On October 9, 2013, in a blog article entitled “Ignorance is Death,” I discussed the vast public ignorance about economics and the extreme danger inherent in GOP policies (here), I wrote:
The fruits of ignorance are truly amazing. In yesterday’s article “Tea Party and the Right”(here), Steven Rosenfeld points to evidence that the GOP will become even more extreme. Already, the GOP has parallel parked dangerously close to the edge of a deep ravine, and from there it desperately wants to make a right turn, thinking there’ll be a safe shoulder waiting just off the road surface. Sorry, but no: It’s a cliff.
America’s economic growth is steadily declining as a result of excessive income and wealth inequality. Consequently, the danger of economic catastrophe is significantly increasing.
The reasons for America’s gradual, exponential decline are extensively explained and documented in my book “Reinventing Economics: The Failure of Capitalism and the Economics of Inequality” (Amazon Kindle, May 2016). Here is a succinct summary of my findings:
- High levels of income and wealth inequality substantially depress economic growth and, uncorrected, ultimately (and exponentially) lead to depression. High inequality is more than just a symptom of other causes – it is a dynamic process and the ultimate cause of depression;
- Trickle-down economics is a cruel hoax. But not only does cutting the taxes of the rich fail to promote economic growth, restoring their income taxes to previous higher levels maintained between WW II and the Reagan Administration is needed for any chance of restoring normal growth. In fact, the entire tax system (including state and local taxes) must be sufficiently progressive in the aggregate to prevent growing inequality, or continuous growth suppression is inevitable;
- The explanation for the association of decline with high inequality is straightforward: The velocity of money is slowed when it is concentrated in the hands of the richest people. With money hoarded or stashed in offshore accounts, transactions that result in production of tangible work product are reduced, as is the effective consumer demand required for income and growth;
- Mainstream economics has suppressed the essential components of this reality by ignoring the tautological Quantity Theory of Money spelled out by the American economist Irving Fisher in 1911, and by marginalizing the enormously important “principle of effective demand” developed by the British economist John Maynard Keynes in 1935. The warning by American economist Simon Kuznets in 1955 that the distribution of income and wealth is crucial to growth has also since been ignored;
- By the 1960s, when I first studied economics, the economics profession had already fallen into the hands of neoclassical ideologues like Paul Samuelson and Milton Friedman and their predecessors. Since then, the economics profession has trained several generations of economists to believe in the virtues of personal wealth maximization, couching theory in terms of incorrect concepts of “efficiency” and “equilibrium” that cannot successfully be related to aggregate economic performance, and that lead to no end of confused thinking;
- By reinterpreting the thinking of the original classical economists – especially Adam Smith, David Ricardo, T.R. Malthus, John Stuart Mill, Karl Marx and Henry George – and demonizing the work, in particular, of Karl Marx and Henry George, all progress in the investigation of inequality and growth was soon banished from the profession;
- The underlying premise of neoclassical thinking, which was adamantly challenged by Keynes, is that economies will automatically recover, within a reasonable period of time, from a recession or depression. This pernicious misconception silently persists however, distorting economic policy, exacerbating a high level of confusion, and obscuring understanding of the continuing failure of the United States and much of the rest of the developed world to fully recover from the financial crisis of 2008 and the Great Recession;
The details are all spelled out in my book, but suffice it to say here that the relationships between taxation and the distribution of income and wealth, and between income and wealth distribution and economic health, have been steadfastly suppressed and denied by mainstream economics. This incredible corruption of “political economy” has both justified and encouraged the culture of tax avoidance by the rich, and badly damaged the institutions of democracy and freedom. It has resulted in a terrifying level of resource misallocation. American billionaires and corporate rulers have, for the most part, refused to address, or even admit, the serious social and environmental crises that confront and will soon overwhelm all of humanity.
