute all this time about CBO’s 4.5% baseline forecast of annual growth through 2024 and 2025? Why did you wait so long to speak out, and then only to attack a fellow progressive economist whose objectives, presumably, you share?

To the extent these economists find the CBO baseline forecast overly optimistic, I agree with them: That has been my view for several years, and I have been disappointed with Krugman’s abject support of that forecast. There is nothing in this attack specifically critical of the Sanders stimulus analysis, however, and quite frankly the Sanders plan seems reasonable and modest, projecting “nearly $14.5 trillion in additional spending over 10 years,” producing “a significant stimulus to an economy that continues to underperform.” (p.9) Clearly, the plan intends to direct money deep into the economy where it is needed, with the expectation that median household income would increase by by 38% over ten years (p. 10). The report estimates that the revenue program by itself should be enough to fund the planned spending program, but adds that “the balance of revenue and spending programs will increase employment and revenue growth because the spending program has a larger fiscal multiplier than do progressive tax increases.” (p.8)  

This appears to be both reasonable and responsible: Although real GDP grew at an average annual rate of 2.93% in the 1980-2008 period (i.e., from the start of the Reagan Revolution to the Crash of 2008), Census Bureau data show that median real household income rose only 0.47% over that period. The bottom income brackets lost a lot of ground in those 28 years, and even more in the last decade. These five economists don’t seem to appreciate this real impact of inequality. The Sanders plan would reduce poverty, heat up the economy, beneficially take the pressure off of government welfare programs, and modestly stimulate economic growth. It’s a redistribution plan.

Keeping in mind that that these economists purport to be sympathetic with the progressive cause jointly shared by Hillary Clinton and Bernie Sanders, it is breathtaking to see them attack the Sanders plan so ferociously less than three weeks after it was issued. Of course, the elephant in the room is “taxing the rich.” No doubt the very wealthy donors to Hillary Clinton’s super-PACs appreciate Krugman’s advice to just keep “fighting the good fight” without a big fuss over taxes. In today’s Op-ed (“Cranks on Top,” New York Times, February 22, 2016, here) Krugman contented himself with announcing that Hillary Clinton, “is the overwhelming favorite for the Democratic nomination,” and comparing how bad the tax policies of either Trump or Rubio would be for our economic future.

He’s right about GOP tax policies, of course, but along with Clinton’s wealthy supporters, he should ask himself where we would be four years from now if he was (gasp!) wrong about inequality and we had a major crash on her watch. How would he defend her against the GOP claim that she had mismanaged the economy? And how would her PAC donors feel about all the losses they had endured during her four years? 

I have long felt we need a woman in the Oval Office, and I can support Hillary Clinton, if she is able (like most women) to curb her more hawkish tendencies. But she has got to learn inequality economics, and I would not want to see Paul Krugman as Chief of her CEA. He simply does not understand the importance of progressive taxation, and his advice will destroy us nearly as quickly as would a Trump or Rubio presidency. What we need now is real, progressive change. It is Paul Krugman’s lame influence, not the Sanders campaign, that is “undermining the credibility of the American progressive agenda.” Whoever the Democratic Party runs for President, the Democratic National Convention should adopt the Sanders economic plan, or something like it, as a key component of the Democratic platform for the general election. 

JMH – 2/22/2016       


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Establishment Economics: Learning from New Hampshire

Back in the Spring of 2012 I eagerly awaited the release of Paul Krugman’s latest book, “End This Depression NOW!” He was an avowed progressive, and as the New York Times economic columnist, he had the widest audience among current economists. Surely, I felt, he would alert the world to the dangers of growing income and wealth inequality. I was badly disappointed. Krugman glossed over the inequality issue, ignoring wealth transfers entirely, and characterized income inequality as a mere “political” problem. A few months later Joseph Stiglitz released his book “The Price of Inequality” and I felt encouraged. He understood that inequality creates instability and reduces growth. But why would two Nobel Prize winners disagree about fundamental macroeconomic principles? Later that year BBC interviewed both of these economists, and Krugman offered no explanation when asked directly why he disagreed with Stiglitz.

