With Apologies to our followers: We haven’t posted here in a while. However, we have been busy. JMH has lately been posting articles on Daily Kos, a series on distributional macroeconomics and the inequality problem. The series has begun to attract attention, because i’ve been getting directly to the point (more or less) synthesizing my perspective. There is a series of seven articles there, and I’ll post the last one here. A good summary is included in: The Failure of mainstream economics: The Road to Nowhere (http://www.dailykos.com/stories/2017/4/2/1649550/-The-Failure-of-Mainstream-Economics#comment_66046417). Here is the text of the final article (It’s a bit long, but the meat is in the first two-thirds):
Sounding the Alarm
Mankind is the consummate “economic animal,” achieving success that has led to dominion over all other species, an advanced level of scientific and technological achievement, and a level of social complexity, unmatched by other species. Thousands of years ago, our ancestors became capable of incredible feats of engineering, the designing and constructing of gigantic, complex pyramids, coliseums and temples. Over the many centuries that followed, economic development has also created the possibility of enormous, shared prosperity.
Social progress and psychological development, however, have lagged far behind scientific and engineering progress: There was precious little human evolution in such a short period of time, and modern humans have proved to be far less capable than other species of living in harmony and cooperation with one another. The vast success of human beings has made us a quarrelsome species. The production and accumulation of wealth has been the source of endless conflict and warfare, and humanity has never found found a satisfactory, universally acceptable approach to distributing of its wealth, a task that virtually all other animal species, have successfully, and quite naturally, accomplished.
Despite the fact that early humans must also have evolved naturally, human history has actually been largely disastrous, a continuous record of conflict and destruction, a record that emerged after humanity began to accumulate surplus production and wealth. With the exponential growth of the human population, the high levels of conflict and environmental despoliation have accelerated, leading over the last century to the brink of irreversible climate change, and to the rapidly accelerating extinction of other species.
These developments are not obscure or mysterious, yet we have been incapable of changing our societies and institutions. We have fallen into deep denial, and the United States, with our great wealth and power, has persistently installed rulers who perpetuate and institutionalize that denial. Thus, America has consistently ignored the grave threats we pose to our own survival.
Warfare around the world remains virtually constant. The United States, since World War II, has established a vast, unmatched military empire, becoming the self-proclaimed world police force, ostensibly to protect “freedom” and “democracy” elsewhere, even as these virtues evaporate at home. In the face of terrifying mass destruction, major efforts were made after the two great world wars of the last century to outlaw warfare and begin to make civilized, cooperative behavior the norm in international relations. Efforts to control the continuous development and growth of U.S. and Soviet nuclear weapons arsenals proved inadequate. We have kept arming ourselves, at great expense, and today the United States is the most dangerous country on the planet.
Today, America is engulfed with fear and uncertainty. The Trump administration is waging a terrifying war against reason, honesty, and integrity. Every day brings worrisome news on all fronts: The headline in today’s (April 7, 2017) New York Times read “U.S. Launches Missiles Into Syria” (here) an attack that, according to Trump, served the “vital national security interest” of the United States. In regard to our national security, another article reported that the CIA withheld information last summer about the Russian interference, in Trump’s favor, with the American electoral process. The conflict between these notions of “national interest” highlights a long-standing hypocrisy inherent in American politics.
Politics and economics are inextricably linked, with both subjects deeply influenced by religion and religious ideology. Recently, on its 50th anniversary, we were reminded (see Benjamin Hedin, The New Yorker, April 3, 2017, here) of Rev. Martin Luther King Jr.’s historic speech protesting the Vietnam War at the Riverside Church in Manhattan. “We as a nation must undergo a radical revolution of values,” he warned. “A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”
King was speaking of fundamental values that do not depend, ultimately, on any formal religious dogma: After all, the “domino theory,” and its companion arguments for the occupation and destruction of that small Southeast Asian country were predicated, as is all warfare, on economic considerations. So King’s message was “secular” rather than religious, reminding people that the human mission here on earth should be one of love and compassion, not hatred and destruction.
Today, that “revolution of values” is still badly needed, especially in economic ideology. Several generations of American students were taught to despise the great German classical economist, Karl Marx, as a disgruntled rabble-rousing economist who sought the destruction of free-market capitalism. But his was a secular message, analogous to that of Dr. Martin Luther King Jr. He was warning of the downfall of capitalism, just as King warned of the downfall of humanity.