The evidence is everywhere, and the effects associated with this economic and social decline dominated this last presidential election. Voters are increasingly aware that “something is wrong” fundamentally with the system. Many want to leave the country in despair, to flee a Trump administration that predictably, in pursuing the interests of the wealthy, will worsen everyone else’s well-being. Most of us cannot or do not wish to leave, however. Giving up on America, in my view, amounts to giving up on the future of civilization. So, where do we start?
To begin, you don’t have to be an economist to know that trickle down doesn’t work. And we can begin to understand (along with a number of our leaders, including Bernie Sanders, Elizabeth Warren, and Robert Reich) that the consequences of prolonged inequality growth have turned out to be far more serious than anyone could have imagined. In his first Op-ed statement since the election (“Where the Democrats Go From Here,” Op-ed, New York Times, 10/11/2016, here) Sanders highlighted the gravity of the situation:
Over the last 30 years, too many Americans were sold out by their corporate bosses. They work longer hours for lower wages as they see decent paying jobs go to China, Mexico or some other low-wage country. They are tired of having chief executives make 300 times what they do, while 52 percent of all new income goes to the top 1 percent. Many of their once beautiful rural towns have depopulated, their downtown stores are shuttered, and their kids are leaving home because there are no jobs — all while corporations suck the wealth out of their communities and stuff them into offshore accounts.
Working Americans can’t afford decent, quality child care for their children. They can’t send their kids to college, and they have nothing in the bank as they head into retirement. In many parts of the country they can’t find affordable housing, and they find the cost of health insurance much too high. Too many families exist in despair as drugs, alcohol and suicide cut life short for a growing number of people.
And he took the high road, as he had to, in serving notice of the continuing vitality of his political revolution, a revolution that will ultimately prove to be a key factor in the quality of our future and in our survival:
I will keep an open mind to see what ideas Mr. Trump offers and when and how we can work together. Having lost the nationwide popular vote, however, he would do well to heed the views of progressives. If the president-elect is serious about pursuing policies that improve the lives of working families, I’m going to present some very real opportunities for him to earn my support.
Let’s rebuild our crumbling infrastructure and create millions of well-paying jobs. Let’s raise the minimum wage to a living wage, help students afford to go to college, provide paid family and medical leave and expand Social Security. Let’s reform an economic system that enables billionaires like Mr. Trump not to pay a nickel in federal income taxes. And most important, let’s end the ability of wealthy campaign contributors to buy elections.
Of course, neither Bernie Sanders nor any of the rest of us can reasonably expect the Republican Party to suddenly abandon its entire agenda overnight. And, as discussed in “Part I” of this post, thoughtful commentators like Eugene Robinson, though not hopeful, also appreciate that our new president-elect brings to the White House considerable uncertainty about his future intentions and about whether, and how, the office will change him. I have believed that for America to work its way out of this mess in the near future, plutocratic billionaires will have to realize in advance that the complete economic collapse – the inevitable result of continuing, unabated inequality growth – would wipe out their own corporate empires and accumulated fortunes while they watched the world descend into anarchy. But I’m afraid most of them are far too myopic for that.
The refusal of American corporations and billionaires to accept the urgency of action to counter global warming has to be high on our list of concerns. To be sure, there are still perhaps another five or six decades before we will see the major effects of global warming fully mature, but by then it will be too late. Urgent action is needed today to limit the damage. Meanwhile, urgent action is also required to address a host of other serious social and environmental concerns, and all of us must adjust our own thinking and behavior to make that happen. Now that the three-ring election is over, all Americans, especially our politicians, our educators, and our media, must do some serious soul searching, and reflect on the fundamental truth that we are all in this together. There is no other path to an acceptable outcome.
The Anatomy of Our Crisis
An economic collapse, on the current path, will occur well before the most serious damage from climate change sets in, and at that point we’ll be in a real pickle: a depression will end virtually any chance of constructive action. The danger of such a collapse is real and growing. The first step in countering that danger is to correct some fatally confused thinking that dominates mainstream economics. So-called “liberal” economists, headed by Paul Krugman, argue that the federal government should expand its borrowing endlessly, and could do so without ill effect. But this is dead wrong, and the idea gets worse when compounded with Trump’s adoption of GOP trickle-down taxation policy.