I have been following Krugman’s views very closely since then, and his strange, hybrid Keynesian worldview is very perplexing: He does reject the neoclassical, mainstream trickle-down idea that taxing the rich will harm economic growth, but he declines to accept the converse proposition that taxing the rich and wealth will facilitate growth. He seems to believe that taxation, or more specifically the progressiveness of taxation, is immaterial to growth. This is something he could not believe, however, if he compared the record of distribution and growth before the Reagan Revolution and after it.

Before 2012, I had already concluded that growing inequality is the cause of decline and depression, and that the excessive inequality growth since 1979 resulted from billionaires and multi-millionaires being allowed to make too much money (as a consequence of inadequate anti-trust and market regulation) and then to keep too much of their excessive gains (because of their huge income tax breaks). Their corporations paid progressively lower taxes, and the top income tax rate was reduced from 70% to 28% (now 35%), and the all-important capital gains tax was kept even lower.

As a consequence, not only did top incomes get way out of line with the median income, but inconceivable amounts of wealth transferred into the top 1%. A reasonable estimate of the increase in top 1% wealth since 1979 is $25 trillion, including amounts sequestered “offshore” to avoid U.S. tax liability. This is about $77,000 per capita for the entire U.S . population, which today totals about 323 million. The per capita gain for every man, woman and child in the top 1% by this estimate, is about $7,750,000. Meanwhile, that figure continues to grow each year, through continuous rent-taking and returns on existing wealth.

Much of that growth in top 1% wealth came from the national debt: The current total of $18 trillion is money the federal government borrowed to finance the tax reductions awarded to the top 1%. In effect, the United States has continuously mortgaged its future to create more wealth for the very rich, higher income inequality and slower growth! There is no sign that the plutocrats ever want to pay off the debt, so incredibly they are content to keep riding this gravy train until it derails.

The balance of the top 1% wealth increase was taken as economic rent (excess profit) from bottom 99%. That roughly $7 trillion amounts to about $21,900 for every man woman and child in the bottom 99%: The average family of five has lost about $110,000 of wealth over this period. Considering that most of the bottom 60% of the population has no net worth at all, to suggest that this is merely a political problem is beyond absurd.

Fast forward to the New Hampshire primaries in 2016, and the head-to-head debate on February 5 between Hillary Clinton and Bernie Sanders: Hillary Clinton argues that she has vast experience, and knows how to get things done. Bernie Sanders, on the other hand, argues that we are up against the growing power of an insatiable oligarchy that must be expelled from power: Hence, he has called for a “political revolution.” In response, curiously, Clinton argues that Sanders would risk losing gains already made if he pushed too hard for reform. For instance, he would risk losing the health insurance gains from Obamacare. On that point, Sanders was very clear in the debate: There have been significant gains, he said, but he would strive, without sacrificing those gains, to do much better by expanding the reach of existing government programs.

Where did Hillary Clinton get the idea that the country needs to work for gradual change in this hostile, plutocratic environment? Clearly, it came from Paul Krugman, her apparent chief economic adviser: During the debate, she bragged that Krugman had “approved” her economic plan.

I had been hoping for these several years that Krugman would join Stiglitz to provide real leadership on economic growth and inequality, but Krugman has punted on both issues; and in a recent Op-ed, he has pretty much dashed my hopes in that regard. (“Plutocrats and Prejudice, The New York Times, January 29, 2016, here). After remarking that “the Republican primary fight has developed into a race to the bottom,” he offered this:

Like many people, I’ve described the competition between Hillary Clinton and Bernie Sanders as an argument between competing theories of change, which it is. But underlying that argument is a deeper dispute about what’s wrong with America, what brought us to the state we’re in.

To oversimplify a bit – but only, I think, a bit – the Sanders view is that money is the root of all evil. Or, more specifically, the corrupting influence of big money, of the 1 percent and the corporate elite, is the overarching source of the political ugliness we see all around us.

The Clinton view, on the other hand, seems to be that money is the root of some evil, but it isn’t the whole story. Instead, racism, sexism, and other forms of prejudice are powerful forces in their own right. This may not seem like a very big difference – both candidates oppose prejudice, both want to reduce economic inequality. But it matters for political strategy.

As you might guess, I’m on the many evils side of this debate.

This is a strange line of argument. Of course, as the debate made clear, Sanders is as passionate about “racism, sexism, and other forms of prejudice,” as Clinton. Moreover, his economic position is not that “money is the root of all evil.” Rather, it is that inequality is extremely harmful and that those on the short end of the stick need a lot more money. The “ugliness we see all around us,” in Sanders’ view, is the proximate result of the taking of too much money from people who need it.

