Establishment Economics: Learning from New Hampshire

Back in the Spring of 2012 I eagerly awaited the release of Paul Krugman’s latest book, “End This Depression NOW!” He was an avowed progressive, and as the New York Times economic columnist, he had the widest audience among current economists. Surely, I felt, he would alert the world to the dangers of growing income and wealth inequality. I was badly disappointed. Krugman glossed over the inequality issue, ignoring wealth transfers entirely, and characterized income inequality as a mere “political” problem. A few months later Joseph Stiglitz released his book “The Price of Inequality” and I felt encouraged. He understood that inequality creates instability and reduces growth. But why would two Nobel Prize winners disagree about fundamental macroeconomic principles? Later that year BBC interviewed both of these economists, and Krugman offered no explanation when asked directly why he disagreed with Stiglitz.

I have been following Krugman’s views very closely since then, and his strange, hybrid Keynesian worldview is very perplexing: He does reject the neoclassical, mainstream trickle-down idea that taxing the rich will harm economic growth, but he declines to accept the converse proposition that taxing the rich and wealth will facilitate growth. He seems to believe that taxation, or more specifically the progressiveness of taxation, is immaterial to growth. This is something he could not believe, however, if he compared the record of distribution and growth before the Reagan Revolution and after it.

Before 2012, I had already concluded that growing inequality is the cause of decline and depression, and that the excessive inequality growth since 1979 resulted from billionaires and multi-millionaires being allowed to make too much money (as a consequence of inadequate anti-trust and market regulation) and then to keep too much of their excessive gains (because of their huge income tax breaks). Their corporations paid progressively lower taxes, and the top income tax rate was reduced from 70% to 28% (now 35%), and the all-important capital gains tax was kept even lower.

As a consequence, not only did top incomes get way out of line with the median income, but inconceivable amounts of wealth transferred into the top 1%. A reasonable estimate of the increase in top 1% wealth since 1979 is $25 trillion, including amounts sequestered “offshore” to avoid U.S. tax liability. This is about $77,000 per capita for the entire U.S . population, which today totals about 323 million. The per capita gain for every man, woman and child in the top 1% by this estimate, is about $7,750,000. Meanwhile, that figure continues to grow each year, through continuous rent-taking and returns on existing wealth.

Much of that growth in top 1% wealth came from the national debt: The current total of $18 trillion is money the federal government borrowed to finance the tax reductions awarded to the top 1%. In effect, the United States has continuously mortgaged its future to create more wealth for the very rich, higher income inequality and slower growth! There is no sign that the plutocrats ever want to pay off the debt, so incredibly they are content to keep riding this gravy train until it derails.

The balance of the top 1% wealth increase was taken as economic rent (excess profit) from bottom 99%. That roughly $7 trillion amounts to about $21,900 for every man woman and child in the bottom 99%: The average family of five has lost about $110,000 of wealth over this period. Considering that most of the bottom 60% of the population has no net worth at all, to suggest that this is merely a political problem is beyond absurd.

Fast forward to the New Hampshire primaries in 2016, and the head-to-head debate on February 5 between Hillary Clinton and Bernie Sanders: Hillary Clinton argues that she has vast experience, and knows how to get things done. Bernie Sanders, on the other hand, argues that we are up against the growing power of an insatiable oligarchy that must be expelled from power: Hence, he has called for a “political revolution.” In response, curiously, Clinton argues that Sanders would risk losing gains already made if he pushed too hard for reform. For instance, he would risk losing the health insurance gains from Obamacare. On that point, Sanders was very clear in the debate: There have been significant gains, he said, but he would strive, without sacrificing those gains, to do much better by expanding the reach of existing government programs.

Where did Hillary Clinton get the idea that the country needs to work for gradual change in this hostile, plutocratic environment? Clearly, it came from Paul Krugman, her apparent chief economic adviser: During the debate, she bragged that Krugman had “approved” her economic plan.

I had been hoping for these several years that Krugman would join Stiglitz to provide real leadership on economic growth and inequality, but Krugman has punted on both issues; and in a recent Op-ed, he has pretty much dashed my hopes in that regard. (“Plutocrats and Prejudice, The New York Times, January 29, 2016, here). After remarking that “the Republican primary fight has developed into a race to the bottom,” he offered this:

Like many people, I’ve described the competition between Hillary Clinton and Bernie Sanders as an argument between competing theories of change, which it is. But underlying that argument is a deeper dispute about what’s wrong with America, what brought us to the state we’re in.

To oversimplify a bit – but only, I think, a bit – the Sanders view is that money is the root of all evil. Or, more specifically, the corrupting influence of big money, of the 1 percent and the corporate elite, is the overarching source of the political ugliness we see all around us.

The Clinton view, on the other hand, seems to be that money is the root of some evil, but it isn’t the whole story. Instead, racism, sexism, and other forms of prejudice are powerful forces in their own right. This may not seem like a very big difference – both candidates oppose prejudice, both want to reduce economic inequality. But it matters for political strategy.