The Debt Bubble Problem
As discussed in my book, there are increasingly vocal warnings from within the investment community of an impending collapse from another debt crisis, probably worse than the Crash of 2008. Chief among those issuing the warnings are conservative and even libertarian politicians and investment advisors. I cited Harry Dent, who argued:
With each new bubble, we reach higher highs, and then crash to lower lows. Its such an obvious megaphone pattern that I’m not sure how anyone could miss it.
I also cited Porter Stansberry, who emphasizes the decline of the dollar and predicts a major currency crisis:
Our government has embarked on a gross, out-of-control experiment, expanding the money supply 400% in just six years, and more than doubling the national debt since 2006. * * * 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.
The Velocity of Money and the QTM
Just a few days after the election, an old advertisement from Bill Bonner that had previously escaped my attention, dating back to June of 2015, mysteriously arrived by e-mail. His presentation is available on the internet (Bill Bonner, “Urgent Public Announcement,” YouTube, 6/12/2015, here). I almost didn’t listen to it, knowing that it was a marketing device and that Bonner would save the secret of his successful career until the very end, but my curiosity got the best of me and I played it. When he got to the end, I was completely surprised by his revelation.
Bill Bonner, like the others, expects a major financial crisis in the near future – so much so that he has revealed the secret of his personal success in investments and headed for the hills. Unlike the others, however, his barometer is the velocity of money! He pointed to the St. Louis Fed’s records showing a steady decline in the velocity of money in recent years. The reason for concern with this indicator, of course, is that when money moves more slowly there are fewer transactions and less income. When as in recent years the money supply has been rapidly expanded, he also observed, there’s a lot more outstanding debt, so bursting bubbles will cause greater damage.
There it was, buried deep in investment advisory archives — confirmation that at least one other professional had noticed the phenomenon that had become the crucial backbone of my new “distributional macroeconomics” – the long ignored Quantity Theory of Money. Bonner did not describe a full-blown QTM, mind you, but the functional essence of it is there. And – this is important – his perspective was derived from actual real-world experience, not from fanciful ideological constructs.
I too have seen another financial catastrophe looming on the horizon, but unlike any of these investment advisors, whose job is essentially to predict the future viability of investments for their wealthy clients, I reached that conclusion from the bottom up, by investigating the implications of income and wealth inequality. Like me, these guys are all very apprehensive about our economic future. In fact, they appear to feel that the game is almost up – they are openly revealing the secrets of their trade, as they scramble to try to find safe havens for their clients’ money.
We really cannot predict how soon the next crash will come, at this point, but it is becoming crystal clear that better forecasting will be possible when forecasters begin to focus on the velocity of money (as I said in my book), and on the implications of inequality.
These investment advisors describe themselves as mavericks , almost certainly because their advice challenges conventional theory so thoroughly that mainstream economists think of them as screwballs and kooks. But mainstream economics has no answer to their concerns: Some major economists (Raj Chetty and Paul Krugman among them) have admitted that conventional economics does not understand the process of growth. In fact, it cannot comprehend either growth or decline; Keynes’s refutation of the fanciful neoclassical ideology, mentioned above, has been long forgotten. Worse, Krugman and other “liberal” economists are unconcerned about the implications of debt, even as the national debt approaches $20 trillion (See the U.S. National Debt Clock, here). Most observers, however, find the growing debt burden quite worrisome. (See, e.g., Mike Patton, Advisor Network, 3/28/2016, here).
The prevailing trickle-down idea that underlies Trump’s proposals to cut taxes for the very wealthy and corporations doesn’t even pass the laugh test: How can anyone expect tax cuts at the top to promote growth when, after 35 years of constant fiscal “stimulation” from massive federal deficits, we’ve ended up not with more growth, but instead with lower growth, an ever-expanding pile of government debt, and ever-widening inequality? Yet here we are, enslaved by this upside-down economics, with a new president-elect planning to apply it with a vengeance in the alleged interest of prosperity and growth.
