Last night at midnight, the United States government shut down, and my first priority today is to write about it. This post will go beyond everything you’ve been hearing and talking about.
Of course it’s insane, in a representative democracy, for people to behave this way. Endless discussions are taking place right now about the libertarian anarchists who call themselves “The Tea Party,” and how they could be so reckless with America’s future. Yesterday’s message by our President (here) exposes how un-American this conduct was: Refusing to pass a budget on time to extort a one-year delay of implementing the Affordable Care Act, legislation passed by both houses of Congress, signed by the President, found constitutional by the right-leaning Supreme Court, and scheduled for immediate start-up — legislation that forces health insurance companies to compete for currently uninsured people and which is already reducing insurance rates in some states — so that they will be able to continue to spread their confusing misinformation about the law and have the President declared a failure by the electorate in 2014.
Wow! The only winner in this scenario (and it actually is a loser too) is Big Insurance. This feels more like plutocracy than anarchy. There was a bone thrown in for the Tea Party, too, an attempt to extort repeal of constitutional laws they don’t like that provide federal support for women’s reproductive freedom.
The bankroll behind the Tea Party is provided by the plutocrats, a group that wants to fast-track approval of a secretly negotiated Trans-Pacific Partnership (TPP), an agreement, we are told (here), that goes beyond NAFTA in exempting huge global corporations from American law, a matter of great concern to an authority on these matters, Joseph Stiglitz (here). This would be a wholesale abdication of the public interest, akin to John Adams or Thomas Jefferson suspending the U.S. Constitution and turning over American governance to the Dutch West India Company. “Tea Party,” indeed! It was only fifty years ago that former President Dwight Eisenhower, the WW II hero who helped orchestrate America’s victory over fascism, warned us in his farewell address about the dangers to our liberty and prosperity posed by the military-industrial complex.
As President Obama pointed out, the federal government is America’s largest employer. Hundreds of thousands of federal employees are losing their incomes, unable to pay their bills and running up more debt just to make ends meet. This is a huge hit for the economy, a big blow to the bottom 99%. This isn’t even a win for the top 0.01%, because lower 99% spending means lower corporate earnings — at least for those corporations relying very much on earnings from within the United States.
This is bad, very bad, but as the title to this post suggests, I want to address an even bigger threat to our economy and democracy, the impending expiration of legal borrowing under the debt limit on October 17, less than three weeks from now (here). An America whose government isn’t running is somehow going to have to avoid defaulting on the national debt, if we are to survive in a global economy already financially weakening in response to the shutdown. In his New York Times Op-Ed yesterday (September 30), “Rebels without a clue” (here), Paul Krugman accurately described both the harm caused by the shutdown and the greater threat posed by the potential default. A default would be devastating, but even more unforgiving, I fear, than Krugman envisions, if that is possible.
Yesterday I submitted a letter to the editor to the Albany Times Union. [It was published 10/2/13 (here)]. What I said, boiled down to two sentences, is that the national debt has financed unimaginable increases in top 1% and top 0.01% wealth. Having all but emptied the cookie jar, the top 0.01%’s spear carriers are now poised to destroy it.
My guess is, we’ll end up in Great Depression II, which might be deeper and longer lasting than the first one. There will, of course, be unthinkable social and political ramifications. Think “Egypt times 1000.” When you read my short letter, you might ask yourself “Has this guy lost his marbles?” I know I did when I first read it — and it almost seemed like a rhetorical question!
So here’s my analysis of the problem:
This is a graph I made of top 1% net worth over the years, computed from Edward Wolff’s wealth distribution data and the Census Bureau’s real net worth data (in 2005 dollars). I also graphed GDP and the national debt (in 2005 dollars).
The national debt and top 1% wealth have been rising faster than GDP since the Reagan administration began in 1980. Each component of the Reagan Revolution is involved here: The wealthiest Americans began to make a lot more money for various reasons, including deregulation, increased profits due to relaxation of the anti-monopoly laws, suppression of labor unions, exportation of labor through globalization, the repeal of Glass-Steagall and Wall Street investment banking excesses, etc. A big, separate factor which caused major increases in income and wealth inequality was the reduction of the top tax rates and lower taxation of capital gains, as shown on the graph prepared by Thomas Piketty and Emmanuel Saez — whose database has made our income inequality analysis possible — appended to the end of this post.
Their latest data show that the top 1%’s share of total income increased from 8.9% in 1979 t0 22.5% in 2012. On the wealth chart above, that would be shown by drawing a line between $5.4 trillion in 1979 and $12 trillion in 2012, and shading in the area between that line and total GDP, which area would represent top 1% income. Everything below that line would be bottom 99% income.
The top 1% income share is growing exponentially: Saez reports (here) that the top 1% share of new income — i.e., income growth — increased from 11% in 1960-1969 to 43% in 1992-2000, 65% in 2002-2007, and 95% in the 2009-2012 recovery period, peaking at 121% in 2010. Thus, nearly all growth is now going to the top 1%, most of it high within the top 1%. The rate of income inequality growth appears to have nearly maxed out, but wealth concentration seems to still be accelerating.
So, the richest people have been making a lot more money, and they have been allowed to keep a greater share of it. Both the national debt and top 1% wealth grew more quickly after 1980 than total GDP (income), and far more quickly than bottom 99% income.