To be sure, Marxian ideas did influence the revolutions against monarchs in France and Russia, but his economic theories, which predated the Russian Revolution by nearly a half century, have proved to be profoundly prescient. Marx and Friedrich Engels lived in the mid-19th Century, a time when industrial capitalism was just emerging from agricultural societies. Even way back then, they believed that capitalism would breed inequality and ultimately collapse of its own weight. This was a brilliant insight, now proving out. Marx was more realist than revolutionary, in the tradition of the social populism that had defined European classical economics from Adam Smith on down. He was a an economic scientist , well before the difference between real world facts and flights of ideological fancy were identified as the crucial problem of economic theorizing.
The Fatal Inequality Conundrum
In my last post on this site (“The Failure of Mainstream Economics,” here), I explained how inequality grows exponentially and depresses growth. The backbone of the new “distributional economics” will be the Quantity Theory of Money: Simply put, the QTM tells us that prices vary with the size of the money supply, while the rate of economic activity and growth (GDP) varies with the velocity of money. The long-neglected QTM and its equation of exchange (MV = PQ) has only recently been revived and explained in an obscure memorandum from the St. Louis Fed which bubbled up on my most recent Google of “velocity of money” (“What Does Velocity of Money Tell Us About Low Inflation in the U.S.,” by Yi Wen and Maria A. Arias, September 1, 2014, here.) In answering the question why a recent monetary base increase did not cause “a proportionate increase in either the general price level or GDP,” these authors wrote:
“The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money. . . . And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:
- A glooming economy after the financial crisis;
- The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds.”
This theorizing was a good start. My amendment to the QTM came with the recognition, explained in my last post, that growing income inequality has been shown to reduce income growth. Hence, growing income inequality is necessarily associated with a declining velocity of money. Here is a version of the graph of the velocity of money from 1930 to 2010, showing the velocity of money declining during the Great Depression and briefly, during subsequent downturns, but otherwise showing a steady increase from 1948 to 1981, a time of declining income inequality, and steadily decreasing thereafter, during the Reagan Revolution and the period of sharply growing income inequality:
Note that the sharp decline after the Crash of 2008 is virtually identical to the decline from 1930-1934. Another factor besides the depressed velocity of the total money supply during periods when the top 1% is doing extremely well but everyone else is not, most likely, is the increase in overall idleness during the general stagnation of a depression. In this regard, one might want to consider the theories of William Harold Hutt, a depression-era British economist whose 1939 book The Theory of Idle Resources (available here) developed some good ideas but has since been generally ignored; in recent years, though, it has been recalled in an awkward effort to discredit Keynes’s General Theory, which I discuss in Chapter 2 of my book Reinventing Economics, Amazon Kindle, here).
The important point to take today from Hutt’s legacy is that there are several potential reasons for a declining velocity of money, one being the declining effective demand resulting from growing inequality, and another a being the sharp decline in economic activity in a depression when the supply side shuts down, with the decline and closing down of factories and retail stores. Much work needs to be done on the QTM, but it is clear that the trend of the velocity of money was nearly same in the 2008-2011 period as it was in the 1919-1923 period. There is certainly a lower 90% depression today, and it is creeping up the income ladder: Another market crash (as predicted by investment advisers like Harry Dent, here, Andrew Smithers, here, and Stansberry Research, here), may well be close at hand. Bear in mind, these investment advisers are interested in attracting customers to their advice, but if there is any scamming going on here, it is in selling the idea that big investors can continuously beat the system.
When I began to research inequality economics about six years ago, once I became aware of the extent of the tax cuts awarded to the wealthiest Americans in the Reagan Revolution, I felt confident, on the basis of my economics education and many years of experience regulating utility rates, that I knew exactly why inequality was growing: The wealthy were taking in and being allowed to keep far too much money. I began to blog the issue, as I researched it further, and I spoke on the topic “The Economics of Inequality” at the Albany Torch Club in February of 2013. Immediately thereafter, I submitted a proposed article to The Torch magazine. It was nominated for an award at the annual convention, so publication was delayed until the Fall 2014 issue of The Torch (Volume 88, Issue 1, here) .
