Paul Krugman’s Op-Ed in today’s New York Times, “Addicted to the Apocalypse” has sent me scrambling back to my computer to post this analysis. He’s right as rain about the apocalyptic fantasies of the financial deficit hawks, but wrong to leap from that to the conclusion that there is nothing to worry about. Krugman ignores growing inequality — the worsening income and wealth distribution — and as I have been pointing out for more than a year, that leads him and the other “neoclassical” economists into a false sense of security that is dangerously wrong. Anyone reading the last dozen, or even half-dozen posts on this blog will understand my points, so I’ll just review them here with minimal citations. Krugman begins:
Once upon a time, walking around shouting “The end is nigh” got you labeled a kook, someone not to be taken seriously. These days, however, all the best people go around warning of looming disaster. In fact, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable. And I do mean fantasies.
And he concludes:
Why, then, should we fear a debt apocalypse here? Surely, you may think, someone in the debt-apocalypse community has offered a clear explanation. But nobody has.
I’ve been fighting the Chicken Little image for almost three years, and when Krugman unleashes his hyper-confident wrath like this to his world-wide readership, as he frequently does, I can feel the door slamming in my face. So all I can do is ask people to think through the issues of stagnation and growth, as discussed in my last post, a bit more thoroughly.
In his book “End This Depression Now!” (May, 2012) Krugman accurately identified the features of a depression economy after the Crash of 2008. But he also devoted an entire chapter to explaining his tentative conclusion that income inequality is merely a “political” problem, i.e., that inequality growth has no real macroeconomic implications. What follows from that are some pernicious perceptions: (1) Redistribution of income and wealth doesn’t impact growth; (2) Real growth depends solely on investor and consumer confidence, and while our current stagnation is lingering much longer than anyone expected or would like, the economy will make an eventual comeback, and grow out of this “depression.”
The problem is, growth doesn’t just happen, and this is the point where neoclassical fantasy fails to confront reality. Growth requires an infusion of actual money. Krugman confidently argued in his book that traditional Keynesian policies will work just fine in this respect. They are:
(1) Lowering interest rates to spur more borrowing for investment and jobs;
(2) Doing “fiscal policy,” a process of “deficit spending” where the federal government borrows money, increasing its debt and increasing the money supply, stimulating the economy.
However, the prime interest rate has been down around zero for several years, and recovery still lags pitifully. Moreover, deficit spending is exactly what we’ve been doing for all of the last thirty years, and instead of stimulating growth, we’ve gotten price inflation (think Frederick Hayek) and growing inequality and stagnation for the bottom 99%.
Alarmingly, the U.S. ran up $17 trillion of debt over the last 33 years, and that debt has caused the severe budget crisis we now face. As I have pointed out, all of this debt was raised to replace the revenue lost from the reduced taxation, engineered since 1980 by Republican administrations, of top incomes, capital gains, and corporate earnings. That new money was quickly captured by the top 1% income class (in ever-increasing concentrations up through the top 0.1% and 0.01%), and today income redistribution has all but maxed out. Over the last three years, Emmanuel Saez has reported, 95% of income growth is going into the top 1%. Most of that has been sequestered as top 1% wealth: Over the last 30 years, I estimate, the top 1% of wealth holders (also with progressively increasing concentration) have gained some $22-25 trillion in net worth.
Thus, not only has the top 1% of wealth holders captured the full proceeds of our national debt, they have siphoned up some $5-8 trillion of the net worth that used to belong to the bottom 99%, the former middle class and, below that, the bottom 90%, most of which had very little net worth to begin with.
Let me re-emphasize, Krugman is absolutely correct that we cannot blame the budget crisis on too much government spending, and he has tenaciously battled the “austerity doctrine” over the last couple of years. Today, he adds:
Consider, for example, Stanley Druckenmiller, the billionaire investor, who has lately made a splash with warnings about the burden of our entitlement programs. (Gee, why hasn’t anyone else thought of making that point?) * * * Or consider the deficit-scold organization Fix the Debt, led by the omnipresent Alan Simpson and Erskine Bowles. It was, I suppose, predictable that Fix the Debt would respond to the latest budget deal with a press release trying to shift the focus to its favorite subject. But the organization wasn’t content with declaring that America’s long-run budget issues remain unresolved, which is true. It had to warn that “continuing to delay confronting our debt is letting a fire burn that could get out of control at any moment.”