This confused thinking was encapsulated immediately following the election in the lead article in the business section of Friday’s New York Times (Neil Irwin, “The Liberal Idea Lining Trump’s Economic Policies,” The Upshot, 11/11/2016). When I searched for this article online, I discovered that it is actually an expanded and significantly modified print version of Irwin’s on-line article dated two days earlier (“The Trump Administration Could Test Whether Deficits Help the Economy,” The Upshot, 11/09/2016, here.) Irwin’s work amplifies the confusion on stimulation and growth.
Here are the first three paragraphs of the original, on-line version of this article:
Here’s a surprising conclusion you reach when you start to game out what economic policy will look like in Donald J. Trump’s administration: While many details of his policy agenda are likely to be staunchly opposed by the left, Mr. Trump appears likely to enact a fun-house mirror version of what many liberal economists have advocated for years: Keynesian fiscal stimulus.
Mr. Trump did not run a campaign with many detailed proposals, but he promised to cut taxes significantly, rebuild and expand infrastructure and maybe increase military spending. Together those moves would most likely increase the budget deficit substantially. That risks increasing interest rates and inflation, which could dampen the pro-growth effects of any tax cut and government spending.
If that turns out to be the policy reality of the next few years, it would be a real-world test of an argument liberal economists have made for years: that higher deficits could help end an era of “secular stagnation” and spur faster growth. Somewhat higher inflation would actually be a feature, not a bug, of the policy approach. (Emphasis added)
And here are the first three paragraphs of the version that found its way into print:
The financial markets are sending one message loud and clear about how investors expect Donald J. Trump’s presidency to affect the economy: with higher inflation and higher interest rates.
That shift, evident in big savings in Treasury bond prices since Tuesday, reflects a building consensus that Mr. Trump’s administration will pursue an economic policy reflecting a fun-house mirror version of what many liberal economists have advocated for years – Keynesian fiscal stimulus.
Mr. Trump did not run a campaign with many detailed proposals, but he promised to cut taxes significantly, to rebuild and expand infrastructure and maybe to increase military spending. Together, those moves would most likely increase the budget deficit substantially, but also lift the rate of economic growth, give the federal Reserve more latitude to raise interest rates without causing a recession and result in somewhat higher inflation. (Emphasis added.)
Irwin completely flip-flopped between these two versions, abandoning his conclusion that the Trump tax cut and increased spending proposals “would most likely increase the budget deficit substantially,” risking “increasing interest rates and inflation, which could dampen the pro-growth effects of any tax cut and government spending.” Instead, he announced in print that “those moves would most likely increase the budget deficit substantially, but also lift the rate of economic growth.”
Version #1 is confusing, and not without problems. Two things are certainly true – borrowing more money will increase the deficit, and higher interest rates and inflation dampen growth. But version #1 ignores the important fact that interest rates have been near zero for several years due to our prolonged recession (actually an unacknowledged depression for low income earners), so the Federal Reserve has been extremely wary of increasing interest rates, properly worried that growth has been so low that anything (inflation included) that might further dampen growth risks more pervasive decline and a deepening recession.
A reasonable way to understand the fact that interest rate policy cannot stimulate income growth in a time of high inequality is to reflect on two basic facts: (1) The wealthiest people and their corporations have such an incredible amount of excess cash that for any productive investments that might interest them they have no need to borrow more; (2) most smaller (and all struggling) businesses must rely on debt to get and keep a foothold in the economy, and higher interest rates can only make their efforts to compete more difficult. For at least two years we have been in a situation where raising interest rates would be doomed to failure and could cause stock markets that – as Janet Yellen has warned are already overvalued – to crash.
But version #2 – the one that newspaper readers saw – made the incredible claim that the proposed tax cuts on the wealthy would actually promote growth. That is pure trickle-down nonsense, and Irwin appears to have fallen under its spell. The wealthiest people at the top will simply accumulate, exacerbating the problems we have been discussing.