By then I was working hard on my book, which had three objectives: (1) To explain how inequality grows and how serious the problem is; (2) To explain why I had found no one else who publicly shared my perspective, and (3) To develop fundamental principles of “distributional macroeconomics.” The book has fifteen chapters and a dozen appendices, and I covered all of the significant issues I had encountered in my work, but the book was too long and unconventional, and I lacked academic connections, so there was no choice but to self-publish it as an e-book. The book was finished in January of 2015 and has not been updated; it became available at Amazon in May of 2015. This is a topic, obviously, that I could not just walk away from, so I continued to work, and I now hope to complete a far more concise treatise soon.
I had quickly realized that most thinking had not extended beyond the income inequality issue. Because this was a problem of money transfers, I began the tortuous process of analyzing wealth inequality. Reported data on the net worth of Americans is scattered and incomplete, and difficult to deal with; wealth distribution data is more difficult to deal with than income data. I was able to develop a reasonable estimate of the top 1% gain of financial wealth between 1982 and 2012, and present the details in Chapter 12 of my book. I discussed the growth of wealth inequality on this blog in an earlier post (“How Wealth Concentration Destroys Everything,” March 15, 2017, here).
Virtually all of the money that has moved into the top 1% of wealth holders over the past 35 years comes form business profits, which are the source of their salaries, dividends, bonuses, capital gains, and other forms of returns on investments. Regardless of the vehicles by which it arrives at the top, we know where all of this money has come from. Nothing could have prepared me for the breathtaking amount of top 1% wealth gain I found, after including the most reasonable estimate I could develop of the financial wealth that has moved off shore:
- I estimate that about $27 trillion of wealth gain (in 2010 dollars) accrued to the top 1% in the 1980-2014 period. The U.S. population in 2014 was about 317 million. For 1% of that population to hold a gain of $27 trillion means that every man woman and child in the top 1%, on average, now holds about $8.5 million of that gain;
- That’s only an average figure, however: According to Emmanuel Saez’ June 30, 2016 Report “Striking it Richer: The Evolution of Top Incomes in the United States” (here), in 2014 the income share of the top 1% was about 12%, and the income share of the top 0.01% was just over 5%. Using the ratio of these income shares to estimate a rough approximation of the distribution of wealth, provides an estimate of wealth accrual to the top 0.01% on the order of 5/12 x $27 trillion = $8 trillion, for a per capita gain for the top 0.01% of about $1.9 billion That’s right — every man woman and child in top 0.01% households has gained about $1.9 billion since 1980! [corrected: 4/23] Of course, near the bottom of the top 1% the per capita gain has been much less than $1.9 million;
- The $8.5 million came from the lower economy, in the normal course of business. The bottom 99% in 2014, therefore, contributed about $27,000 per capita, on average, to that gain. That’s over $100,000 for a family of four, and it would pay a ton of bills;
- In fairness, though, $19 trillion of all that transfer came from the new money inserted into the economy by the national debt, and if we conservatively assume all of that ended up in top 1% coffers, only about $2.5 trillion of those profits actually came from the bottom 99%, still nearly $8,000 per capita, on average, or $32,000 for a family of four. But that still is not chump change, especially for members of the declining middle class in the top decile or quintile who have lost most of that wealth themselves. It is no wonder that small middle-class businesses are continually failing and being absorbed by the corporate behemoths;
- Of course, the exponentially growing national debt must eventually either be repaid or be defaulted, and in case of such a monumental default the entire U.S. economy collapses, like a giant soufflé, and everyone drops into the deep hole of Great Depression II, likely dragging the rest of the world along with it;
Inequality Is Rapidly Getting Worse
The following chart (found at the WAWG blog, here), which compares the growth of 90% income and top 1% income in the 1946-2008 period, again using Piketty and Saez data, is typical of this comparison:
After 2008, as shown above, the declining velocity of money reveals a further sharp increase in income inequality. All available information confirms a lower 90% depression, with the lower 60% on life support.
