Public credit affords such facilities to public prodigality, that many political writers have regarded it as fatal to national prosperity. For, say they, when governments feel themselves strong in the ability to borrow, they are too apt to inter-meddle in every political arrangement, and to conceive gigantic projects, that lead sometimes to disgrace, sometimes to glory, but always to a state of financial exhaustion; to make war themselves, and stir up others to do the like; to subsidize every mercenary agent, and deal in the blood and the consciences of mankind; making capital, which should be the fruit of industry and virtue, the prize of ambition, pride, and wickedness.
A nation, which has the power to borrow, and yet is in a state of political feebleness, will be exposed to the requisitions of neighbors. It . . . perhaps must lend, with the certain prospect of never being repaid. These are by no means hypothetical cases: but the reader is left to make the application himself. * * *
The command of a large sum is a dangerous temptation to a national adminis-tration. Though accumulated at their expense, the people rarely, if ever profit by it: yet in point of fact, all value, and consequently, all wealth, originates with the people. — Jean-Baptiste Say, A Treatise on Political Economy, Chapter IX, Of National Debt, 1803 (here).
Two French economists, Emmanuel Saez and Thomas Piketty, have in recent years awakened us to the significance of growing income and wealth inequality, and in his much-hailed 2014 book Capital in the Twenty-First Century, Piketty has called our attention to an important aspect of the problem, the need to control the concentration of wealth. Two centuries ago, when rudimentary ideas about how economies work were just beginning to be formulated in the minds of political philosophers, another Frenchman, Jean-Baptiste Say, was among the first and the best of the new “classical” economists.
Say, and several decades later the Englishman John Stuart Mill, each devoted a chapter in their books on economic principles to the important issues raised by the raising of national debt. Say opined, listing detriments that sound all too familiar today, that national debt in effect reallocates “value” and wealth originating with people in efforts that rarely benefit them. He regarded the activities of the state thus financed as frequently unvirtuous and, from society’s viewpoint, mostly wasteful. Mill (The Principles of Political Economy, Chapter V, “Of a National Debt ,” 1848, here) was at least equally critical of national debt:
The question must now be considered, how far it is right or expedient to raise money for the purposes of government, not by laying on taxes to the amount required, but by taking a portion of the capital of the country in the form of a loan, and charging the public revenue with only the interest. * * *
[I]f the capital taken in loans is abstracted from funds either engaged in production, or destined to be employed in it, their diversion from that purpose is equivalent to taking the amount from the wages of the laboring-classes. Borrowing, in this case, is not a substitute for raising the supplies within the year. A government which borrows does actually take the amount within the year, and that too by a tax exclusively on the laboring-classes, than which it could have done nothing worse, if it had supplied its wants by avowed taxation; and in that case the transaction, and its evils, would have ended with the emergency; while, by the circuitous mode adopted, the value exacted from the laborers is gained, not by the state, but by the employers of labor, the state remaining charged with the debt besides, and with its interest in perpetuity. The system of public loans, in such circumstances, may be pronounced the very worst which, in the present state of civilization, is still included in the catalogue of financial expedients.
Thus, Mill observed that in its practical effect national debt is a vehicle for redistribution of wealth to employers — a point ignored today. Beyond that, on the general question of whether to tax or borrow, he offered the common-sense test with which we are all familiar:
[T]he question really is, what it is commonly supposed to be in all cases—namely, a choice between a great sacrifice at once, and a small one indefinitely prolonged. On this matter it seems rational to think that the prudence of a nation will dictate the same conduct as the prudence of an individual; to submit to as much of the privation immediately as can easily be borne, and, only when any further burden would distress or cripple them too much, to provide for the remainder by mortgaging their future income. It is an excellent maxim to make present resources suffice for present wants; the future will have its own wants to provide for.
Among the classical economists, so far as I have discovered, there was no dissent from this “excellent maxim.” It was expected, in any event, that debts incurred were to be repaid as soon as possible after the financial emergency had passed. Say’s views also reflected Mill’s later understanding that national borrowing has the general effect of retarding private investment and employment:
There is this grand distinction between an individual borrower and a borrowing government, that, in general, the former borrows capital for the purpose of beneficial employment, the latter for the purpose of barren consumption and expenditure. A nation borrows, either to satisfy an unlooked-for demand, or to meet an extraordinary emergency; to which ends, the loan may prove effectual or ineffectual: but, in either case, the whole sum borrowed is so much value consumed and lost, and the public revenue remains burthened with the interest upon it.
That would not be entirely true, of course, if a government endeavored to invest in domestic growth; but why, other than to escape from a depression, would government borrow extensively to try to do that? And has the U.S. budget, over the last three decades, generally been a pro-growth budget?
Say also discussed what would happen if a government ignored the maxim to borrow only when absolutely necessary, and engaged in perpetual borrowing:
When a government borrows, it either does or does not engage to repay the principal. In the latter case, it grants what is called a perpetual annuity. * * * The governments best acquainted with the business of borrowing and lending have not, of late years at least, given any engagement to repay the principal of the loan. Thus, public creditors have no other way of altering the investment of their capital, except by selling their transferable security, which they can do with more or less advantage to themselves, according to the buyer’s opinion of the solidity of the debtor government, that has granted the perpetual annuity.