This mythology reflects the almost unbelievable truth that mainstream economics, in its subservience to the interests of wealth, has managed to conflate the impacts of taxation on the wealthiest people with the impacts of taxation on nearly everyone else. This was accomplished by eliminating Keynesian demand-side economics from the mainstream playbook.
The difference is reasonably straightforward:
- Tax reductions for the rich do not, indeed cannot, stimulate growth because they immediately increase income inequality and through increased saving and hoarding reduce the velocity of money: and with fewer transactions there is, by definition, contraction and declining growth;
- Tax reductions for others, including and especially negative taxation (welfare) at the bottom of the income ladder, have the opposite effect: They stimulate growth because these groups spend a much higher than average percentage of their increased income. This increases the velocity of money, which constitutes, by definition, growth – not decline.
I urge every interested reader to study the two versions of the Irwin articles and the other references he mentions. And read Paul Krugman’s first Op-ed since the election (“Trump Slump Coming”? The New York Times, 11/14/2016, here), which reveals the connection between his thinking and Irwin’s work product. There, Krugman wrote:
[T]the specifics of our economic situation mean that for a time, at least, a Trump administration might actually end up doing the right thing for the wrong reasons.
Eight years ago, as the world was plunging into financial crisis, I argued that we’d entered an economic realm in which “virtue is vice, caution is risky, and prudence is folly.” Specifically, we’d stumbled into a situation in which bigger deficits and higher inflation were good things, not bad. And we’re still in that situation — not as strongly as we were, but we could still very much use more deficit spending.
This advice reflects, frankly, an upside-down “funhouse mirror” version of reality. It is reckless and will have extremely dire consequences. I hate to be so blunt about this, but I have been following Krugman’s views closely for nearly six years, and they have not responded to the increasing urgency of the situation. Missing is any appreciation of the dampening effects of the growing concentration of income and wealth at the top. Now we are running out of time and should be running out of patience.
We cannot hold people like Neil Irwin, Donald Trump, or even Paul Krugman, responsible for these misconceptions. Ultimately, the fault for all this confusion lies with the economics profession for covering up the truth about how economies really work. It has been a gradually worsening process of deception that has led modern commercial-industrial societies to the brink of disaster.
Fortunately, the problem would not be all that difficult to fix, given the will of nations to do so. The entire world economy, with a total of about $60.1 trillion of public debt today (See, the global debt clock, The Economist, here) will have to get together with the United States, which has a total of about $19.8 trillion of national debt today (U.S. Debt Clock, here) and work out protocols for raising tax progressivity around the world and getting inequality growth under control.
That would turn economics right-side-up again. Obviously, however, that is literally the farthest thing from the minds of Donald Trump and all his advisers, as he prepares for his administration. Which is why anyone with any significant understanding of how the economy actually works is scared to death right now.
Here is a brief synopsis of the major factual and fact-based findings in my book, as they are pertinent to our current situation:
- Income inequality, as demonstrated by the French economists Thomas Piketty and Emmanuel Saez, is very highly correlated with the top income tax rate, and has grown rapidly once the top income tax rate was reduced below 70% in the Reagan Revolution;
- The drastic reduction in taxation at the top effectively substituted borrowing and national debt for any given amount of reduced tax revenues at the top. Thus, federal federal borrowing directly financed the tax cuts;
- Consequently, the national debt, which was almost eliminated by 1980, grew to over $19 trillion, and it’s growing exponentially;
- Even with a stable distribution of wealth and income, wealth will continuously accumulate at the top, through the collection of corporate profits and other “economic rent,” so a sufficiently progressive taxation is needed to ensure stability and growth;
- Between 1980 and 2007, reported top 1% net worth can be reasonably estimated to have increased by about $15-16 trillion, adjusted to constant 2010 dollars. The top 1% lost about $5 trillion of recorded net worth with the Crash of 2008, but most of that value has rebounded;
- When reasonable estimates of top 1% wealth moved out of the country are included, a fair estimate of the total top 1% wealth gain between 1980 and 2007 is in the range of $23-25 trillion;
- The major coup by our wealthy elite, accomplished by controlling the federal government, was to permit themselves substantially to lend money to the government rather than paying taxes. To that extent, the wealthy elite has shifted an almost unimaginable burden of debt coverage to less well-to do taxpayers;
- The perpetual annuity thus created for the top 1% as well as foreign lenders is unprecedented in world history, and debt coverage is growing exponentially. The Congressional Budget Office estimated in 2014, the last time it presented such a projection, that the rapidly growing interest on the debt will exceed the entire defense budget (about $670 billion) by sometime in 2021;
- CBO has acknowledged that the level of deficit spending will necessarily increase at least through 2026, with annual deficits reaching 4% of GDP by 2020, which CBO has only vaguely (and casually) conceded is an unsustainable trend.
