Inequality, and the Next Crash

Every day articles appear in news media that remind me of the consequences of income and wealth concentration at the top. A front-page article in today’s (6/8/15) New York Times, for example, is entitled: “States Confront Wide Budget Gaps Even After Years of Recovery,” (Julie Bosman, 6/7/2015, here). Illinois, Bosman points out, faces a $3 billion shortfall, and Gov. Bruce Rauner warned that “a major, major restructuring of the government” is around the corner. The article also features the deficits of Kansas and Louisiana. Boseman reports:

Though the national economy is in its sixth year of recovery from the recession, many states are still facing major funding gaps that have locked legislatures in protracted battles with governors. In some states, lawmakers have gone into overtime with unresolved budgets, special sessions and threats of widespread government layoffs.

Why do these serious problems exist? Why the shortage of money?

Inequality

The problem here is the premise that “The national economy is in its sixth year of recovery from the recession.” It the economy was in recovery, income (and hence tax revenues) would be growing. However, total aggregate income is not growing: In fact so far in 2015 it has declined slightly. There is a shortage of money in the economy, and hence incomes lag, and as I have explained in recent posts, that has everything to do with the Quantity Theory of Money (QTM): As income and wealth concentrate at the top, the velocity of money slows, and incomes decline. This is an automatic, mathematical certainty.

It took some work to make that finding, but I find it to be irrefutable. So far as I am aware, others have not yet arrived at that conclusion. Paul Krugman isn’t there yet. In his Op-ed in today’s New York Times, entitled “Fighting the Derp” (here)  he rails once again against “fear mongering over inflation”:

[E]veryone makes bad predictions now and then. But making the same wrong prediction year after year, never acknowledging past errors or considering the possibility that you have the wrong model of how the economy works – well, that’s derp. * * *

It’s an article of faith on the right that any attempt by the government to fight unemployment must lead to disaster, so the faithful must keep predicting disaster no matter how often it fails to materialize.  

According to Wiktionary, the verb “derp” means “to make a foolish mistake” (here), and Know Your Meme says: “Derp is an expression associated with stupidity” (here).

It definitely is not a stupid mistake to fail to appreciate the overwhelming importance of the distribution of money. So far, practically no one does. I started out several years ago with the premise that mainstream economics, because of all of the failures Krugman is talking about, has been using a faulty model of how the economy works. But the errors lie not only in refusing to understand that cutting taxes on the rich and corporations doesn’t stimulate growth (the trickle-down fantasy) or in believing that cutting government spending will somehow stimulate growth (the austerity doctrine). These two are really derpy ideas. The errors run much deeper than that, however: It’s also derp to continue to insist that we’re recovering from the “Great Recession” more than six years after the Crash of 2008, when we really are not.

It is certainly true, as Krugman points out, that there can be derpy economic ideas on both sides of the political divide:

The first line of defense, I’d argue, is to always be suspicious of people telling you what you want to hear.

Thus, if you’re a conservative opposed to a stronger safety net, you should be extra skeptical about claims that health reform is about to crash and burn, especially coming from people who made the same prediction last year and the year before (Obamacare derp runs almost as deep as inflation derp).

But if you’re a liberal who believes that we should reduce inequality, you should similarly be cautious about studies purporting to show that inequality is responsible for many of our economic ills, from slow growth to financial instability. Those studies might be correct — the fact is that there’s less derp on America’s left than there is on the right — but you nonetheless need to fight the temptation to let political convenience dictate your beliefs.

Fighting the derp can be hard, not least because it can upset friends who want to be reassured in their beliefs. But you should do it anyway: it’s your civic duty.

Okay, Mr. Krugman, I hear that, loud and clear. Unfortunately, I would rather be disabused than reassured of my beliefs on these subjects:  So I feel that it’s my civic duty to point out that the studies which show inequality is responsible for slow growth (and all that goes with it, including declining state, county and local government funding) are correct: It is the proof of the truism that is the QTM. The reason is that money – income and wealth – is continuously concentrating at the top.