The U.S. Debt Problem
The United States has not run up more than $17 trillion of national debt to respond to any financial exigency, but rather to finance tax cuts for the wealthiest Americans and, consequently, to provide them with a vast increase in wealth (net worth). To help come to grips with this horrendous reality, let’s keep McHugh’s chart in front of us for closer inspection.
Per Capita Income
McHugh has, appropriately, shown the change in aggregate per capita income in the black columns in nominal dollars; adjusted for inflation, the black columns would show the median “real” per capita income declining over the past few years. Notably, these aggregate income numbers include both top 1% and bottom 99% income. The trend line for the top 1% per capita income would slope up (erratically, reflecting the Crash 0f 2008) indicating the generally increasing per capita income of the top 1%; the bottom 99% line, however, would be declining after 2007, reflecting the declining nominal median per capita income of the bottom 99%.
There was some income growth after 1990, but as shown for example on the Piketty/Saez chart in the last post, this was an already severely reduced growth rate, as the growth of bottom 99% income had already declined sharply after 1980 when income inequality began to grow.
Per Capita National Debt
The exponential growth of per capita debt reflects debt interest compounding faster than the U.S. population. The U.S. debt has been a “perpetual annuity” for many years, meaning that all of the money needed to pay the interest is borrowed each year, and the principal balance keeps growing. In fact, the principal balance is growing rapidly, and as the interest burden grows relative to other government functions, the debt gets increasingly unmanageable. The Obama Administration has been stressing that the deficit has recently been reduced. To reverse the growth of the debt, however, the government must run surpluses, and as long as lower 99% incomes continue to decline, given the regressive state of taxation, there is no prospect of surpluses ahead.
Indeed, the Congressional Budget projects increases in budget deficits. In its latest report, “The Budget and Economic Outlook: 2014 to 2024,” February 2014 (here), and summary dated February 4, 2014 (here), the CBO projects increasing interest rates and inflation through 2014, and declining unemployment (from an estimated 7.0% in 2013 to 5.8% in 2017 and 5.5% in 2024 (p. 6). With this forecast in the background, here is the projection for the budget deficits looming ahead:
Year Deficit ($billions) Year Deficit ($billions)
2013 -680 2019 -752
2014 -514 2020 -836
2015 -478 2021 -912
2016 -539 2022 -1,032
2017 -581 2023 -1,047
2018 -655 2024 -1,074
This is not movement in the right direction. GDP is not predicted to double between 2014 and 2024, nor is population, so the perpetual annuity is projected to increase its stranglehold on federal government finance. The problem is not spending (see Outlays, Table 3-1). Government non-discretionary spending is, of course, projected to rise, but Social Security and Medicare expenditures are funded separately, and Social Security funding is not yet in trouble. The expenditure that is rising the fastest, by far, is net interest expense, rising from the 2013 actual of $211 billion to $880 billion in 2024. Compare that steep rise, for example, with the expected growth in the discretionary defense budget from $625 billion in 2013 to $719 billion 2024.
The fact that interest expense will soon exceed the entire defense budget underscores the awfully high price we pay for setting up this perpetual annuity for government creditors: Interest expense is projected to rise from 1.3% of total outlays in 2013 to 14.7% in 2024. Because interest compounds exponentially, the problem going forward is obvious.
And every discussion of CBO projections of government tax revenues must be qualified by recognition that mainstream forecasting begins with the wildly inaccurate “supply-side” assumptions inherent in neoclassical thinking. We are not told how the CBO takes reduced consumption and incomes into effect, though we know that Fed forecasters have recently stumbled over this problem. We can, however, be reasonably certain that the bases for their growth assumptions, and for decline in unemployment to 5.5% by 2024, are no more than wishful thinking.
Here’s why: The increases in per capita national debt reflected in HcHugh’s chart, and the future debt increases reflected in the CBO projections, mirror and closely match the continuing increases in top 1% wealth. It bears repeating that the $17 trillion of national debt is the direct result of tax cuts for the rich; the national debt has done nothing but finance an increase in top 1% net worth. The rich have been allowed to retain more income as wealth, and that has caused and accentuated an inequality cycle driven by government spending.
So far as I know, I am the only one so far to publish the estimated increase in top 1% net worth since 1980, and here is my graph:
The crucial point is that the increase in top 1% net worth has risen at about the same pace as the national debt (compare 1980 with 2012), only slightly faster. These numbers, derived from government net worth data, show top 1% net worth increasing by $17 trillion between 1980 and 2012 (in constant 2005 dollars). However, when account is taken of U.S. top 1% wealth increases from the “shadow economy” discussed in the last post, and stored in “off-shore” accounts, a reasonable estimate of the actual gain is $22-25 trillion.