The magnitude of these numbers reflects inequality growth that has completely transformed the American economy. The reckless and wholly irresponsible administration in favor of American’s wealthiest people, in pursuit of the GOP’s libertarian philosophy of shrinking the federal government, merely funds the massive growth of inequality. CBO projections have accounted for this austerity budgeting, but CBO has failed recognize or account for the shrinking growth caused by growing inequality. In any case, it should have long ago acknowledged that the federal debt cannot ever be repaid, except over many years, and only if the wealth transferred to the top 1% is taxed back into the public coffers, where it can be redirected to correct the growing needs of society.
In a few years, the federal government will have to shut down, or to begin defaulting on its sizable interest obligations. To the libertarians who would welcome the demise of the U.S. government I say: Be careful what you wish for. A default on the national debt will have enormous and largely unpredictable negative consequences for the dollar and for America’s standing in the world. Needless to say, the stock markets will crash at that point, causing panic to cascade around world, possibly crippling the entire global economy.
My guess is that it will likely capsize at least the most fragile of President-elect Trump’s widespread investments, even as other vulnerable consumer-based companies collapse. It might wipe him out entirely. Donald Trump will not like this very much: Indeed, it will almost certainly usher in Great Depression II. We are already nearing the brink of such a catastrophe, and on our current course, I fear, the only question is how soon this will happen.
I know that what I have described is a nightmarish scenario. Chances are you don’t want to believe any of this. I wish I didn’t have to believe it or talk about it: It’s an extremely harsh reality, and it troubles me deeply. But we live in a real world that conforms to its own rules, not to our prejudices, and we gain nothing by living in denial – a lesson that we can only hope Donald Trump will learn, sooner rather than later.
I am reminded of a phrase from a 2008 song (“The Great Correction”) by the thoughtful and talented singer songwriter Eliza Gilkyson of Austin Texas:
“Well the truth’s so hard it just don’t seem real.”
No, it doesn’t, and it never will. Now, with the election of Donald Trump to the presidency, a great many more people are joining in my despair, struggling to find some reason for hope. My sister, now unemployed and living in semi-poverty in the West Virginia panhandle, recently told me she welcomes the inevitable “Great Correction.” Other friends, along with thousands of our fellow Americans, are thinking about leaving the country, but I expect that few will actually make it out: Other countries have problems of their own, and few will welcome the burden of additional immigrants from America.
Believe it or not, I see a possible silver lining here, and considerable reason to stay and fight on: Donald Trump is going to get an amazing and sobering education soon, and he may feel that he has too much to lose when things go seriously wrong. Unlike the more antisocial or even sociopathic members of his GOP clan, he may not be nearly as indifferent to the fate of his country and to the demise of the planet’s ecology. And at least, if the next big economic crash hits on his watch, the GOP will not be able to place the blame on Hillary Clinton: The Democratic Party, or whatever progressive party emerges from the current debacle, will likely bounce back and, perhaps, make some real progress.
We have a long way to go before both economic professionals and the media properly understand the important relationship of tax progressivity to inequality and growth.
JMH – 11/15/2016 (edited 11/18/2016, 11/27/2016)