I had other plans for this morning, but today’s newspapers had stories that hit me hard. I have known I needed to improve upon my own recent efforts to clarify the true nature of our economic situation, and to provide a view of the basics from 5,000 feet. Three articles launched my determination to write about it this morning:
The first was a front page article in the New York Times, by Steven Greenhouse, “More workers are claiming wage theft” (here) . Greenhouse reported on a growing number of lawsuits claiming violations of minimum wage and overtime pay laws, including a major suit brought against a west coast trucking company. My initial reaction: This is not news. Who among us old folks has not, at some point or another, been cheated out of wages or commissions by an unscrupulous employer? On the larger scale of things, we recall John Steinbeck’s The Grapes of Wrath, and Upton Sinclair’s The Jungle, and we know about a broad history of repression of labor.
Wage theft is nothing new, and it goes back no doubt for millennia. For as long as it has existed, I am certain, money has been stolen. But each generation must learn history’s lessons all over again. Today’s darling author is Ayn Rand, whose book Atlas Shrugged preached the glories of unfettered capitalism. It is easy for today’s quasi-prosperous youth to ignore the dark side of human nature, just as today’s economists by and large ignore the dark side of capitalism. But with every month that passes, the dark side is becoming harder to ignore.
The second was a syndicated Op-ed by Charles Krauthammer, appearing in my home-town Albany Times Union, entitled “Lower Corporate Tax Rates Now” (here). Krauthammer argues that minimizing corporate taxation is not unpatriotic, because corporations have an “indisputable fiduciary responsibility” to protect shareholder interests. The appeal to liberals, he says, is economic fairness, so why not eliminate loopholes for a “level playing field”? In his view, the amount of tax revenues doesn’t matter, because “lowering rates stimulates the economy,” and if we had an aggressive president, he’d “address corporate tax reform with a serious revenue-neutral proposal to Congress:”
We might end up with something like the historic bipartisan tax reform of 1986 that helped launch two decades of nearly uninterrupted economic growth.
All over America today, and around the world, people are reading Krauthammer’s words and thinking he’s knowledgeable and authoritative. Actually, his proposal is the worst thing we could do: Lowering rates at the top (corporate profits and top incomes) reduces the progressiveness of taxation and depresses the economy. As I have detailed in recent posts, the “historic bipartisan tax reform of 1986” launched nearly three decades of steadily declining economic growth, coupled with rapidly rising income and wealth inequality. The facts are fully detailed in my recent post “Inequality Suppresses Growth: A Serious Problem?” (here).
As a visual reminder, here is the Piketty/Saez graph of distributed (1%/99%) income over the last century, together with the top income tax rate:
On this Labor Day, I wonder: how many people have actually seen this graph, and has Krauthammer seen it? Sadly, These realities are not presented in the mainstream newspapers I follow: We only get to read Krauthammer’s trickle-down misconceptions. When the trickle-down anesthesia wears off, the deep pain will not have been cured — it will be worse. Today’s liberals have indeed been thinking mostly in terms of “fairness,” but they should be thinking about the threat to our survival.
The Federal Debt
The third piece that set me to this task was Paul Krugman’s Op-ed “The Medicare Miracle” in The New York Times (here). Here’s his intro:
The story so far: We’ve all seen projections of giant federal deficits over the next few decades, and there’s a whole industry devoted to issuing dire warnings about the budget and demanding cuts in Socialsecuritymedicareandmedicaid. Policy wonks have long known, however, that there’s no such program, and that health care, rather than retirement, was driving those scary projections.
Once again, there is no mention of taxation, and there never has been with Krugman, even if we go all the way back to his policy recommendations in his 2012 book End This Depression Now! In fact, though he frequently maintains there is no evidence that reducing taxation of the wealthy and corporations will increase growth, the Krauthammer version of trickle-down ideology, he inexplicably endorses the claim that increasing their taxes can (and has) reduced growth.
This is untenable: Trickle-down in any formulation is nothing but pure fantasy. The debt itself, along with lower growth and higher inequality, was the direct consequence of the tax reductions shown in the graph, and our greatest growth took place during decades of highly progressive taxation. I do not know how to deal with this huge blind spot in Krugman’s thinking. I do know, however, that his reputation as a leading populist allows the Krauthammers of the world to surf in his wake, posing as equally “liberal” while asking the bottom 99% to hand over to the top 1% the keys to the treasury.
The View from 5,000 Feet
Here’s an overview of the major relevant points, the factual proof of which can be found on this blog. The first is really a “philosophical” point.
Liberal v. Conservative
Political ideas, I believe, have colored our perceptions of the real world. For example, when I was young, maintaining a balanced budget, living within your means, and paying your debts, was generally considered a “conservative” attitude. In politics, however, conservative has come to mean what is good for wealth. Hence the economics of conservatives consists of the ideologies that argue what is good for wealth is good for everyone. And the traditional “conservative” idea that governments should balance their budgets is downplayed in favor of ever-expanding government debt. The same is true of “left” vs. “right.” These designations are tendentious and meaningless. If there is a useful, scientific dichotomy, it is “wrong” vs. “right.”
The Failure of “Economics”
Economics as a “science” got derailed with the development of market capitalism over 150 years ago. In the late 19th Century, theorists like A. Marshall, A. C. Pigou, V. Pareto, and L. Walras in Europe, and in the United States J.B. Clark and P. Samuelson, gradually generalized theories of individual or firm behavior into explanations of aggregate economic outcomes. This trend involved what logicians call the “fallacy of composition.” Per Wikipedia:
The fallacy of composition arises when one implies that something is true of the whole from the fact that it is true of some part of the whole.
The “trickle-down” myth is an excellent example: Although a successful industry or firm will grow or flourish with more money at its disposal, it is untrue that an entire economy will flourish when more money is put to the disposal of specific firms or industries.