Admitting that “it’s going to be a hard slog at best,” he ends on this strangely equivocal note:

Is this an unacceptably downbeat vision? Not to my eyes. After all, one reason the right has gone so berserk is that the Obama years have in fact been marked by significant if incomplete progressive victories, on health policy, taxes, financial reform and the environment. And isn’t there something noble, even inspiring, about fighting the good fight, year after year, and gradually making things better?

Clearly, he has Hillary Clinton convinced to follow this “don’t-rock-the-boat” strategy. It is a position you would expect from someone who sees inequality as nothing but a political problem, and ignores the continuing concentration of wealth at the top. Things have been steadily worsening, and they are not going to get better on their own, or even with Hillary Clinton’s able intervention. There is no automatic return, even in the long run, to “full employment equilibrium.” The economy is either stable or it is unstable, and it has been unstable ever since the tax system became far too regressive.

Krugman focuses on the growing number of private sector jobs as a sign of economic improvement: More recently, he noted that “after President Obama won re-election, . . . the tax rates at the top went up substantially; since then we’ve gained eight million private sector jobs.” (The Time-Loop Party,” The New York Times, February 8, 2018). This is a useful political argument, but it is inaccurate economically:

(1) It is wrong to attribute the growth in jobs to the 35% top rate instituted by Obama. The 35% rate is well below the 70% top rate that prevented the growth of inequality up until the Reagan Revolution, and with growing inequality, growth is depressed;

(2) The official unemployment rate is misleading, because it does not account for people who have been out of work so long that they are no longer in the job market, nor does it account for the people working more than one job, and the declining wage level. The proper test is the rate of growth of incomes (GDP), which has been falling.

It is unclear why Krugman and Clinton are satisfied with the current top income tax rate. Because he has always rejected “trickle-down” ideology, Krugman probably would disagree with Josh Barro’s (“Bernie Sanders’ Tax Plan Would Test and Economic Hypothesis,” The New York Times, February 9, 2016, here) argument that, although Sanders is proposing to raise the top rate only to 45%, the increase (especially in combination with other taxes) would be so high as to “reach or even pass the point after which higher tax rates mean less revenue instead of more.” Studies (even those by Emmanuel Saez, cited by Barro) estimate that the optimal top income tax rate is actually over 80% and may as high as 90%. The ultimate disproof of Barro’s trickle-down theory, however, is that the top rate alone was 91%, then 70%, from 1945 to 1979, a period of relatively rapid growth of income and of middle class prosperity, and of declining income inequality.

Sanders’ margin of victory in New Hampshire, about 60% to 39%, even among voters that generally regard Hilary Clinton as more experienced, suggests that these voters soundly rejected the Clinton gradualism approach, which frankly reflects the harmful influence of neoclassicism on Paul Krugman. Robert Reich, on the eve of the New Hampshire primary (“Why We Must Try,” Robert Reich’s Blog, February 7, 2016, here), strongly renounced that approach:

Instead of “Yes we can,” many Democrats have adopted a new slogan this election year: “We shouldn’t even try.” * * * I understand their defeatism. After eight years of Republican intransigence and six years of congressional gridlock, many Democrats are desperate just to hold on to what we have.

I get it, but here’s the problem. There’s no way to reform the system without rocking the boat. There’s no way to get to where America should be without aiming high. * * * Wealth and income are more concentrated at the top than in over a century. And that wealth has translated into political power.

The result is an economy rigged in favor of those at the top – which further compounds wealth and power at the top, in a vicious cycle that will only get worse unless reversed.

The resounding response at the long rally following Bernie Sander’s victory showed me that voters are starting to catch on to the truth about economics, and are beginning to force a retreat from the profit-oriented neoclassicism of mainstream economics to the public-welfare oriented classical economics of Adam Smith and his successors. They know what is happening to them, and that the “ugliness we see all around us” is abnormal, and hurting them and our country beyond reason.

After the Primary, Reich wrote in his blog (“What New Hampshire Tells Us,” February 9, 2016):

You will hear pundits analyze the New Hampshire primaries and conclude that the political “extremes” are now gaining in American politics. * * * The “extremes” are not gaining ground. The anti-establishment ground forces of the American people are gaining.