As you might guess, I’m on the many evils side of this debate.

This is a strange line of argument. Of course, as the debate made clear, Sanders is as passionate about “racism, sexism, and other forms of prejudice,” as Clinton. Moreover, his economic position is not that “money is the root of all evil.” Rather, it is that inequality is extremely harmful and that those on the short end of the stick need a lot more money. The “ugliness we see all around us,” in Sanders’ view, is the proximate result of the taking of too much money from people who need it.

Admitting that “it’s going to be a hard slog at best,” he ends on this strangely equivocal note:

Is this an unacceptably downbeat vision? Not to my eyes. After all, one reason the right has gone so berserk is that the Obama years have in fact been marked by significant if incomplete progressive victories, on health policy, taxes, financial reform and the environment. And isn’t there something noble, even inspiring, about fighting the good fight, year after year, and gradually making things better?

Clearly, he has Hillary Clinton convinced to follow this “don’t-rock-the-boat” strategy. It is a position you would expect from someone who sees inequality as nothing but a political problem, and ignores the continuing concentration of wealth at the top. Things have been steadily worsening, and they are not going to get better on their own, or even with Hillary Clinton’s able intervention. There is no automatic return, even in the long run, to “full employment equilibrium.” The economy is either stable or it is unstable, and it has been unstable ever since the tax system became far too regressive.

Krugman focuses on the growing number of private sector jobs as a sign of economic improvement: More recently, he noted that “after President Obama won re-election, . . . the tax rates at the top went up substantially; since then we’ve gained eight million private sector jobs.” (The Time-Loop Party,” The New York Times, February 8, 2018). This is a useful political argument, but it is inaccurate economically:

(1) It is wrong to attribute the growth in jobs to the 35% top rate instituted by Obama. The 35% rate is well below the 70% top rate that prevented the growth of inequality up until the Reagan Revolution, and with growing inequality, growth is depressed;

(2) The official unemployment rate is misleading, because it does not account for people who have been out of work so long that they are no longer in the job market, nor does it account for the people working more than one job, and the declining wage level. The proper test is the rate of growth of incomes (GDP), which has been falling.

It is unclear why Krugman and Clinton are satisfied with the current top income tax rate. Because he has always rejected “trickle-down” ideology, Krugman probably would disagree with Josh Barro’s (“Bernie Sanders’ Tax Plan Would Test and Economic Hypothesis,” The New York Times, February 9, 2016, here) argument that, although Sanders is proposing to raise the top rate only to 45%, the increase (especially in combination with other taxes) would be so high as to “reach or even pass the point after which higher tax rates mean less revenue instead of more.” Studies (even those by Emmanuel Saez, cited by Barro) estimate that the optimal top income tax rate is actually over 80% and may as high as 90%. The ultimate disproof of Barro’s trickle-down theory, however, is that the top rate alone was 91%, then 70%, from 1945 to 1979, a period of relatively rapid growth of income and of middle class prosperity, and of declining income inequality.

Sanders’ margin of victory in New Hampshire, about 60% to 39%, even among voters that generally regard Hilary Clinton as more experienced, suggests that these voters soundly rejected the Clinton gradualism approach, which frankly reflects the harmful influence of neoclassicism on Paul Krugman. Robert Reich, on the eve of the New Hampshire primary (“Why We Must Try,” Robert Reich’s Blog, February 7, 2016, here), strongly renounced that approach:

Instead of “Yes we can,” many Democrats have adopted a new slogan this election year: “We shouldn’t even try.” * * * I understand their defeatism. After eight years of Republican intransigence and six years of congressional gridlock, many Democrats are desperate just to hold on to what we have.

I get it, but here’s the problem. There’s no way to reform the system without rocking the boat. There’s no way to get to where America should be without aiming high. * * * Wealth and income are more concentrated at the top than in over a century. And that wealth has translated into political power.

The result is an economy rigged in favor of those at the top – which further compounds wealth and power at the top, in a vicious cycle that will only get worse unless reversed.

The resounding response at the long rally following Bernie Sander’s victory showed me that voters are starting to catch on to the truth about economics, and are beginning to force a retreat from the profit-oriented neoclassicism of mainstream economics to the public-welfare oriented classical economics of Adam Smith and his successors. They know what is happening to them, and that the “ugliness we see all around us” is abnormal, and hurting them and our country beyond reason.

After the Primary, Reich wrote in his blog (“What New Hampshire Tells Us,” February 9, 2016):

You will hear pundits analyze the New Hampshire primaries and conclude that the political “extremes” are now gaining in American politics. * * * The “extremes” are not gaining ground. The anti-establishment ground forces of the American people are gaining.

For more than a century our thinking has been controlled by the pernicious dogma of “neoclassical” economics, and it has deeply poisoned our thinking. We can only hope that the voters in New Hampshire have sent a message to the economics establishment as well.

J.M.H. – 2/10/2016

This entry was posted in - FEATURED POSTS -, - MOST RECENT POSTS -, Economics, Politics, Wealth and Income Inequality. Bookmark the permalink.

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