Wisdom is a strange commodity. Most of the time we don’t recognize it when it infiltrates our addled brains, and it is always hard-won and a long time coming. Yesterday’s post “Krugman v. Stiglitz — Debt v. Taxation” deserves this postscript, for having written it, I have arrived at what I hope readers will agree is a wise epiphany, for the difference between blundering along as the United States government continues to do — feeding the concentration of wealth and income at the top — and finding a way to stop the madness, is the difference that will determine whether our children and grandchildren can ultimately survive. Yes, it’s that serious. Here’s my summary of what I believe I have learned about our current choices on how to proceed:
- Money is debt, and traditional monetary policy won’t help at all, because by creating more money it will just keep feeding inequality, and inflating debt bubbles;
- Janet Yellen (apparently) and Ben Bernanke before her (assuredly) don’t understand this. For his part, Bernanke idolized Milton Friedman’s “free market” philosophy that said, in effect, everything will be fine if we just give free rein to entrepreneurs and corporations, and there is no such thing as “too rich”;
- John Maynard Keynes, in 1935, provided essential insights with his “General Theory,” which said there are three truly independent variables (independent of each other) in a market economy: (1) the interest rate; (2) society’s propensity to consume; and (3) the “marginal efficiency of capital” or the “cost of capital” (i.e., the present value of all expected future returns on investment). I became intimately familiar with the cost of capital in my career, and affirm that Keynes’s marginal efficiency of capital is identical to the Capital Asset Pricing Model (CAPM) used to estimate the cost of equity capital;
- The “General Theory” boils down to this — as long as there is enough demand in the population, and enough money to spend, there will be sufficient expectation of future returns on investment to prompt investing in growth and jobs. Changes in the interest rate, in normal times, can make it easier or harder for firms to borrow money needed for additional investment;
- But these are not normal times. Now we must abandon the idea that interest rate manipulation can influence the demand for new capital. It won’t work, because there is already far more than enough money out there for new investment, sitting idle, because it came from the former middle class, which no longer has that money to spend;
- That is true because of all the many trillions of dollars of economic rent extracted from the economy by the top 0.1% and the top 0.01%, as Joseph Stiglitz so ably argues;
- These trillions of dollars of economic rent stayed at the top because of the tax reductions for the richest Americans and their corporations engineered by the Reagan revolution;
- Because income and wealth concentration at the top drastically reduces growth, the U.S. economy will continue to decline, sinking into ever-deeper depression;
- There is a more immediate problem, however: The federal government already is so deeply in debt that a major fiscal crisis is threatened, and continuing to increase the money supply only exacerbates that problem, inflating more debt bubbles;
- We now have to worry that a significant increase in the interest rate will provoke another crash, which means that safety requires maintaining a zero interest rate indefinitely.
- Re-institute very high levels of income taxation at the very top; tax the top 1% or so at a marginal FIT rate of about 70%, the top 0.1% or so at about an 80% rate, and the top 0.01% at a rate of 85-90%, as we did after World War II. That is not just the top priority, it is essential;
- Use the money, first and foremost, to deflate debt bubbles — retire student debt, vehicle debt, medical debt, mortgage debt, and so forth, in a careful, systematic way;
- Stimulate consumer demand and growth: increase and enforce the minimum wage, and provide more assistance to the indigent and disabled veterans. Remember, the more money they have, the more they can spend;
- Use the money as well to improve our dedication to medical care, and institute a single-payer health care system; and to seriously invest in education and a renewed emphasis on scientific thinking and progress;
- And certainly not least, use the money to invest in infrastructure improvements at home, and in saving the planet from the looming disaster posed by global warming. These priorities will create booming industries and millions of jobs;
- Enter into international agreements that curb the excesses of the banking and financial industries, and avoid those that lock in advantages for the corporate profiteering.
If this sounds like “socialism” that’s because that is exactly what it is. We’ve operated under perverse ideas of “socialism” that demonize labor and work for far too long. Let’s agree to pursue the objective defined by Adam Smith and the classical economists, namely, a society in which the purpose of economic activity is the optimization of the public welfare, not personal gain.
Can this happen overnight, or even at all? We can be certain that corporatism is dedicated to preventing such a development. Two advocates who are not especially optimistic in this regard are Thom Hartmann (The Crash of 2016) and Joseph Stiglitz (The Price of Inequality). I recommend these two books to everyone — put them right at the top of your reading list.
Then do your best, which is all any of us can do. It’s for our children and grandchildren.
JMH – 8/22/2015