For more than a century our thinking has been controlled by the pernicious dogma of “neoclassical” economics, and it has deeply poisoned our thinking. We can only hope that the voters in New Hampshire have sent a message to the economics establishment as well.

J.M.H. – 2/10/2016

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The (Future) State of the Union

Tonight (1/12/2016), Barack Obama delivered his final State of the Union address as President of the United States. It will go down as one of the great speeches in American history, I predict, because some years from now, when the truth about the current “state of the union” is better understood, it will become clear that Obama got it, and that he did the most any President could have done to successfully alert us all to the dangers we face. He was both prophet and cheerleader, cutting through the pettiness of current political discourse like butter and changing his focus — without directly saying so — to what we are going to have to do to survive.

It is well known that the Republicans in Congress have refused to cooperate with his administration ever since Obama was first elected. Mitch O’Connell’s Senate Republicans openly refused to cooperate and work with him on budget and economic issues. Even his appointments have been routinely blocked. At this point, there was no need for Obama to attack: He briefly reviewed his successes, pointing to the high level of private sector job creation and reduced unemployment during his presidency, wryly noting that there would not be a meeting of the minds on health care “any time soon.” He then quickly changed his focus to the future, beyond his presidency and even beyond the next presidency. His speech — as he affirmed explicitly about half way through — was mainly directed at the American people. Here are the major points that are still resonating with me a few hours later:

  1. The American people are losing faith in the political system, and becoming apathetic believing that there is nothing they can do because they are up against immense wealth, and the system is rigged. On this point, Obama said pointedly, we must keep working for change, or we will not have the future we want and need;
  2. For a strong democracy, we must all work together and try to settle our differences. He called for an end to prejudices and reactionary fears, and a re-dedication to constructive problem solving;
  3. He called for an end to denial, pointing out that when Sputnik was launched, inaugurating the space competition between the U.S. and the Soviet Union, we did not pretend that Sputnik did not exist — we went to work and less than two decades later we had successfully landed astronauts on the moon;
  4. He sketched out a calmer, more constructive approach to international affairs. We are the strongest country in the world, he emphasized, and what people look to us for is leadership. Our great force must be used wisely. He specifically condemned invasions, singling out the Vietnam and Iraq wars for particular condemnation;
  5. He said we have a strong, inventive, and creative economy, and twice emphasized that anyone who says we are in economic decline is not telling the truth;
  6. He emphasized the inequality problem, however, several times. These were mostly fleeting references to the inequality, such as the comment that it is not the average worker that avoids taxation by putting money in offshore accounts;
  7. Although the economy is growing, he emphasized the huge decline in the ability of Americans to afford a college education;
  8. He said we need to strengthen Social Security and Medicare, not weaken them;
  9. Emphasizing the decline of the middle class, he spoke of the need to promote small business;
  10. He spoke forcefully about the importance of combating climate change, but arguing that even if the problem was less severe, American businesses can only gain in the development of alternative energy sources;
  11. In response to the intense progressive opposition to the Trans-Pacific Partnership (TPP) he argued that it would put America in a better position to influence growth and development around the world.

This was nothing short of a progressive manifesto, though mostly by implication. Bernie Sanders was interviewed on MSNBC shortly afterwards, and he discounted the idea that Obama was trying to influence the Clinton and Sanders campaigns. But he noted the similarity between Obama’s agenda and his platform. Asked about his assessment of his chances for victory in Iowa and Wisconsin primaries, he expressed optimism.

Here’s the thing: Everyone knows, by now, the rapid growth in Bernie’s popularity among democratic voters, everywhere he goes around the country, and it is becoming clear that people are rallying around his core message that almost all wealth and income growth are concentrating in the top 1%. People understand there is something wrong when this continues to happen, year after year. And those of us who have been around for decades realize just how much the economy has changed.

This is not rocket science, and Obama surely knows it. When people lose their savings, their jobs, and their homes with incredible swiftness, as they did after the Crash of 2008, something is simply wrong. The really remarkable thing about the State of the Union Address, this time, was that the President did not have to assert these matters as if they were debatable questions of fact. This time, it was common knowledge, and the question was whether the American people would take notice and fight back. “I can’t do this by myself,” he said. “No president” can do this alone. We need a functional democracy. This was a call to arms, and a confident one.