The Next Crash

There is a growing awareness of America’s continuing economic decline, and some people, usually not economists or financial analysts, however, are increasingly sensing the relationship of that decline to growing inequality.

            Thom Hartmann

In his latest book, The Crash of 2016: The Plot to Destroy America – and What we Can Do to Stop It (Twelve, New York, NY, 2014) Hartmann relates a realistic new sense of urgency that goes beyond the concerns he expressed a few years ago in Rebooting the American Dream. A broad thesis developed in this new book is the idea that every eighty years or so depression and war come along, following a “Great Forgetting” in which all those who endured the previous crisis have died off. At that point, he argues, the “Economic Royalists” are able to take over government and reestablish the conditions for corporate takeover and depression. Notably, the connection between inequality and depression that mainstream economics denies is mainly just implicit in his perspective:

The Royalists of the 1950s and early 1960s . . . knew that the vigilant spirit FDR had installed in the nation against the forces of plutocracy was waning by the end of the 1960s. Those who were just coming into power with FDR during the last Great Crash in 1929 were, by the late 1960s and early 1970s, retiring and dying off, being replaced by a new generation with little direct memory of why the why the crash had happened, how it had worsened for the long years, and, most important who caused it. And that generation would be teaching the next generation, who had no memory whatsoever of what caused the Great Crash and the war that followed it. (p. 29)

The “Great Forgetting” expresses a meme that resonates deeply with me, because I studied economics in the mid-1960s just as neoclassical economic ideology was asserting its dominance over Keynesian macroeconomics.

Hartmann’s book also impressively stresses the fundamental role of progressive taxation in the development of middle class prosperity. And Hartmann, in my judgment, correctly perceives the seriously advanced stage of the current inequality cycle:

This crash is coming. It’s inevitable. I may be off a few years plus or minus in my timing, but the realities of the economic fundamentals left to us by thirty-three years of Reaganomics and deregulation have made it a certainty. We are quite simply repeating the mistakes of the 1920s, the 1850s, and the 1760s, and we are so far into them it’s extremely unlikely that anything other than reinflating the recent bubbles to buy a little time here and there will happen. (p. xxvii)

Hartmann shows how historical perspectives can lead to conclusions, and sometimes with uncanny accuracy, that a scientific economics unencumbered by politics could and should be objectively reaching.

Inequality growth has been going on for far too long already, and the scary thing is that given our national debt situation and developing private debt bubbles, there could actually be another crash as early as 2016. A diverse group of professionals is now advancing the same warning.

           Harry Dent

Harry Dent, for example, argues from a monetary and financial analysis:              

With each new bubble, we reach higher highs, and then crash to lower lows. It’s such an obvious megaphone pattern that I’m not sure how anyone could miss it.

Central banks continue to stimulate us out of each downturn and crash with free money and zero interest rates. How could that not create a greater bubble and greater crash to follow… unless you really can get something for nothing? (“The Impending Collapse: Most Economists Miss This,” by Harry Dent, Economy & Markets Daily, May 11, 2015, heresee also, “Warning: The Greatest Market Crash of Your Lifetime Is Coming,” Harry Dent, Economy & Markets Daily, here).

          Porter Stansberry

Stansberry Research emphasizes the decline of the dollar and predicts a major currency crisis. Interestingly, in a linked memorandum, Porter Stansberry argues from the commonly known facts of debt accumulation and economic decline:

Our government has embarked on a gross, out-of-control experiment, expanding the money supply 400% in just six years, and more than doubling our national debt since 2006. * * * It took our nation 216 years to rack up the first $8.5 trillion in debt… then just 8 more years to double that amount. * * *

Sometime in the next few years, we will experience a “new” crisis of epic proportions. * * * We’re going to have a major stock market crash – and it will be worse than the one we experienced seven years ago. * * * We’re going to have a currency crisis too – because investors and governments around the world will realize the U.S. dollar is not the safe haven it once was. (“A Multi-millionaire’s Personal Blueprint For Surviving the Coming Currency Collapse: ‘This is what I’m doing to protect my family and my finances – I recommend you do the same,” here).