Top 1% wealth grew very fast because top 1% incomes shot through the roof; the increase in top 1% wealth tracked income concentration growth; it was money removed from active circulation (i.e, saved, not spent or invested in more production).
This growth in top 1% wealth also closely tracked the growth of the national debt, which grew much faster than GDP and, as the graph shows, has now reached the level of GDP. The national debt was about $16.1 trillion in 2012, and now totals $16.7 trillion (about $14 trillion in 2005 dollars) . The reason the growth in national debt has closely tracked the growth of top 1% net worth is clear: The federal government replaced the revenue lost from cutting top taxes by borrowing money. In effect, the national debt financed the tax cuts for top incomes.
The reported Top 1% net worth in 2012 was $20 trillion in 2005 dollars (about $21.8 trillion in current dollars), according to Edward Wolff’s wealth distribution figures and the Census Bureau’s net worth data. Top 1% wealth (in 2005 dollars) grew from about $2.5 trillion in 1952 to $4 trillion in 1980, then increased to $21 trillion in 2006, fell back with the 2008 stock market crash, and recovered to $20 trillion 2012. Top 1% wealth has been growing faster than GDP since 1976, and its growth has been accelerating: Aggregate net worth has already grown by $3 trillion in the first half of 2013, and with 95% of income growth going to the top 1%, most of that must be transferring to the top.
There’s more: Both the income and wealth distribution estimates are understated because huge amounts of U.S. income and wealth have moved out of the country, deposited in accounts in places like the Cayman Islands and Switzerland. There was an estimated $21-32 trillion of global wealth held in offshore accounts in 2012 (Tax Justice Network). U.S. GDP was $16.7 trillion, almost 20% of the Gross World Product (GWP) of $85 trillion, so a reasonable estimate of the amount of off-shore money coming from U.S. depositors is $4-6 trillion.
So, in 2005 dollars, we have a roughly $16 trillion increase in reported top 1% net worth from 1980 to 2012, and I’ll estimate another $1-2 trillion more already in 2013, for a total of $17-18 trillion; that’s about $18-19 trillion in current dollars. Including off-shore estimates, the total wealth gain is $21-24 trillion in 2005 dollars, and $22-25 trillion in current dollars.
The national debt was about $16.1 trillion in 2012, and is now about $16.7 trillion, up from less than $1 trillion in 1980. The increase in top 1% wealth since 1980, in current dollars, stood at about $21-23 trillion in 2012, and is estimated at $22-25 trillion today.
The upshot is this: The top 1% wealth by 2012 increased about $5-7 trillion more than the national debt since 1980, and is $5-8 trillion above the national debt today. That’s much a greater wealth transfer than I had imagined, but it makes sense: The top 1% was able to amass more wealth than provided by federal borrowing because there was another source of money — the wealth of the bottom 99%. The bottom 60% has virtually no net worth, and middle class savings have been depleted over the past thirty years.
There is much work for economists here: Keynes argued that central governments could revive flagging economies by injecting new money to stimulate growth. Despite about $16 trillion of new money injected into the U.S. economy, however, aggregate growth was reduced since 1980, and we’ve landed in a depression, although it is officially regarded as merely a slow “recovery” from the “Great Recession.”
It is plain that most all of that new wealth was sequestered by the top 0.01% and 0.1%, high up in the top 1%. Quite simply, there is no other explanation for the astronomical increase in top 1% net worth since 1980. The $5-8 trillion that was removed directly from the bottom 99% was apparently sufficient to have precipitated the depression impacts experienced in the bottom 99% economy, including rising poverty and unemployment, declining median income, the prohibitive cost of higher education, the declining affordability of health care and home ownership, and the decline of small businesses and government services at all levels.
As for the view that we have been in recovery from the recession, most people (and economists) have assumed the economy would recover on its own, eventually, and therefore they see recent signs of growth in some sectors as signs of recovery. However, the growing inequality that brought us to this point hasn’t abated, and the enormous wealth concentration leveraged by the national debt is accelerating. We’ve long been in a liquidity trap, with low interest rates and monetary expansion by the Fed failing to stimulate growth. Now there will be even more decline and unemployment with a government shutdown of any length. Our economy is poorly situated to contend even with the government shutdown, much less another crash.
So, over the next two weeks, I hope for everyone’s sake that President Obama will stand firm against a default on the debt. This whole problem is the result of inequality growth, and it’s getting worse all the time. This crisis was caused by the same people who are now sorely threatening the U.S. economy. What would happen if we default on the debt, and the plutocrats who already made off with the lion’s share of the wealth don’t care to save it? More to the point, why would they make all this this happen if they did?
This situation would have been appalling to virtually all of the early economists from Adam Smith on down, notably John-Baptiste Say, David Ricardo, Karl Marx, John Stuart Mill, Henry George, and John Maynard Keynes. It violates their most basic principles. Political economy, Adam Smith said,
“proposes two distinct objects: first to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.” (Wealth of Nations, Book IV, 1776)
And John Locke, a major inspiration for American independence whose passion for economic freedom inspired our founding fathers, argued as a matter of natural law that:
“Whatsoever [a man] removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. . . [I]t hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer.” (Of Property, 1689)
John Locke and Adam Smith would likely have regarded this immense wealth redistribution in America not only a great tragedy, but also a great crime against humanity.
JMH – 10/1/13 (rev. 10/2/13)
Piketty, Saez, and Stantcheva (here)