Piketty, Saez and Zucman released new information in December 2016 (here) with a chart comparing the growth of top 1% income with bottom 50% income since 1962:
Average real income for the bottom 50% was $16,000 in 1980, increasing to $16,200 in 2014, virtually no growth. Top 1% average income more than tripled, from $428,000 in 1980 to $1,305,000 in 2014. On a separate graph, the top 1% share of total income was shown to have grown from a little more than 11% in 1982 to more than 20% in 2014, while the share of the bottom 50% declined from 19% in 1982 to about 12.5% in 2014. (Remember that over that entire period, the rate of aggregate income growth declined considerably, while the population growth rate did not: Obviously the standard of living for the bottom half declined markedly.)
Saez himself, in his 2016 report “Striking It Richer” (here), provided an informative table showing that top 1% real income grew in the 2009-2015 period at a substantially higher rate (37.4%) than did the income of the entire bottom 99% (7.6%). The top 1% captured a stunning 52% of all income growth over that period:
In their above-cited 2016 report on income growth, Piketty, Saez and Zucman presented the following table (Table 2, p.45) breaking down the growth of national income into two 34-year periods: (a) after WW II to Reagan (1946-1980); and (b) thereafter (1980-2014), on both a pre-tax and post-tax basis:
Importantly, this table destroys the popular myth that we need not be concerned about pre-tax income inequality, because the income tax is “progressive.” Despite a nominally (by definition) progressive income tax schedule, overall, the tax reductions at the very top have caused a substantial increase in post-tax inequality. Compare the two periods for the top 1% and the top 0.001%:
- For the top 1%, the growth of post-tax income in the first period (58%) was slightly higher than the growth of pre-tax income (47%), and in the second period, post-tax income grew slightly less (194%) than pre-tax income (206%);
- For the top 0.001%, in the first period post-tax income grew much more (163%) than pre-tax income (57%) while in the second period there was slightly more growth in pre-tax income (636%) than in post-tax income.
There are three key observations here: First, the nominally “progressive” income tax schedule has not made a dent in the growth of income (and hence income inequality) at the very top, because the top rate itself is far too low, and extremely regressive. Second, below the top rate the schedule is not “progressive” enough to prevent a massive redistribution of income and financial wealth into the top 1%. Unfortunately, these facts continue to be obfuscated in the media, and the New York Times editorial board never permits exploration of federal income tax issues. Third, The overall structure of U.S. taxation is extremely regressive, for the burden of property, sales and use taxes falls disproportionately on lower income groups.
Discussion of The Researchers’ Interpretations
In this report, the three authors wrote, just before their conclusion: “The taxable labor income of bottom 90% earners –which is the only form of income that can be used for the consumption of goods and non-health services — has not grown at all [since 1980].” Therefore, for this income group, at any rate, there can have been no growth in consumer demand since 1980, except through debt expansion!
But, importantly, their table presents cumulative sums, and does not progress by increments: The top 10%, for example, includes the entire top 1%, instead of presenting, as some researchers do, the top 1% and “the next 9.“ Thus, the “demand” produced by any cohort cannot be deduced from their table, because at each step “top down” averages are presented. This undermines conclusions about inequality growth and effects.
In their conclusion, they state first: “Our \Distributional National Accounts”estimates capture 100% of National Income and hence provide decompositions of growth by income groups consistent with macroeconomic economic growth.” No, they do not: Not when the growth of the money supply is considered in a fully distributed, QTM-based distribution model, which no one has yet done (to my knowledge).
They continue: “Since 1980, growth in real incomes for the bottom 90% adults has been only about half of the national average on pre-tax basis and about two-thirds on a post-tax basis. Median pre-tax incomes have hardly grown since 1980. The reduction of the gender gap in earnings has played an important role in mitigating the increase in inequality among adults since the late 1960s but the gender gap is far from being closed especially at the upper earnings end. Tax progressivity at the top has declined since the 1960s but the generosity of transfers at the bottom has increased hereby mitigating the dramatic worsening in inequality.”