Stansberry, interestingly enough, backs this financial perspective with basic economic observations:

I know many people see the recovered stock market, the rebound in real estate prices, and want to believe everything is “back to normal.”

But I promise you, nothing is “normal” about what is happening in America today. It is all smoke and mirrors – the result of an out-of-control government experiment with our money supply.

       After all, how can it be “normal” when:

  • Roughly 75% of Americans are living paycheck to paycheck, with essentially zero savings, according to a recent study by Bankrate.
  • The “labor force participation rate” (basically the percentage of able-bodied people who are actually working) has fallen every year since 2007 and is at its lowest level since the 1970s. (Source: The U.S. Bureau of Labor Statistics)
  • How can things really be “normal” in America,when the number of people on food stamps has basically doubled since Barack Obama took office and when HALF of all children born today will be on food stamps at some point in their life?
  • Yes, you read that correctly: Roughly 50% of all children born in America today will be on food stamps at some point in their lifetime. Does that sound “normal” to you?
  • Can our country really be back to “normal” when, according to the most recent numbers from the Census Bureau,an incredible 49% of Americans are receiving benefits from at least one government program EVERY SINGLE month?
  • Or when 52% of all American workers make less than $30,000 a year?
  • Can things really be “normal” in America when at one point, a single U.S. government-controlled agency (the Federal Reserve) was purchasing up to 70% of the bonds issued by the U.S. Treasury – simply by creating money out of thin air?
  • Or when the “too-big-to-fail-banks” that got bailed out in 2007 are actually37% larger than they were back then?
  • And how can things be normal when our country’s money supply has increased by 400% since 2006 – all just printed out of thin air. (Original emphasis)

           Ron Paul

Stansberry Research has enlisted former Congressman Ron Paul in its advertisement of another impending crash. (See Ron Paul’s prediction of collapse from a full-blown currency crisis, here); Stansberry Research in association with Ron Paul has been predicting, imminently, a currency crisis and the collapse of the dollar. (See “Developing Story: Dr. Ron Paul Reveals #1 Step to Prepare for America’s Next Big Crisis, by Michael Palmer, Advertorial, The Crux, April 21, 2015 (here); . see also “Warning: The Greatest Market Crash of Your Lifetime Is Coming,” Harry Dent, Economy & Markets Daily (here).

These folks are in business and hope to profit from their advice, which means that we must be wary of what they are trying to sell us. Still, I find, Dent, Stansberry, and Paul accurately perceive the symptoms of depression. None of them, it must be noted, have perceived the extent to which the concentration of wealth and income aggravates the problems they analyze and, conversely, the degree to which deconcentration can alleviate the threat of the collapse they are forecasting.  

      Eric Janszen

From a mainstream, supply-side perspective, Eirc Jansen, author of The Post-Catastrophe Economy: Rebuilding America and Avoiding the Next Bubble, has been arguing that the current situation is evidence of an an “output gap;” that is, a deficiency in actual output below potential output, and that “policy responses to the existence of the output gap are creating a stagflationary environment” and conflict with “policy measures needed to prevent a future bond and currency crisis.” (“Portfolio Strategy – Section 1, Part II: The Devil’s in the Details,” by Eric Janszen, iTulipp.com, June 14, 2011, here.)

Pursuant to this mainstream analysis, he computed the growth rate needed to overcome the current output gap:

To review, if the U.S. economy grows at a 1% annual rate, it will never recover to a pre-recession level of economic output.

If the U.S. economy grows at a 2% annual rate, it will also never recover to a pre-recession level of economic output.

Even if the U.S. economy grows at a 3% annual rate, it will not recover to a pre-recession level of economic output until 2019. I expect a new recession well before then that will grow the output gap even further.

The U.S. economy has to grow in real terms by 4% per year in order to close the output gap in 2013, before the next recession.

