Finding a New Macroeconomics: (11) Escaping the Neoclassical Cloister

One lesson from recent economic troubles has been the usefulness of history. Just as the crisis was unfolding, the Harvard economists Carmen Reinhart and Kenneth Rogoff — who unfortunately became famous for their worst work — published a brilliant book with the sarcastic title “This Time Is Different.” Their point, of course, was that there is a strong family resemblance among crises. Indeed, historical parallels — not just to the 1930s, but to Japan in the 1990s, Britain in the 1920s, and more — have been vital guides to the present.

Yet economies do change over time, and sometimes in fundamental ways. So what’s really different about America in the 21st century?

The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump. — Paul Krugman [1]

I have frequently discussed and criticized Paul Krugman’s perspectives on inequality issues, not because I enjoy contending with Nobel Laureates (I do not) but because he is America’s most publicly visible influential Keynesian, and his views are crucial to the future of the U.S. economy. So I was delighted one Friday morning last month, at a time when I was working on Reinhart/Rogoff issues, to see Krugman among a small cluster of economists lining up behind Joseph Stiglitz in recognizing the importance of economic rents to declining growth. For me, Krugman’s new recognition of the impact of economic rent was like the Bulletin of Atomic Scientists moving the minute hand on the “Doomsday Clock” (here) back a couple of minutes. Krugman has a way to go to in appreciating the macroeconomic implications of inequality growth, but with the recognition of the importance of “profits without production” he has highlighted the connection between excess profits and declining growth, a significant step for an economist who has not previously attributed macroeconomic significance to income and wealth redistribution and has heretofore considered income inequality a “political” problem. Krugman has yet to causally relate economic decline and inequality, and he’s wrong about excess profits becoming a new problem only since the Crash of 2008, but with this article it appears he has moved ahead of most of his peers.

I concluded the last post in this series, Post #10 (here), with the thought that, thanks to some ideas suggested by the Reinhart/Rogoff debate, economists will be able to begin incorporating “redistributional macroeconomics” into their thinking and start working out how much time the U.S. economy has left as it plummets downhill in an inequality spiral. In my discussion in the last post, which also related to the topic of economic rent and excess profits, I promised an extended graph of top 1% net worth, GDP (income), and the national debt, which I expected would reveal much about what has happened to the U.S. Here it is, for the sixty-year period 1952-2012, [2] in constant 2005 dollars:

my graph 1952-1982 c

Some preliminary observations: First, all amounts are in 2005 dollars, so inflation (the declining value of the dollar) has been effectively removed, and all growth reflects changes in value. (To convert any value to current 2013 dollars, multiply by 1.16.); Second, the numbers for GDP are not directly comparable to the national debt and the top 1% wealth numbers, because GDP is the amount of income recorded in a year. Top 1% net worth and the national debt, however, are compilations of assets and liabilities. GDP is effectively a benchmark figure for income, which affects both net worth and public debt; Third, because GDP is aggregate income, it includes both top 1% and bottom 99% income.

Here is what this graph shows:

1. Real national debt remained fairly constant after 1950 and only began to grow after 1982, at which point it has risen steadily. The national debt, which had fallen below the level of GDP by 1949, did not begin to approach the level of GDP again until after the Crash of 2008 and the onset of today’s depression;

2. In 1949, the first year for which I have been able to compute an estimate of top 1% wealth, top 1% net worth was $1.77 trillion and GDP was $1.84 trillion (in 2005 dollars). Sometime between 1949 and 1952, probably in 1952, top 1% wealth passed GDP, and it remained close to GDP until 1972, when it fell below again.  Moving in tandem with the top 1% income share (here), it began to decline in 1968 and bottomed out in 1976, at about $3 trillion. (Thus, at that time, in 2005 dollars, the average top 1% family had a per capita net worth of about $9.7 million);

3. Top 1% net worth, like the national debt, has grown faster than income (GDP) since the late 1970s, and especially since 1980. Asset values fluctuate, and as wealth concentration grew, as was the case with income concentration, there have been huge swings in top 1% net worth associated with speculative asset booms. The first decline came at the time of the “” bubble at the end of the Clinton years, and the second with the collapse of the real estate bubble at the end of the G.W. Bush years. With those “paper gains” removed, it is important to note, top 1% net worth has consistently grown at about the rate of the national debt since 1992;

4. The reported real top 1% net worth, in 2005 dollars, grew from $4 trillion in 1980 to a peak of $22 trillion in 2006, a gain of $18 trillion.  The net worth gain now stands at $16 trillion.