I’m sorry, I cannot buy this final, overall summation:
- Yes, the income tax for the bottom 90% is progressive, but progressivity is relative, and varies from top to bottom: It is because of the regressive structure higher up that median incomes “have hardly grown since 1980”;
- The reduction of the gender gap cannot have played a significant role in mitigating inequality among adults. Hundreds of billions of dollars of net financial wealth have transferred into the top 1% every year, net of any trickle-down effect. The top 1%, and, exponentially, each income subdivision within the top 1%, is the source of most if not all of inequality growth, and the gender gap reduction cannot have had a material impact;
- The researchers (too casually) observe that “tax progressivity at the top has declined since the 1980s…” This is the source of the problem: This is why the top 1% has gained some $27 trillion of wealth since 1980! We can and should make Wall Street investment banking rip-offs illegal and enforce the law. But we must recognize that most of the income inequality problem results from the normal operation of the capitalist system;
- The “generosity of the transfers at the bottom,” has actually dramatically decreased, reducing effective demand and accelerating “the dramatic worsening of inequality.” Government discretionary transfers have been dramatically reduced, and now the Trump administration is poised to eliminate what’s left, even robbing us of the non-discretionary transfers (Social Security, medicare, and medicaid) for which the top 1% has not been taxed at all. Tax regressivity and income inequality will be dramatically increased, and as I attempted to show in my book (Chapters 11 and 12) this has been a problem all along.
Reflections on Our Escape from Reality
To give the impression that economics is a “science” mainstream neoclassicism has doggedly insisted that an economy can always grow its way out of decline — a mathematical impossibility — and given out Nobel Prizes every year to economists who mostly agree. But economics is more religion than science, and neoclassical dogma, at its roots, has never been substantiated. (See Robert Nelson, Economics as Religion, 2001, Parts One and Two; Avner Offer & Gabriel Söderberg, The Nobel Factor, 2016.) I have long felt that Piketty, Saez, Stantchova, and Zucman should get Nobel prizes for their remarkable work, but the Prize went two year ago to inequality-denier Angus Deaton (see Chapter 6 of my book).
I always knew my “radical” analysis would not be an easy sell, even though what I was mostly recommending, really, was a return to the Keynesian demand-side perspective, and taking the next logical step. I am saddened to see Saez and his compatriots crashing into the all but impenetrable wall of Paul Samuelson’s mystical “neoclassical synthesis,” especially since generations of academic economists have been taught little else. Of course, my new distributional paradigm requires that we recognize something unpleasant, something that Paul Samuelson, over fifty years and through 19 editions of “Economics,” has always denied: Karl Marx’s theory of inequality growth and capitalist decline is correct.
However, the retreat of Samuelson and Nordhaus in 2004 to Arthur Okun’s famous claim that reducing inequality is inconsistent with optimizing “efficiency” was beyond the pale. Okun’s 1975 book Equality and Efficiency: The Big Tradeoff, had only one basis for his remarkable theory: “The Invisible Hand” automatically creates market efficiency, and it would be a mistake to tamper with the automatic efficiency of the marketplace by redistributing wealth and income.
Yes, I am from another planet: I have read Adam Smith’s two references to this rhetorical metaphor several times, and he simply never came close to claiming that everyone’s pursuit of individual self-interest would optimize anything. He abhorred the predecessors to modern corporations that were emerging in 1776, and he detested greed and all forms of market control and manipulation. Like David Ricardo, T.R. Malthus, John Stuart Mill, Karl Marx, and the other philosophy-based classical thinkers who followed in his footsteps, he was a populist, a “socialist.”
There was a major paradigm shift when neoclassicism emerged in the mid- to late 19th Century, emphasizing profit maximization and the pursuit of self-interest. A vast cult of the “Invisible Hand” invaded our intellectual world, as I have documented (see Chapter 4 and Appendix A of my book). Meanwhile, Okun’s book is in republication, hailed as a “classic that still has lessons for inequality,” amid proud recognition that, after all, economics is not science (Brookings, May 4, 2015, here, quoting Larry Summers).
Of course, Piketty, Saez and his colleagues cannot be blamed for cleaving to a neoclassical stance. Even liberal mainstream economists like Paul Krugman and James Galbraith duck for cover when their work might suggest the need to lower inequality. They all have jobs they would like to keep, with institutions that rely on the financial support, ultimately, of billionaires.
