The science of economics has failed us. Until I got deeply into my research on the economics of inequality, which has been my passion for the last three years, I did not imagine how badly it has failed us, and how far off track conventional economics really is. I’m working daily on my book, and will hopefully get some articles published. There isn’t much time, though. By October 17, the debt limit must be lifted or else, as we used to say in the 1960s, “it’s all over but the shouting.” And it looks pretty clearly like we’re headed there, for a whole variety of really bad reasons.
The fruits of ignorance are truly amazing. In yesterday’s article “Tea Party and the Right”(here), Steven Rosenfeld points to evidence that the GOP will become even more extreme. Already, the GOP has parallel parked dangerously close to the edge of a deep ravine, and from there it desperately wants to make a right turn, thinking there’ll be a safe shoulder waiting just off the road surface. Sorry, but no: It’s a cliff.
Rosenfeld reports on the initial findings of the Democracy Corps “Republican Party Project” (here). In this post I’m concerned about, and only prepared to discuss, one aspect of Tea Party thinking: the economic reality that the anarchistic, libertarian worldview overlooks and that libertarian policies greatly worsen. By “worsen,” I mean depress the economy, make almost everyone poorer, and increase poverty. I’m referring, of course, to the “austerity doctrine,” which maintains that cutting back or even eliminating the federal government will deliver recovery and economic growth. Less, somehow, is more. There has never been a worse, more dangerous time to destroy our economy with such backward thinking.
Tellingly, the pollsters said that Tea Party’s advocacy pined for an America that may never have existed but was seen in nostalgic remembrances of another era.
“They want to return to a time when they believe government was small, people lived largely free of the government, and Americans took responsibility for themselves,” their report said. “This is not those times.”
The Tea Partiers constantly spoke of going “back to basics” and never mentioned that their families might rely on federal retirement programs. Instead, they bristled at what they called “big government” and constantly complained they were losing their “freedom” because Obama’s federal government might tell them what to do.
Whether these well-known libertarian concerns have any merit at all is not my concern here. My concern is the abysmal failure to understand how the economy works that underlies their ability to feel comfortable holding such views. Rosenfeld continues:
While some women who described themselves as moderates were skeptical of the private sector’s ability to care for the vulnerable, Tea Party men were proud defenders of the wealthy, claiming they provide jobs for the country. They ridiculed the notion that prosperity flows from America’s middle class, as Obama has repeatedly said in his stump speeches:
“The whole middle-class-up economy format is completely ridiculous. Because who’s going to give the middle class their money? The upper class. The middle class isn’t going to make money coming out of nowhere. They’ve got to get a job. And who gives the jobs? The rich people. So if you take all the rich people’s money, they’re not going to be able to give anybody a job. Just it’s so backwards. He [Obama] keeps talking about a strong middle class. I don’t want a strong middle class. I want to make all the middle class rich people, because then you’ve got even more rich people who can give more jobs. It’s like a – it’s just ridiculous.”
This is the ignorance that leads to death. These are common themes we’re all aware of: Prosperity trickles down; and the rich people are the job creators. Let them have as much money as they want, for heaven’s sake. Then we’ll all have more.
What I know, and what I’ll be communicating vociferously from here on out, is that the top 1% (highly concentrated in the top 0.1% and top 0.01%) has increased its net worth (wealth) by an estimated $22-25 trillion since they cut themselves loose from the bottom 99% in the Reagan years.
How much is $22-25 trillion anyway? We know we can’t really imagine that much money, but is this really a big deal? Well, let’s see: What if we loaded all $22-25 trillion on a train of boxcars, the standard length of which is 50 feet, extending all the way around the world? The circumference of the earth is about 24,900 miles, or 131,472,000 feet. That’s 2,629,440 boxcars.
Each boxcar on that train would hold $8.4-$9.5 million.
But it’s hard to imagine how far it is all the way around the world. So let’s load that money on a train that only extends across the United States. The U.S. is about 3,000 miles wide, on average. That’s 15,840,000 feet, or 316,800 boxcars.
Each boxcar on that train would hold $63.1-78.9 million.
Perhaps we can begin to ask ourselves a few obvious questions: If as argued above the middle class gets its money from the wealthy, where did the wealthy get this huge increase in its financial wealth? Did it just drift in from some alternative universe? And if this unimaginable increase in top 1% wealth has actually “trickled down” to any degree at all, why have bottom 99% real net worth and incomes declined? Why are bottom 99% cities like Detroit becoming insolvent? Why has a college education become prohibitively expensive for almost everyone except top 1% students? I could go on and on, but I’ll stop there.
There is a serious problem for intelligent people who are capable of thinking these matters through: “Economics” has let us down. As this timeline shows, the entire academic field of economics has been developing for scarcely more than two centuries:
Adam Smith published The Wealth of Nations in 1776, the year the American colonies declared their independence from the British Crown, the year we celebrate every July 4th. These early economists were inventing a new social science, and it wasn’t that long ago. Today the early “classical” economists are mythologized, but mostly they are either honored for their more trivial observations (like “Say’s Law”) or their views are misrepresented today as favoring corporate freedom.