The Implications of Accelerating Redistribution

Thinking in terms of the “two economy” model discussed earlier in this series of posts, we can begin to appreciate how, today, the lower (bottom 99%) economy can remain mired in a depression while the upper (top 1%) economy continues to grow and flourish; the GDP line on this graph encompasses both. We have learned from Emmanuel Saez that 121% of all income growth since 2009-2011 has gone to the top 1%, which means that all of the economy’s income growth is absorbed high in the top 1%. It is noteworthy that most of the reported gain in the nation’s net worth between 2010 and 2012 ($7.1 trillion in current dollars) is reported for 2012 ($6 trillion in current dollars), and aggregate net worth has already grown by $3 trillion in the first half of 2013. I have yet to find an explanation for these sudden increases in the growth of net worth — nothing happening in the lower 99% economy is consistent with such an increase in net worth — but both income inequality and the concentration of net worth at the top, just in the last two years, appear to be markedly increasing. We’ll need to follow wealth inequality closely from here on.     

There’s one more caveat: Although the reported total income and wealth of the bottom 99% is reliable, the top 1% numbers are extremely soft. The figures reported to the national government appear to be significantly understated. Wealthy individuals have been making increasing use in recent years of overseas and off-shore tax havens, which means much of their income and wealth goes unreported to the U.S. government. I’ll cite them later on this: Thomas Piketty and Emmanuel Saez are on record as emphasizing that their inequality figures are understated. Clearly, $5-6 trillion of missing wealth would add a new dimension to the scope of the redistribution problem.  

I plan a thorough review of this issue soon, but already, it is becoming apparent that the wealthiest people have accumulated more wealth than they, quite literally, know what to do with. It is not surprising, with their net worth rising so rapidly, to see many trillions stashed away like buried treasure in off-shore hiding places. Acquiring extra wealth, even when reasonable avenues for using it or spending it have all become exhausted, is a powerful habit. Though many call it “greed,” we are learning that the system has long been rigged to maximize wealth accumulation. 

The Cloistered Neoclassical Perceptions

This is a contemporary understanding of macroeconomics, of how the economy actually works, that is far removed from most of the perceptions held in the academic community. I’ll update this post later, expanding on this discussion and providing citations, but right now I want to highlight the enormous contrast, a yawning Grand Canyon-like span, between the reality of dominant wealth bringing down entire economies, in particular and especially the entire U.S. economy, simply by avoiding government regulation and taxation, and the academic perspectives still so prevalent today on the macroeconomics of wealth and income redistribution. 

The narratives from the right about the “inequality” problem being one of grown people trying to avoid personal responsibility by mooching from the government are nothing short of transparently manipulative, but they have worked with millions of people. Similarly, to pit groups of workers against one another, usually the public sector employees against private sector employees, is also blatantly manipulative. Equally pernicious are arguments blaming the victims of inequality themselves for their fate. Ben Bernanke, for example, argued in 2012 that the inequality problem is one of people without college and graduate degrees not being paid as much as those who have a higher education. (His argument was actually included in the 2012 Economic Report of the President.) There is something sinister about the leader of the financial world covering up a profoundly serious problem of monopoly market power and financial control with such an argument, and it seems no coincidence that Bernanke was a devoted protegé of Milton Friedman. Paul Krugman slammed that argument in his book “End This Depression Now!,” directing his ire at the Cato Institute rather than Bernanke.   

But in 2013, at a time when student debt already totals more than $1 trillion and graduates are typically saddled with a lifetime of debt — just to get an education and the promise of all too often barely subsistence-level earnings — and while controversy rages in Congress on doubling the interest rate on federal student loan support, that kind of argument must be wearing very thin with almost everybody. [3] The realities of life in a depression are starting to sink in.    

The denialism from the right is bad enough, but an equally serious problem for public perceptions is the persistence among mainstream economists of neoclassical thinking. Their persistently expressed faith in an automatic, eventual return to full employment, and in the stability of market economies, buoy public confidence — and complacency — but these ideas are simply wrong. Market economies do not follow the “laws” of supply and demand, nor are they automatically efficient and productive. Neo-Keynesian economists can’t seem to help forgetting that Keynes himself understood the inherent instability of market economies. That Keynes was right has been repeatedly and dramatically demonstrated, and once again by the massive top 1% wealth accumulation over the last three decades shown in my graph.

Keynes paid no attention to Henry George, whose earlier focus was mainly on the economic rent accruing to land. The broader reality today is that “profit without production,” to use Krugman’s term, is all economic rent. Indeed, the entire economy — its financial, banking, market, and public sectors — is the modern counterpart to Henry George’s land, and because of the pervasive control exercised by corporations in all sectors, we can properly think of economic rent in its broadest sense.

Paul Krugman’s assertion that corporate rent-taking is a new phenomenon since the Crash reflects an understandable hope that it is economies, not economics, that are changing. He is a good economist, but sadly too many of his long-cherished neoclassical beliefs are crumbling. Rent-taking has always been a problem, and it has always been at the heart of inequality and economic decline. The truth is that ours has been a very top-heavy economy and society all along, but that since 1980 excessive inequality has been choking the life out of it. Earlier in this series, I mentioned EPI’s 2011 report on the growth of wealth inequality. [4] Here is the graph of the results:

share_of_total_wealth_gainSince 1983, the top 1% has shared wealth growth, in about equal measure, with the Next 4%. This has left 20% of wealth growth for bottom 95%, and the bottom 60% has lost ground. The Next 4%, however, is losing ground today.   