Yes, these guys are wrong to argue that the debt must be confronted immediately, especially with more austerity. That will only make things worse. But we must think this all the way thorough: It is equally wrong to ignore the impacts of inequality. “Inequality is holding back the recovery,” says Joseph Stiglitz (here): “Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined.” And as Robert Reich has been tirelessly arguing, most recently in “The Triumph of the Right” (here), “Conservative Republicans . . . say the biggest problem is the size of government and the budget deficit. In fact our biggest problem is the decline of the middle class and increasing ranks of the poor, while almost all the economic gains go to the top.”
Our bottom 99% is in a depression, from which it is not recovering. Arguments that our economy is getting better rely principally on an alleged improvement in the official unemployment rate as it has inched down under 8% over the last few months, and record stock market performances. Effective unemployment, however, continues to rise, as more and more people have been unemployed for so long they have given up trying to find work, and are having to settle for part-time employment. Meanwhile, the median household income has dropped 10% since the Crash, and poverty and homelessness continue to rise. And the record stock market performance is simply evidence of how effectively the wealth holders are profiting from the shrinking bottom 99% economy and increasing wealth inequality.
There are daily reminders in the press of the advancing mechanisms of upward wealth redistribution, from growing bottom 99% consumer debt, e.g. for medical services (here), to Wall Street’s intention to increase its profits from government pensions via speculative hedge fund investments (here). Big corporations are only increasing their monopoly powers, with little or no constraint and much help from the federal and state governments, and inequality is growing exponentially.
Recovery in these dire circumstances absolutely requires investment in the bottom 99% economy, and the only potential source of money for that is the top 1% economy. We’ve tried everything else, and it has only succeeded in greater wealth transference – to the top.
Look at it this way: Suppose the top marginal income tax rate was suddenly raised back up to 70%, where it was when Reagan took office, that corporation owners and principals were required to pay a similar rate on capital gains above a reasonable amount, and that corporations were required to pay higher taxes on earnings. The government would raise, it appears, more than $500 billion of additional annual revenues, perhaps substantially more. If that additional revenue was raised and circulated back through the bottom 99% economy — in support of small middle-class businesses and infrastructure, health care, education, and the social safety net — there would be a major stimulation of the economy, balanced budgets, a reduction of the national debt, and perhaps even a decrease in the rate of consumer price inflation. We’d be moving back towards the more balanced, prosperous economy we abandoned in 1980. Shouldn’t that hypothetical be more than enough to persuade us that our failure to maintain progressive taxation (taxation that prevents continuously growing inequality) has been our fundamental problem?
Think about what will happen if we don’t substantially improve tax progressivity. The bottom 99% economy will continue to shrink, and things will keep getting worse. Yes, I’m predicting an inevitable “bottom 99% apocalypse,” but please don’t confuse that with the apocalyptic future imagined by the deficit hawks that Krugman rails against so vociferously. I’m not predicting a blowout (unless, of course, the government defaults on its debt). Instead, I’m talking about a steady leak, until the tires eventually go flat and the economy stalls. Who knows how long that will take? The process is slowed by the continuing federal borrowing, but more and more that additional money just goes straight into the coffers of the rich.
We have to plug the leak, and taxation offers the only remedy. The Keynesian remedies are not working, and cannot work. But Krugman and his fellow neoclassical Keynesians assume there is no leak, that the economy can recover, eventually, as if redistribution is no problem at all. They would tweek monetary policy, when it becomes possible to do so, and otherwise just sit around and wait for the economy to revive of its own accord. Don’t worry, be happy, Krugman advises:
So the next time you see some serious-looking man in a suit declaring that we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his friends have been wrong about everything so far, and they literally have no idea what they’re talking about.
But as he rails contemptuously against the “fantasies of fiscal apocalypse,” Paul Krugman spreads his own neoclassical fantasy, and it’s a very dangerous one. He should be afraid — we all need to be afraid — of the bottom 99% apocalypse waiting just down the road.
JMH — 10/25/2013