Before the speech, the conversation on MSNBC centered around GOP political strategist Steve Schmidt’s argument that Obama would have to deliver an ultimatum to Iran to release the imprisoned U.S. sailors or he would lack credibility as a strong, determined leader. Obama did address the credibility about his determination to deal with terrorism in the speech: “Just ask bin Laden” he suggested. He argued that terror groups are a threat to populations, but not to our existence, and should be dealt with accordingly, and he took pains to distinguish the threats posed by ISIS and Al Qaeda from threats posed by nation states.

After the speech, Schmidt found himself attacking the rest of the panel, Rachel Maddow and Chris Matthews, etc., for blaming Republicans for the failure of Washington to get things done. He was backed into a corner, at that point, forced to ignore the fact that the Republican constituency (and much of the Democratic constituency as well) consists of wealthy donors. Obama knows this, of course, but his tactic was to empathize with all of Congress for the growing need to raise more and more money just to stay in office. It appears the President covered all the bases, in a speech he has been preparing since November.

Once again, I was inspired again by Obama’s obvious sincerity. He remarked that democracy must be based on trust, and I do trust him. (No one could have faked that effort and pulled it off!) He’s been misled on a few issues, in my opinion, like the impact of the TPP (and his stridency in foreign affairs tends to undercut his arguments supporting internatinal c0operation and good will), but he’s no hypocrite. And how, exactly, was he supposed to play the hand he was dealt? He seems clear that sincerely wants a better world.

My overall sense is that the prospects for America’s economic future and democracy reflect the failure of unfettered capitalism. Corporations now have too much power, and they set up domestic and international trade and banking to benefit the bottom line. They’ve gone way too far, and will not be easy to stop. “It’s hard,” Obama wistfully remarked. 

Bernie Sanders is right that income and wealth are the key issues we need to address. I am heartened by the fact that so many concerned potential voters are rallying to him at this crucial hour in our history. However, what most people don’t realize, quite yet, is just how serious the threat inequality poses of another major depression.  Obama is technically correct — and in the context of this speech he needed to say it — that our economy is not in decline. However, we are learning in the last two years that aggregate income growth has slowed to a near standstill, gradually, even before the Crash, while corporate profits have continued to soar. And it is becoming better known, thanks to the efforts of Bernie Sanders, that more than 80% of the lowest real incomes have actually declined since 1980. We have two economies, one for the rich and one for everyone else. Many analysts are predicting another stock market crash in the next few years.

So, yes, the situation is serious. It’s not about Democrats vs. Republicans. Its still about labor vs. capital, a class warfare that has been obscured by mainstream economics for over a century. The economic/political power of plutocracy and the public psychology behind it have been building for far too long. People now opine that our number one issue is climate change. That’s huge, but what chance is there to address that problem aboard a runaway train that’s headed for another crash? 

What are our chances? If we don’t make it, we’ll have only our own collective apathy to blame. And it will not be for want of a stronger appeal from our outgoing President, Barack Obama.

JMH — 1/12/2016 (ed. 1/13)


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Economics and Ecology: The Handwriting on the Wall

Now and then a day comes along when several news stories combine to reveal a clear picture of the human condition, and of America’s future, and for me today (December 2, 2015) is a prime example of such a day:

1. An article by Ravi Somaiya in the business section of the New York Times (Columbia Disputes Exxon Mobil on Climate Risk Articles) reports on the continued wrangling between Mobil/Exxon and Columbia on the issue of whether Mobil/Exxon has presented incorrect propaganda and improper influence in its opposition to the scientific evidence that man-made global warming is a reality.

The unprecedented recent protests around the world (‘No Planet B,’ marchers worldwide tell leaders before U.N. climate summit), and the government response in the Paris negotiations, reminds us that the “denial” card is just about played out, even as these controversies continue to roil. The reactions of Big Oil companies to the findings of climate science over the last few years, however, have made it clear just how myopic the profit motive can be. Even as the evidence mounts, some capitalists would “rather fight than switch,” and would fight to the death (of the economy, and even human civilization and the planet) in kamikaze style just to ensure near term profits. Have Mobil/Exxon and the other big oil and gas companies yet decided to wind down the mining of carbon fuels and get into other lines of production, even as alternative energy sources are becoming increasingly cost-effective? Their plans for fracking and arctic drilling suggest otherwise. I’m still looking for significant evidence of change.         

