In my last post, “Follow the Money,” I argued that the absurd theater of the Fox News-sponsored Republican presidential “debate” of last Thursday really can be traced to the stark reality of American economics. Economist Paul Krugman, in one of the best social commentaries I have seen from him, pointed out that all of today’s Republican candidates are just as extreme as Donald Trump: “If you pay attention to what any one of them is actually saying, as opposed to how he says it, you discover incoherence and extremism every bit as bad as anything Mr. Trump has to offer.” (“From Trump on Down, the Republicans Can’t Be Serious,” here). He argued that today’s Republican Presidential hopefuls are virtually required to buy into nonsense in order to have a chance.
It has long been obvious that the conventions of political reporting and political commentary make it almost impossible to say the obvious — namely, that one of our two major parties has gone off the deep end. Or as the political analysts Thomas Mann and Norman Ornstein put it in their book “It’s Even Worse Than It Looks” (here), the G.O.P. has become an “insurgent outlier … unpersuaded by conventional understanding of facts, evidence, and science.” It’s a party that has no room for rational positions on many major issues.
The theme of my post was that the political party of the wealthy has gradually become the political party of the very wealthy since 1980. The interests of extreme wealth are antithetical to the common interests of society, and austerity government and “trickle-down” economics have become rigid tenets of faith. It is equally obvious why this has come to pass: None of the massive accumulation of wealth at the top is workable or justifiable in an economy interested, as was Adam Smith and the Classical Schools of economics, in the general welfare. It can be prevented, and was prevented after WW II in the United States – until 1980. But now, we’re in a serious predicament.
I bought the Kindle version of Mann and Ornstein’s book seeing Krugman’s citation, and I’m a little over one-half way through it. These two are experienced political scientists with years of experience with our national political system: Where there analysis dealt directly with economic questions, I was interested in their perception of how the economy works.
There have been two more recent posts, one each from two of my favorite progressive thinkers, that I felt deserved a few brief comments: (1) Paul Krugman continued his assessment of the Republican debates with “G.O.P. Candidates and Obama’s Failure to Fail,” The New York Times, August 10, 2015 (here), and (2) Robert Reich recently published “The Revolt Against the Ruling Class” in his blog, August 2, 2105 (here).
Here’s what’s on my mind: The failure of mainstream economics to recognize the reality about how market economies work over the last 150 years or so, which encompassed the entire period of the development and perfection of the system we know as “capitalism,” has put all economic thinking in a deep hole out of which very talented, gifted thinkers are only starting to climb. And, to borrow a line from Krugman, “this is no accident.”
Confronted with the recent history of the development of economic theory, no trained economist can be expected to see the dividing line between his or her own version of “model-dependent realism” and a better, more unobstructed view of reality — especially since for more than 50 years Paul Samuelson, the discipline’s first recipient of a Nobel Prize, dedicated his work to promoting neoclassicism and cementing its presumptions and mistakes in professional minds. That was a fate I narrowly avoided back in the 1960s, and I have found that many of the impressions of my youth are borne out today by both logic and subsequent experience. The upshot has been remarkable. This is what I have found:
Inequality in the distribution of wealth and incomes is the controlling factor in determining prosperity or stagnation, and the impact of redistribution of money is far more substantial than we have dared to imagine.
Mann and Ornstein
As good as the Mann and Ornstein book is, the authors are constrained by neoclassical economics to miss the full seriousness of their thesis. Thus, while they ably chronical the decline of functional federal government, and the players that made it happen, they are unable to expand on the serious economic implications of some of their major points. For example, in discussing the Republican push for a balanced budget amendment (pp. 177-124), they conclude:
The system, when it was functional, showed that it can do that without changing the Constitution. The argument that government is so out of control that only a nuclear option of this sort will work is entirely bogus. The amendment would not end or reduce the dysfunction. It would diminish the Constitution and render the country less capable of effective self-governance. (It’s Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism, Basic Books. Kindle Edition, 2013, pp. 123-124.)
There’s nothing wrong with this conclusion, as far as it goes. Any such amendment and the draconian levels of austerity it would entail, as the authors suggest (p. 117), would be very dangerous:
The relationships among taxes, spending, deficits, and economic growth are highly contingent on a host of other factors. It would be foolhardy even to try to restrict or direct economic policy making with a balanced budget requirement in the Constitution. (Id.)