The retreat from reality grows with the supreme dominance of Trumpism, and the rise of the meme “alternative facts.” Most of us, it appears, are shocked by our new government’s policies — In energy, we see favoritism toward the declining coal industry, approval of coal mining lease on public lands, approval of any and all and gas pipeline proposals, indifference to environmental pollution, the sharp reduction in the size and authority of the EPA, and the intense denial of global warming that has extended to forbidding the mere discussion of the problem at the White House. In international affairs, xenophobia reins supreme. The assault on ordinary Americans by the very rich, which began immediately after Trump became president with a draconian attempt to reverse Obamacare (see my March 24 post, “Voodoo Economics and the Health Care Crisis,” here).
Trumpism continues on many fronts, including the recent move by Betsy DeVos to enable predatory interest charges on student loan defaults (see “The Wrong Move on Student Loans,” The New York TImes, editorial, April 6, 2017, here). The editors opined: “Federal student loan defaults are dragging on the economy — making it impossible for people to buy cars or homes — and are increasingly following people into old age, where their Social Security benefits are being garnished for loan payments.” The underlying problem here is that the need for so much debt to get a college education has been created by declining incomes and wealth for nearly all Americans.
The following day, New York Times economist Paul Krugman (“The Bad, the Worse and the Ugly,” April 7, 2017, here) implied that an incompetent and paranoid Donald Trump is attempting to implement the entire GOP agenda:
“The Trump administration is, by all accounts, a mess. The vast majority of key presidential appointments requiring Senate confirmation are unfilled; whatever people are in place are preoccupied with factional infighting. Decision-making sounds more like palace intrigues in a sultan’s seraglio than policy formulation in a republic. And then there are those tweets. * * *
”Trumpist governance in practice so far is turning out to be just Republican governance with (much) worse management. Which brings me back to the original question: Does the appalling character of the man on top matter?
“I think it does. The substance of Trump policy may not be that distinctive in practice. But style matters, too, because it shapes the broader political climate. And what Trumpism has brought is a new sense of empowerment to the ugliest aspects of American politics. * * *
”. . . Mr. Trump isn’t an honest man or a stand-up guy, but he is, arguably, less hypocritical about the darker motives underlying his worldview than conventional politicians are. Hence the affinity for Mr. O’Reilly, and Mr. Trump’s apparent sense that news reports about the TV host’s actions are an indirect attack on him. One way to think about Fox News in general, and Mr. O’Reilly in particular, is that they provide a safe space for people who want an affirmation that their uglier impulses are, in fact, justified and perfectly O.K. And one way to think about the Trump White House is that it’s attempting to expand that safe space to include the nation as a whole.”
Yes, style matters — a great deal — but style doesn’t cause depressions. My view has been that Donald Trump is directing a three-ring circus that came to town to distract public attention with an odd, essentially dishonest worldview, while proceeding to dismantle the federal government — in the words of the libertarian Grover Norquist, to “shrink government to a size where we can drown it in a bathtub” (here). Of course, this is not what the minority of Americans who voted for Trump had in mind. They thought they were signing up for more jobs and higher incomes.
Right now, everyone’s alarm bells should be ringing loudly: This is a very dangerous situation for the human race. Most Americans are living in a depression, and the rapidly worsening depression is spreading around the developed world. The culprit is unfettered capitalism, a direct outgrowth of the eternal “class warfare” which, throughout history, has generated crime and elevated fraud and trickery in the pursuit of individual gain. These effects have been pervasive, and were once well-known. Recently however, they been forgotten in this country, under the persistent proselytizing of mainstream economics. History, of course, repeats itself.
Now there is a serious danger, with everyone’s aversion to the “dismal science” and the huge distractions of America’s political dysfunction, that the American people will not learn the truth until it is too late.
Several key facts emerge from this discussion:
(1) The bottom 90% is in depression, and on our current path we are inevitably headed for a financial disaster that will engulf everyone;
(2) We can pull ourselves out of this mess, but we’re all going to have to change our perspectives, radically, and abandon ideological thinking;
(3) We can’t survive very much longer if we don’t significantly limit income and wealth inequality;
(4) Lowering the top income tax rate to benefit the wealthy was a disastrous mistake: Everyone would be better off with a far more balanced distribution of wealth;
(5) We will need an overall progressive taxation system to accomplish that goal, and doing so is now essential.
J.M. Harrison (reposted 4/12/2017)