Two points: First, in addition to money the federal government has borrowed ($17 trillion) to finance their growing wealth, the top 1% has gathered in an estimated $5-8 trillion from the bottom 99% over these years. The lower incomes and wealth of the bottom 99% have substantially reduced bottom 99% tax revenues. Second, and this is a critical point, this is going on right now: Between 2008 and 2012, $3 trillion transferred up. This should have been revenue provided to the federal government: instead of reversing this confiscatory trend, however, our representatives in Congress are letting it continue, and plotting to increase it.
The budget death spiral
It cannot be over-emphasized that this destruction of our federal budget is the natural consequence of the reduced tax obligations of the rich and their corporations that have led to unimaginable inequality and depression for the bottom 99%. Not only does a huge portion of the interest on the debt increase top 1% wealth, the proceeds of all of the government debt, including money borrowed from China or other countries, ends up profiting the top 1% as well: We are in an advanced stage of the income and wealth concentration process reflecting a systemic change in the economy; now virtually all income growth is at the top, and more inequality growth is a nearly automatic result of all government spending.
Nor can it be over-emphasized that there was never any purpose for these tax cuts other than to make the very rich still richer. That these moguls did not anticipate the devastating consequences of their actions, looming just a few decades ahead, is no excuse. They are still denying those consequences, perpetuating a neoclassical “trickle-down” fantasy that requires total ignorance of economic reality to believe. The Paul Ryan budget calls for still more tax reductions for the wealthy (here). And the political right disingenuously and improperly argues for still more slashing of government programs in the name of “responsibility.” (E.g., “Analysis of CBO’s 2014 Budget and Economic Outlook,” Committee for a Responsible Federal Budget, here).
Note that while CRFB correctly points out that our budget problems are not going away, on behalf of the wealthy it merely offers, like the Ryan budget plan, to make things worse, calling for a vague package of tax “reforms” which it surely must know, or at least suspect, is based solely on the no longer even marginally credible “trickle-down” myth. The economic right is either ignorant of economic realty or content to preside over the demise of the U.S. economy and society.
Think about it
The scope of this problem is beyond the abilities of our imaginations to comprehend, but let’s try. Mark McHugh, in “Understanding the National Debt (Sesame Street edition)” said this:
I’m tired of convoluted explanations of simple problems. It distracts people from the truth, which is usually the intent of those doing the explaining. The end result is large numbers of people pretending to understand things they don’t. Bernie Madoff’s “success”, ETFs, Treasury auctions, the housing market.
The easiest way to confuse people is with numbers so mind-numbingly big they mean nothing to the average person. What’s 13 and a half Trillion dollars supposed to mean to Joe Sixpack?
Thank you Mark, for that, and for translating the debt numbers into per capita figures for us. But now, let’s really think about it: McHugh’s figures show that the share of the national debt of every man, woman, and child in the U.S. grew from $32 thousand ($128 k for a family of four) in 2007 to $40,000 ($160 k for a family of four) in 2011. What could possibly have happened to our country, and in our lives, to have put each of us so deeply in (collective) debt? And perhaps more poignantly, how could each of the more than 300 million of us have picked up an additional $8,000 of national debt (federal spending for which our considerable tax dollars were somehow insufficient to pay) in just four years?
We can begin to see, I think, that such numbers are so mind-numbingly big that the answers to these questions actually become obvious. There really is no mystery here: The vast bulk of this money simply could not have been spent on us or on our country. And it does not take a lot of research to learn where the money actually went.
These are the evils of which classical economics warned, but which have been rationalized and denied by neoclassical economics. Our country borrowed many trillions of dollars not because we needed to, but because the richest among us wanted to get richer, and didn’t want to pay taxes. Perhaps Martin Feldstein, the Harvard professor who helped Ronald Reagan get this debacle underway, merely didn’t understand how economies work. But then again, very few who professed to be economists back then actually did — and most still don’t. But a growing handful are learning. We are deeply indebted to Robert Reich and Joseph Stiglitz for all they are doing. Hats off as well to Mark McHugh, and to Société Générale strategist Albert Edwards who, I have recently learned, is sticking tenaciously to what appears to most analysts to be excessively bearish views about our economic future.
The inequality problem has gotten so huge that it is sensible to worry about a backlash of denial or avoidance among reasonable people. But avoiding economic collapse is not our only serious problem. The world faces serious human population and environmental problems as well. This evening, Showtime debuts its climate change series “Years of Living Dangerously.” I watched the first episode on the internet yesterday, and one thing stands out in my mind today: A climate scientist whose work was followed by Don Cheadle showed how a devout Christian like herself could still be a scientist, and believe in the lessons of real world evidence. And she showed how other Christians could change their perspective and avoid denial: God has given us the ability to think for ourselves and make our own decisions, she explained, and in the end it is our own responsibility to help ourselves.
It does not appear that human civilization as we know it will last another century. My immediate concern is whether the U.S. economy can survive another decade. That could scare me into denial or inaction. What I fear more, however, is failing to do my best to help preserve our way of life for our children and our grandchildren.
JMH – 4/13/2014 (ed. 4/14/2014)