But it would be suicidal, not just foolhardy, and it’s not really as complicated as mainstream economics makes it seem. The over-riding factor is the capacity of the money supply to absorb such stress. We should have no difficulty agreeing with their conclusion to Part I of the book: “All of the boastful talk of American exceptionalism cannot obscure the growing sense that the country is squandering its economic future and putting itself at risk because of an inability to govern effectively” (p 101). But our sense of danger is not good enough if we continue to feel that we’re living in a self-correcting economy. Our economic situation is much worse than it looks.
Thom Hartmann’s recent book “The Crash of 2016: The Plot to Destroy America and What We Can Do the Stoop It” (Hatchett Books, 2013) comes fairly close to sensing the true scope of the danger. In his introduction, he opined:
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 more time here and there will happen (p. xxvii).
There are some accurate perceptions here: We’re too far along in the scheme of things to just hope for recovery; there are mechanisms of stagnation at work; and the economy is fundamentally unstable. Hartmann can get to these conclusions because he is not the captive of neoclassical, supply-side economic ideology.
A well-known and talented progressive economist, Thomas Piketty, could not see matters from this perspective: Ensnared in the neoclassical “long-run equilibrium” framework, he could only review wealth consolidation in the long run, using theories on the long-run course of wealth accumulation as measured by “capital/income ratios.” Long-run models generate long-run conclusions. Hence, he could only conceive of the U.S. inequality problem as a long-run problem, one that might become serious as soon as “2030?” (Capital in the 21st Century, English ed., Belknap, 2014, Table 7, pp. 247-249). But wealth concentration has been growing in the United States steadily and exponentially since 1980, and the first major inequality crisis was the Crash of 2008.
Meanwhile, Reich makes these observations:
Yet in the last three decades – when almost all the nation’s economic gains have gone to the top while the wages of most people have gone nowhere – the ruling class has seemed to pad its own pockets at the expense of the rest of America.* * * Along the way, millions of Americans lost their jobs their savings, and their homes.* * * The Game seems rigged – riddled with abuses of power, crony capitalism, and corporate welfare.
It’s unfortunate to see the word “seemed” in this context, as if any of these facts may only be apparent, not real. I suspect that Reich is just holding back as a precaution, however, for his observations are factually accurate. The wealth that accumulates at the top does actually come at the expense of everyone else: Those who acquire more than above-average per capita amounts of the finite supply of wealth can do so only because there are those who acquire below average per capita amounts. Beyond this arithmetic truism, the Quantity Theory of Money establishes that the greater the income and wealth gaps become, the lower will be the rate of growth. Therefore, there is no scenario in which the rich can get richer without the poor also getting poorer — and then some. We’ve already reached the point in the United States where nothing short of reversing the inequality cycle will suffice to save the economy. I fervently hope that this fact becomes well known before our economy falls into another deep depression.
Mann and Ornstein pointed out that a conscious GOP strategy all throughout the Obama presidency was to obstruct his policies and blame him for any policy failures. In his latest Op-ed, Krugman notes that the Republican candidates did not attack Obama’s policy failures in the first “debate.” Krugman has tirelessly supported the success of the Affordable Care Act over the last year or so, but the GOP has forged ahead with their criticisms without regard for the facts. This is politics, and arguably in this first debate Donald Trump’s threat to party unity was a bigger concern.
Krugman accurately characterizes the GOP worldview: “Try to help the unfortunate, support the economy in hard times, or limit pollution, and you will face the wrath of the invisible hand.” The economics discipline’s argument against correcting excessive inequality has never been anything more than Arthur Okun’s alleged tradeoff between inequality and efficiency, which is looking more and more absurd as inequality rises. Arthur Okun, it turns out, based his entire theory on argument of the power of the “invisible hand,” a magical argument based on a misrepresentation of Adam Smith’s arguments way back in 1776.
The difficulty lies in Krugman ‘s last paragraph:
I’m not saying that America is in great shape, because it isn’t. Economic recovery has come too slowly, and is still incomplete; Obamacare isn’t the system anyone would have designed from scratch; and we’re nowhere close to doing enough on climate change. But we’re doing far better than any of those guys in Cleveland will ever admit.
Krugman’s argument that America is recovering, not declining, comes tumbling down, however, if and when there’s another market crash. Bubbles are growing. What will his argument be when the guys in Cleveland come roaring back, in support of more austerity, with this: “You said we were doing all right?”
The overriding flaw of neoclassical economics is that it drastically understates, intentionally or not, the significance of income and wealth distribution. We are not doing all right. More progressive taxation will be needed, and soon. And it’s not Obama that is holding back growth and recovery. It’s the political party of those guys in Cleveland.
JMH – 8/12/2015 (ed. 8/21/2015)