2. Coral Davenport’s front-page article in the New York Times (The Marshal Islands are disappearing) got me thinking again about the relationships between economics and ecology. The Marshall Islands are gradually slipping into the ocean as sea levels rise, wreaking havoc for residents:

Most of the 1,000 or so Marshall Islands, spread out over 29 narrow coral atolls in the South Pacific, are less than six feet above sea level — and few are more than a mile wide. For the Marshallese, the destructive power of the rising seas is already an inescapable part of daily life. Changing global trade winds have raised sea levels in the South Pacific about a foot over the past 30 years, faster than elsewhere.

This is not a new story, and alarming reports made the news in 2013. Today, however, as the relatively poor residents continue to ineffectually protect their homes from the rising sea, Tony A. deBrum, the Marshall Island’s foreign minister, is trying to influence the terms of the United Nations climate change accord now being negotiated in Paris. His focus is “Squarely on the West’s wallets,” Coral reports,  “recouping ‘loss and damage,’ in negotiators’ parlance, for the destruction wrought by the rich nations’ industrial might on the global environment.” A great many low-lying lands around the world, such as Bengladesh, are no doubt looking for similar compensation from the world’s large industrial nations:

But the Marshall Islands holds an important card: Under a 1986 compact, the roughly 70,000 residents of the Marshalls, because of their long military ties to Washington, are free to emigrate to the United States, a pass that will become more enticing as the water rises on the islands’ shores.

So the United States will face added costs, in addition to all the costs of reducing carbon emissions and handling our own retreating shorelines: We may have to assist other countries that are in the same boat, and we will likely face additional and costly immigration problems.

3. In the current political atmosphere of the United States, these burden will be pushed, as much as possible, on the vanishing middle class. There is no sign, as yet, that the public will demand higher taxation of corporations and top incomes with the vigor it has shown in the United States and elsewhere in climate change protests. There are signs in today’s news stories of the effects of raging income and wealth inequality growth in the United States:

a. Today I found a report published December 1 by the Institute for Policy Studies on the growing concentration of wealth: (Billionaire Bonanza: The Forbes 400 and the Rest of Us). This, too, is not a brand new revelation — wealth has been rapidly concentrating since the beginning of the Reagan revolution in 1980, and Bernie Sanders has been making wealth inequality a major component of his presidential campaign. But it’s getting even more pronounced. Here is the IPS statement of some its major findings:

  • America’s 20 wealthiest people — a group that could fit comfortably in one single Gulfstream G650 luxury jet –­ now own more wealth than the bottom half of the American population combined, a total of 152 million people in 57 million households.
  • The Forbes 400 now own about as much wealth as the nation’s entire African-American population ­– plus more than a third of the Latino population ­– combined.
  • With a combined worth of $2.34 trillion, the Forbes 400 own more wealth than the bottom 61 percent of the country combined, a staggering 194 million people.
  • The median American family has a net worth of $81,000. The Forbes 400 own more wealth than 36 million of these typical American families. That’s as many households in the United States that own cats.

The astounding per capita wealth gap between the top 20 and the bottom half of U.S. households keeps growing, and it has reached a ratio of more than 3 million-to-one.

b. This is way too much money at the top, and collecting there, it has slowed our economy and its growth rate substantially, while want and deprivation increase at the bottom of the income ladder. We have seen hundreds of billions of this excess wealth “invested” in fine art, as record prices are obtained at auction even for some obscure paintings, prints and sculptures. Even with that, it was somewhat surprising to see in this morning’s news an article, by Vindu Goel and Nick Wingfield, reporting that Facebook’s CEO, the youthful Mark Zuckerberg, and his wife have decided to donate most of their wealth to charity (Mark Zuckerberg Vows to Donate 99% of His Facebook Shares for Charity):

The pledge was made in an open letter to their newborn daughter, Max, who was born about a week ago. Mr. Zuckerberg and his wife, Dr. Priscilla Chan, said they were forming a new organization, the Chan Zuckerberg Initiative, to manage the money, through an unusual limited liability corporate structure. “Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities,” they wrote.