There is a finite money supply — not fixed, but finite. Everything depends on the availability of money. Keynes realized that within the constraints of a given supply of money, allocating relatively more of it to saving and investment meant reducing the amount used for current consumption, and vice-versa. New money is created, here in the U.S., when banks extend credit. If I buy a house, the money loaned to me is new money, and it begins to circulate as soon as I spend it. Economy-wide, this is the process of income growth, and it takes place reflecting a growth in the population.
Keynes argued that there could be too little consumption at times, and that this would effectively reduce future investment and production. As I pointed out, it was a “dynamic” perspective that he traced all the way back to T.R. Malthus. This introduces an element of instability, and central government plays a central role in controlling the business cycle by borrowing for stimulation (fiscal policy) and making credit for expansion easier by controlling the prime interest rate (monetary policy).
Responsibilities to shareholders, as Krauthammer has pointed out, require minimizing corporate tax responsibility. Business interests, perhaps realizing that government debts would have to be repaid and that tax increases would eventually be required if tax rates were not already high enough to generate government surpluses, floated the fallacious idea that an economy can grow just as fast, perhaps faster, if the wealthy business segment reduced its contribution to society’s common costs. Today, it is this false “trickle-down” perspective that dominates economic thinking.
Income and Wealth Distribution
We are beginning to understand, but only in recent years, that there is a tight, causal relationship between effective demand (consumption from income), taxation, and income and wealth distribution. Thus, when taxes were greatly reduced on corporations and the wealthiest households in the 1980s, a cycle of income and wealth inequality began. Government replaced revenues lost because of these tax reductions by borrowing money.
So, while as illustrated in this second Piketty/Saez graph, the lower taxes continued to drive up the top 1% share of income, the federal debt grew to its current level of about $17.6 trillion:
Government borrowing had increased the money supply, but as we have seen, over the past 30-40 years an ever-increasing proportion of this new money ended up in the top 1% as incomes concentrated at the top.
The market competition assumed in the neoclassical model to provide an “efficient” allocation of resources has all but disappeared in our modern economy of huge nationwide and international corporations. Thus, the ability of these top corporations to make excess profits has increased enormously. By my estimates, the top 1% has increased its net worth (both reported in U.S. accounts and estimated in off-shore accounts) by $22-25 trillion since 1980, and the wealth transfers and sequestration of this money necessarily both absorbed the expansion from federal borrowing and reduced the savings of the middle and lower classes.
The Federal Debt Crisis
There apparently was never any expectation or impetus to pay back the federal debt — which has financed so very much increased wealth at the top — at least among those continuously benefiting from this continuing process of wealth concentration. The Crash of 2008 raised the stakes considerably, markedly reducing overall income growth and increasing unemployment. The effect on government financing has become increasingly catastrophic.
The “conservative” position, promoted by the Congressional Budget Office (CBO) and Paul Krugman, is that we’re doing fine: there will be growth in the future, enough to reduce the budget deficits for at least a few years, before they start climbing again. From this morning’s Op-ed, here’s Krugman’s position in a nutshell:
First, our supposed fiscal crisis has been postponed, perhaps indefinitely. The federal government is still running deficits, but they’re way down. True, the red ink is still likely to swell again in a few years, if only because more baby boomers will retire and start collecting benefits; but, these days, projections of federal debt as a percentage of G.D.P. show it creeping up rather than soaring. We’ll probably have to raise more revenue eventually, but the long-term fiscal gap now looks much more manageable than the deficit scolds would have you believe.
What?? Federal deficits are not way down, as shown in this graph from the Wall Street Journal I recently posted. They only slightly decline before rising again significantly to $1 trillion per year, and from now on they will be consistently worse than any year before Crash of 2008:
Worse, CBO has projected that interest on the debt will increase, between now and 2024, at about 17 times the rate of all discretionary government expenditures, and nearly 4 times the rate of the mandatory programs Krugman discusses today. As I emphasized, by 2021 the interest on the debt will exceed the entire defense budget! Clearly, government operations are severely limited by this rapidly developing crisis.
Worse still, this “forecast” is considerably over-optimistic, by an uncertain amount: CBO projected GDP (income) to grow at 2.1% annually, even though it has grown only 1.4% annually over the last decade, according to Standard & Poor’s. This lower growth reflects the past effects of growing inequality and wealth concentration, the future growth of which, according to data from Piketty/Saez, is not only continuing but accelerating.
There is no basis in these facts for finding that the fiscal crisis has been stalled “perhaps indefinitely,” or even at all. And Krugman’s hopeful expectation that this exponentially increasing debt is only creeping up relative to GDP requires a liberal application of the trickle-down assumption that growth in income and consumption can take place without the distribution of more money throughout the system.
Remember, inequality reduces income growth, and interest on the debt is paid to wealthy people, so growing interest automatically concentrates income and wealth, reducing aggregate growth still further. This is a “mini” vicious cycle, operating within the broader inequality-driven cycle of decay.
Paul Krugman ignores these Keynesian dynamics and related implications of inequality growth: It does not seem unlikely that another bubble will burst (the student debt bubble?) before 2020; and there is no apparent basis for Krugman’s apparent perception that that we can coast beyond 2020 without a significant increase in tax revenues from top incomes and corporations.
As I argued in my last post, Republican strategies in this election year rely on keeping people convinced of the validity of trickle-down “economics.” It is not really surprising, then, to see the New York Times on Labor Day doubling down on this strategy in its major economics column. So, yes, count me as a “deficit scold.” But I am one of those on the “Left” who want to reduce inequality and increase growth and prosperity, not one of those on the “Right” who want to reduce government.
JMH – 9/1/2014 (ed. 9/2/2014)