The book I am writing will make clear that such an image of classical economists is far from the truth. The so-called “invisible hand” of Adam Smith, interpreted today as the view that an economy free from government interference would optimize productivity and prosperity, is pure fiction. It was an expression he only used two or three times, and not with that point in mind, so it trivializes and misrepresents his wisdom: What Smith railed against, consistently, was corporate interference with markets, notably labor markets.
No aversion to government involvement in economies flourished within the discipline until Milton Friedman published Capitalism and Freedom in 1962, and Free to Choose in 1980. No classical economist, to my knowledge, ever made such an argument; they recognized and distinguished between good and bad governments. In the 18th and 19th centuries, Europe was typically characterized by extensive squalor and inequality. The concern of T.R. Malthus, for example, was that the exponential growth of population would outpace the linear growth of the food supply, and even with technological advances in agriculture would likely doom Europe to subsistence-level economies. In these circumstances, the suppression of labor’s freedom, not capital’s, was the topic of interest.
The classical economists were, in fact, very good economists, and at one time or another, they observed all we need to know to understand today’s inequality problem, and how to correct it. Adam Smith, with no data to back up his intuition, reasoned that the growth of income and wealth inequality would mean reduced aggregate economic growth. That observation was logical and intuitive, remarkable for its day. It is a reality demonstrated by the income and wealth distribution data available today, but the relationship between growth and income inequality remained unexplored after Smith until Simon Kuznets investigated it in 1955.
The early economists also spent much time and effort on understanding the concept of “economic rent,” payments to landowners who made no contribution to increased production and real wealth (value). Malthus was among the best on this topic. The early analysis of rent can be properly applied to today’s capitalist/landlords (corporations), on a far broader scale.
John Maynard Keynes ignored rent entirely, an oversight which unfortunately invalidated the basic conclusions of his “full employment” model. This was no small oversight, because full employment is not enough, as Keynes thought it would be, to stave off decline and depression. Hence we are treated to the surreal experience of today’s “neoclassical” economists awaiting eventual recovery and full employment, when the reality is that huge wealth transfers continue to siphon up to the top 1%, further restricting the depressed bottom 99% economy.
Nearly all mainstream Keynesian economists, like Paul Krugman, believe that income inequality is merely a “political” problem, and they ignore these massive wealth transfers. The surviving contributions of Keynes’s General Theory are his emphasis on the crucial importance of effective demand (anticipated by Smith, Malthus, Mill and others as “effectual” demand) and liquidity preference (his sophisticated explanation for the “hoarding” recognized by classical theory). These are very important contributions which establish the fundamental instability of modern market economies.
Finally, as should be clear to us, the top 1% could not have obtained anywhere near $22-25$ trillion of new, real wealth since 1980 from the bottom 99% alone. There has been a substantial siphoning of bottom 99% wealth to the top, but there also had to have been a major influx of new money — and there was. The top 1% was able to accumulate such astronomical additional net worth because of the federal income tax cuts they received beginning with the Reagan administration. These tax cuts were financed by the substantial national debt raised to replace these lost revenues, a debt that as I write this is approaching $17 trillion. This amount is recognizable as economic rent in the classical, Malthusian sense. No real wealth has been created, but the wealthy have ended up with more than enough to easily destroy the dollar, should the default that the Tea Party is too ignorant to avoid actually take place.
Interestingly, the classical economists of 200 years ago couldn’t help but notice that European countries frequently overextended their credit to finance their many wars. Economic decline such as that accompanying the current American debt crisis accompanied those episodes as well. Jean-Baptiste Say and John Stuart Mill each devoted a chapter in their books on economic principles to the problems that arise when governments borrow to pay for current bills instead of living within the means provided by taxation, especially when the debt gets so high that governments, like the United States today, must borrow more money just to pay the interest on the preexisting debt. Invariably, the result is stagnation and higher inequality.
Tea Party radicals are oblivious to all of this. Worse, they rail against the accumulated debt of thirty years of Republican malfeasance — yes, it’s virtually all Republican debt, except for interest on earlier Republican debt paid during the Clinton and Obama Administrations, and the bailout money and stimulus needed immediately after the Crash of 2008 — then select the worst possible time to insist that the United States, for the first time ever, default on its debt.
None of this would be transpiring, it seems to me, if mainstream economists properly understood the dynamics of income and wealth redistribution. All of the wisdom of the classical economists is lost on today’s “neoclassical” economists, who have elevated the simplifying assumptions of classical supply and demand analysis to the level of presumed fact; hence, the notion of “full employment equilibrium.” The result is dismaying to say the least. There is very little about the economic analyses and projections reported today that is not infected with conceptual error.
Much will happen in the next 200 years to change economic conditions. Who knows, there may even be a return to the subsistence economies of the classical era, where resource shortages rather than the natural resource abundance and technological progress of the 20th Century will prevail.
Right now, I’m just hoping that we can get past October 17 without setting in motion a spiral down into Great Depression II. Economics needs time to catch up with reality.
JMH — 10/9/2013 (ed. 10/15/201 3)