The handwriting is on the wall: The ultra-rich have far more money than they know what to do with, and the more philanthropic among them are beginning to realize they came by it far too easily and owe a huge debt to society. This is but a modest philanthropic gesture, however, in the context of the entire Forbes 400 wealth. The Waltons and the Kochs, meanwhile, continue their brands of predatory capitalism, with the opposite effect.   

c. Another article in today’s New York Times by Jackie Calmes (Broad Effort Aims to Expand Financial Services to Low-Income Consumers) announced that the Obama administration, “teaming with private partners including the Gates Foundation and JPMorgan Chase, announced initiatives on Tuesday to expand banking services to millions of Americans and others worldwide who lack essentials like checking or savings accounts and access to credit.”

“More than two billion people around the world rely solely on cash transactions, and basic financial services are out of reach for one in four individuals on earth,” the Treasury Secretary, Jacob J. Lew, said at a two-day financial inclusion forum of government, financial industry, academic and nonprofit leaders at the Treasury Department.

“Even in the United States, with greater access to conventional financial services, one in five households continues to use alternatives like check cashers or auto title loans,” Mr. Lew added, and millions do not have enough financial history — despite years of paying rent and bills — to have the credit score needed for access to loans. 

This may sound like a good idea, but it’s actually a step in the wrong direction. It is at bottom a banking initiative, and it will only lead to more inequality. What the world definitely does not need now is more debt. The Crash of 2008 was the result of excessive, subprime mortgage debt, and growing subprime auto debt and student loan bubbles are also beginning to threaten the integrity of the U.S. economy. What is needed by most of the people in the world, and certainly in the United States, is more jobs and income not more credit. The current situation is a classic “Catch 22” and the only way out is to raise taxes on top incomes and corporations.

d. Also in my e-mail today was Harry Dent’s recent publication, sent free to his mailing list on request (How to Survive and Thrive During the Great Gold Bust Ahead). Dent has been predicting another stock market crash, like the one on 2008, and not without reason.  In this article, he warns against buying gold. But there is much sense in his underlying analysis of America’s debt problem:

[B]elieve me I take no pleasure in issuing warnings like this one. It’s no fun standing up and screaming into the stampede that everyone’s going the wrong way. For one, my warnings fall mostly on deaf ears. For example, I called the height of the U.S. real estate bubble peak in late 2005. Those who heard called me every bad name under the sun. As for most others, they just tuned me out. Only the few who had been following my research were able to sidestep the catastrophe.

And my research is telling me that today we’re headed for the largest debt and asset bubble burst in our history. Worse than the Tulip Bubble in the 1630s. Worse than the Great Depression. Worse than anything you’ve seen in your lifetime.

That’s because this bubble is being pumped up by our own government. The bubble tried to burst naturally in 2008, but Hank Paulson, Secretary of the Treasury at the time, begged Congress to step in and stop it from happening. And they did.

Wall Street was bailed out to the tune of almost a trillion dollars with money we didn’t have, but instead we borrowed or printed. Since then the government has printed $4 trillion to keep the banks and financial institutions from collapsing like they did in the 1930s.

Other countries are also printing money like it’s crack cocaine. This has led to the biggest global debt and financial asset bubble in modern history.

I think Dent is right about this highly over-leveraged economy. The following graph he presented of total U.S. debt as a percentage of GDP from 1870 to 2015 caught my attention:

This is a remarkable graph, showing both public debt and private debt (U.S. debt alone is around 100% of GDP). To me, the most noteworthy thing abut the period from 1930 to the present is the huge decline in debt up to the relatively stable period in the 1950s through the 1970s, followed by the steep increase after 1980. Because it follows the trend in top 1% income concentration, this reflects income inequality, and the basic features of the trend are fairly apparent: Private debt has increased during the “Reagan revolution” because, outside of the top 1%, people have had to borrow more money for the basic essentials of American life (including housing, automobiles, and education).

Because of the similarity of the broad parameters of debt and inequality, it is plain that the reduction of the increasing regressivity of taxation that came with the Reagan revolution had much to do with the steepness of these trends: As the tax burden shifted away from the top income earners onto those with lower incomes, the opportunity for lenders to make even more money through credit transactions rapidly increased. More than ever before, the incomes of everyone who must borrow money are eaten up by the burdens of taxation and debt service.