In an earlier post in which he graphed these scenarios, he argued:

The contraction phase of the Great Recession left America with a $1 trillion gap between actual and potential growth. The economy must grow at a rate of at least 4% per year now in order to reach growth potential before the next recession opens the gap further a few years from now. If we fail to meet this deadline, the American political economy will enter a second circle of hell as chronic economic pain from high prices and low wages morphs into a self-destructive cycle of class conflict and political deadlock. (“The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat,” by Eric Janssen, iTulip.com, October 8, 2010, here .)

This is the first mainstream analysis of the post-Crash decline I have seen that regards the situation as a “trap,” the first even to theoretically abandon the idea of an eventual return to full employment. It is noteworthy that he has arrived at a sense of urgency regarding the current U.S. situation from the perspective of a conventional mainstream ideology. Thus, in his 2011 post, he attributed the steady decline of annual growth rate to a “maturing” of the U.S. economy.

In his book, he argued that the American economy – the “FIRE economy” – has moved away from tangible production as it accumulated excessive private and public debt. Consistent with the mainstream perspective, he has assigned no responsibility to the distribution of money, and he opened his review of ”the ruins of the FIRE economy” with this accounting of inequality growth:

At the end of the run-up to the near collapse of the world economy in 2008, what did the legacy of the FIRE economy leave us?

  • Unprecedented distortions in wealth, income, and debt distribution, leading to political divides between rich and poor, creditors and debtors, older and younger generations, and different races that will widen dangerously during the Great Recession, thwarting needed cooperation. * * * (The Post-Catastrophe Economy: Rebuilding America and Avoiding the Next Bubble, Portfolio Penguin, New York, NY, Kindle Ed., 2010, p. 54)

Inequality is seen as effect only, reflecting the mainstream perspective that the distribution of money has no macroeconomic impacts, only political effects. Janszen has many solid arguments based on a great deal of research and thought. However, the supply-side orientation of the mainstream perspective on growth, which underlies his thinking, fatally fails to reflect the influence of demand on growth. The income gap, it has been argued, must be due to social explanations, such as the inability of the lower-income groups to advance their opportunities or their training sufficiently to match the growth rates at the top.

Of course, the entire top 1% has not increased its productivity, i.e., its ability to produce real output by ten percent annually in recent years, while the rest of the population regressed. If that were true, the long decline in the top 1% income share from 23.9% in 1928 to 8.9% in 1976 would have to have reflected a massive increase in bottom 99% productivity while the top 1% lost its ability to produce! I have never seen such a preposterous proposition articulated, but that is what the neoclassical rationale effectively implies. 

Worse, the deeply ingrained neoclassical assertion that growing inequality has no macroeconomic impact causes a serious underestimation of what it will take to close the theoretical output gap. It is like measuring the arduous task of salmon swimming many miles upstream during spawning season without accounting for the added difficulty of having to swim up powerful waterfalls to reach the spawning grounds, a far greater barrier to spawning success.        

Summary

America continues to be confused by the continuing decline, and continues to cite inequality only superficially or anecdotally in connection with real factors that continue to cause further decline. For example, if the worst fears about the Trans-Pacific Partnership (TPP) play out, there will be both an enhancement of the suppression of incomes at the bottom and the treasures reaped at the top. But these other factors are only a part of the problem.

But all of these other factors reduce total growth, to everyone’s detriment, including those at the top. Inevitably, this means another crash, and perhaps more after that, will occur. Notably, these conclusions have been reached by analysts even without considering the role of the distribution of money. But only the continuing growth of inequality since 2008 can adequately explain the magnitude of the continuing reduction of income growth: Conventional economic thinking greatly underestimates the scope of the problem.

When we read an article like the piece in today’s New York Times about the state budget crises, it is important to remember that this can all be turned around with more money in circulation. What that necessarily means is taxing the rich at the federal level, and taxing their corporations. A more progressive system of taxation is needed to reverse the concentration of income and wealth that has been taking place since 1980.  

JMH — 6/8/2015 

This entry was posted in - FEATURED POSTS -, - MOST RECENT POSTS -, Economics, State & Local Government, Taxation, Wealth and Income Inequality. Bookmark the permalink.

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