It remains extremely ironic, in the current dire circumstances,  that the best the academic economics can do in 2013 is provide a contest between neoclassical Keynesians and austerity ideologues, fought to an ambiguous political draw, over the Reinhart/Rogoff Study “Growth in a Time of Debt.” While national wealth is continuously and increasingly sucked up by the top 1%, virtually unnoticed by the economics profession, what the profession has noticed is the growth of the ratio of our national debt to GDP (PD/GDP).   

I’ll provide one more citation here, and that will be enough for now: In 2010, Joseph Stiglitz set forth some of his most compelling economic perceptions in a book review, of all things. [5]  A friend recently sent it to me, or I might not even have noticed it.  I offer it here because it dramatically describes Stiglitz’s accurate understanding of how market economies work. My only concern is that he has yet to demand an immediate re-institution of adequately progressive taxation.       

The Inconvenient Truth

When I started studying the future of the U.S. economy and capitalism full-time over two and one-half years ago, I already knew that capitalism, left entirely to its own devices, would eventually destroy itself. That is what Keynes had implied and what I had been taught, and an entire career of utility rate regulation has re-enforced that perception. Much of what I understand about economics, I was surprised to learn, is not understood by most economists. There seems to be a general failure to understand that aggregate efficiency declines dramatically when corporations make too much money; and I appreciate far better than most what “too much” means.  

So, when I first saw the graph of the growth of the top 1% income share, my immediate reaction was: “They’re making too much money.” That much seems obvious, certainly, but when I saw the Piketty/Saez graph showing the close correlation between the top 1% income share and the top income tax rate, it also seemed obvious to me that they were not only making too much, they had been allowed to keep too much. Inequality growth was accomplished via wealth transfers. This fact, although not entirely lost on the bottom 99%, seems to have gone unnoticed by the economics profession.

Now we see the ultimate proof of the inequality mechanism, and its enormity, in the stunning accumulation of top 1% net worth. A natural consequence of this process is the national debt needed to fund those tax decreases. Logic dictates that as inequality grows, new money injected into the system through federal borrowing would become increasingly ineffective for stimulation and contribute more and more to generating still more excess profits, exacerbating the problem. With no income growth below the top 1%, we are at or near the point where deficits and “stimulus” spending benefit only the wealthy, as more and more of the new money moves into the “gravitational pull” of the excess profit system and the inequality spiral. 

There is much work here for capable economists, to define and measure the parameters of the redistribution problem. Most economists appear to have overlooked the basic reality that inequality grows via wealth transfers to the top, as income and wealth inequality progress in close tandem. None of us, however, could have imagined how unstable this situation would eventually become, not without actually living through it. 

It is plain that the U.S. (and much of the world) economy has been seriously trashed. The ultimate question now is how much more decline must take place before the point of no return is reached, the point where the U.S. economy becomes so starved it is forced to reinvent itself. What will happen to all of us then, and what will happen to our society and our democracy? When will the final curtain come down? We are nearing the end of this grand experiment with laissez-faire capitalism, but this time the forces of corporatism, not populism, are in control. Even if they awaken to the dangers they ultimately pose to themselves as well as to everyone else, the corporate plutocrats may not be inclined to change course. 

These are sobering thoughts, but as Walter Cronkite used to say, “that’s the way it is.” 

JMH – 7/12/2013 (ed. 7/13/2013)


[1] “Profits Without Production,” by Paul Krugman, The New York Times, Oped, June 20, 2013 (here).

[2] Sources: Census Bureau, table B100; St. Louis Fed FRED (here); Top Heavy, by E.N. Wolff, The New Press, 2002 (pp. 82-83); W.N. Wolff, WP 589 (here); Linda Levine, July 17, 2002 (here); Kimberly Amadeo (here); St. Louis Fed FRED) (here) (billions of chained U.S. dollars, 4th quarter); St. Louis Fed (here). Note: Top 1% share percentages were not available from these sources for all included years. My interpolations do not materially affect the shape or magnitude of the net worth curve. 

[3] See “A lost generation of degrees and debt,” by Pete Kreppein, Commentary, Albany Times Union,  July 13, 2013 (here). This excellent commentary appeared just a day after I published this post.

[4] “Huge disparity in share of total wealth gain since 1983,” by Lawrence Mishel, Economic Policy Institute (EPI)September 15, 2011 (here).

[5] “The Non-Existent Hand,” by Joseph Stiglitz (review of Keynes: The Return of the Master, by Robert Skidelsky (2009), London Review of Books, April 22, 2010 (here).

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