4. Into this overall picture of growing inequality and decline, with the looming threat of deep depression (note there is a decline in total debt since 2008, which parallels the decline in top income) we now must concern ourselves with paying for a huge chunk of the additional extreme costs of saving the planet from ecological collapse, and the likely need to provide financial assistance to the poorer countries in their efforts to combat the effects of global warming This will likely require a high degree of international cooperation, unlike what we are used to in recent years. But there is one more big issue that one of my favorite New York Times reporters, Eduardo Porter, wrote about in this morning’s offering (Imagining a World Without Growth). In the print version, the title was “No growth, no world? Think about it.” Porter raised the question, quite simply, whether the world order could survive without growing:

It’s hard to imagine now, but humanity made do with little or no economic growth for thousands of years. In Byzantium and Egypt, income per capita at the end of the first millennium was lower than at the dawn of the Christian Era. Much of Europe experienced no growth at all in the 500 years that preceded the Industrial Revolution. In India, real incomes per person shrank continuously from the early 17th through the late 19th century.

As world leaders gather in Paris to hash out an agreement to hold down and ultimately stop the emissions of heat-trapping greenhouse gases that threaten to make Earth increasingly inhospitable for humanity, there is a question that is unlikely to be openly discussed at the two-week conclave convened by the United Nations. But it is nonetheless hanging in the air: Could civilization, as we know it, survive such an experience again? The answer, simply, is no. 

Economic growth took off consistently around the world only some 200 years ago. Two things powered it: innovation and lots and lots of carbon-based energy, most of it derived from fossil fuels like coal and petroleum. Staring at climactic upheaval approaching down the decades, environmental advocates, scientists and even some political leaders have put the proposal on the table: World consumption must stop growing.

Mainstream economics has been based all along on a presumption  of continuous unlimited growth; at least, the only constraint in neoclassical theory on growth is demographic. Porter has tapped into the ultimate question: In a world of limited (and in some cases rapidly dwindling) resources could human population and civilization continue to expand at anything like the rates of the last two centuries? Porter writes:

The Stanford ecologist Paul Ehrlich has been arguing for decades that we must slow both population and consumption growth. When I talked to him on the phone a few months ago, he quoted the economist Kenneth Boulding: “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

I have seen estimates that total human population is stabilizing and will stop growing sometime this century. Porter investigates whether any more human population growth at all is consistent with saving the planet’s environment:

The proposal that growth must stop appears frequently along the leftward edge of the environmental movement, in publications like Dissent and the writing of the environmental advocate Bill McKibben. It also shows up in academic literature. For instance, Peter Victor of York University in Canada published a study titled “Growth, degrowth and climate change: A scenario analysis,” in which he compared Canadian carbon emissions under three economic paths to the year 2035.

Limiting growth to zero, he found, had a modest impact on carbon spewed into the air. Only the “de-growth” situation — in which Canadians’ income per person shrank to its level in 1976 and the average working hours of employed Canadians declined by 75 percent — managed to slash emissions in a big way.

And it is creeping into international diplomacy, showing up forcefully in India’s demand for “carbon space” from the rich world, which at its logical limit would demand that advanced nations deliver negative emissions — suck more carbon out of the atmosphere than they put in — so the world’s poor countries could burn their way to development as the rich countries have done for the last two centuries.

Yes, there was plenty of food for thought in today’s news. Reduced growth is going to be needed, but reduced growth is being destructively imposed on us by inequality, without constructive planning (especially by Big Oil) for a sustainable future. I continue to have this gut feeling that if there is going to be any chance for our grandchildren and great-grandchildren to live reasonably safe and happy lives beyond the middle of this century, there are going to have to be some major changes in how we think about ourselves and our communities. We need more cooperation and less confrontation. We need to change our perceptions of what a “good life” means on this planet. As demonstrators so aptly put it on their signs, “There is no planet B.”

We certainly need a social agenda for economic activity that does not make profiting from our transactions with one another the ultimate objective. I wonder: Is that what Mark Zuckerberg and his wife are trying to tell us? 

JMH – 12/2/2015

Postscript (added 12/3/2015): Here’s a link to the open letter Zuckerberg and Chan wrote to their newborn daughter (A letter to our daughter). This is the lead idea from their summation:

Our hopes for your generation focus on two ideas: advancing human potential and promoting equality.

Of course, they mean equality of opportunity: Once everyone understands how much economic inequality has harmed most people’s opportunities, and everyone’s future, I expect many others to rally behind Zuckerberg and Chan.

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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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