Enslavement of the Middle Class

Financial FAQs

It is becoming obvious that the American middle class (topic dujour among presidential candidates these days) has been enslaved by an ideology that only benefits the wealthiest among US. It is an ideology of austerity that has prevailed in the U.S. at least since the 1980s, and Paul Krugman says is putting Europe into its Second Great Depression.

It is really an economic ideology of the 18^th century first formulated by Adam Smith—of fewer government services and lower taxes that has made corporations all powerful with the greatest profits in their history, left American workers with little or no control over their livelihoods, and resulted in the greatest income inequality since the 1920s.

Such an insidious ideology has kept the poorest states poorer, caused declining investment in education (our seed corn for future entrepreneurs), is quickly degrading our public infrastructure, and even the ability to protect ourselves. President Obama’s State of the Economy report and latest speeches have made it obvious. The greatest income inequality since the 1920s is here to stay, unless there are major changes in economic policies.

That is why most Americans (at least the 90 percent) have become harried, 24/7 workers with little vacation time, poor health care options (in spite of Obamacare), too expensive educational opportunities, too few well-paying jobs, and little protection from the globalization that stronger labor laws would bring.

Those policies have been called supply-side economics, under the theory that giving more tax breaks to the wealthiest by reducing capital gains and maximum tax rates, while shrinking government investment and oversight, would induce the wealthiest to put their money into productive investments, thus creating more jobs.

But that never happened. When President Reagan cut the maximum income tax rate from 70 percent that prevailed in the 1970s to 50 percent, it and 2 recessions created the largest budget deficit of that era, which is why he instituted 11 tax hikes to bring the budget back into a semblance of balance. This was all catalogued by his budget director, David Stockmen in The Triumph of Politics.

Then we have GW Bush’s further tax cuts on both maximum income tax rates to 35 percent and capital gains to their lowest in modern history that so depleted tax revenues it created the largest budget deficits in history, and ultimately the Great Recession.

It’s no use sugar coating the truth any longer. Since the end of the Great Recession, the top 1 percent of income earners have garnered 96 percent of total income since 2009, after a brief dip. And Americans still have the greatest income inequality of the developed western world.

Why could such inequality be here to stay? In part because so much wealth has flowed to so few, and it is easy to buy influence in this country. The most obvious receivers of such largesse are the conservative members of Congress, mostly Republicans, who continue to block the economic reforms that would better the lives of those that live on Main Street.

Nobelist Paul Krugman said as much in his latest NYTimes Oped: “So what does it say about the current state of the G.O.P. that discussion of economic policy is now monopolized by people who have been wrong about everything, have learned nothing from the experience, and can’t even get their numbers straight?... Clearly, failure has only made them stronger, and now they are political kingmakers. Be very, very afraid.”

Graph: CEA Report

The White House just released their Council of Economic Advisors 2015 Report, chaired by Jason Furman. It said, “The second important factor influencing the dynamics of middle-class incomes is inequality. This, too, is a global issue. In the US, the top 1 percent has garnered a larger share of income than in any other G-7 country in each year since 1987 for which data are available, as shown in the above graph.”

It should be clear what must be done to remove the obstacles that hold back most Americans from a better life. Let us start by jettisoning the 18^th century myth which enslaves all economic classes, a myth that only holds us back in the 21st century. Indiscriminately lowering taxes while minimizing government services and oversight hasn’t improved the lives of anyone except the wealthiest among us.

Harlan Green © 2015

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T Piketty and Capital Beyond the 21st Century

Popular Economics Weekly

Thomas Piketty’s Capital in the 21^st Century is about more than proving that excessive income and wealth inequality has been the norm over centuries by so-called free market capitalism, or its social democratic versions in Europe. It’s also about how future generations might share in that wealth, and hence what capitalism must look like in future centuries, if it is to survive.
For it has to be no surprise that capital growth must exceed economic growth, and so earnings, for a country to be able to feed all its citizens. Because the whole system is built upon creating enough excess to invest in order to expand future growth. That is why the capitalist system was created. That excess is called profits; or the amount of capital above and beyond operating expenses, including wages and salaries. And companies need to invest most of their profits in expanding their output, if they hope to survive.
Piketty’s contention is that capital has to be taxed in some way to guarantee a more equal distribution of its benefits for future generations, so as to avoid some of the risks inherent in more unequal wealth distribution—such as Great Recessions, Depressions, or rising levels of crime and social dysfunction as enumerated in Richard Wilkinson and Katie Pickett’s The Spirit Level.
There are several forms this can take. Nobel economist Robert Shiller has proposed inequality insurance as an answer to the propensity of capitalist systems to accumulate its wealth in fewer hands. This is insurance that governments could set up to redistribute the excess wealth being created under capitalism.

“Inequality insurance would require governments to establish very long-term plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise,” says Dr. Shiller, as an example. “I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. Just as one must buy fire insurance before, not after, one’s house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains.”

The “entitled rich people” have already begun to counterattack Piketty’s research data that he has posted online. They mainly contest his assertion that income and wealth inequality is built into the current capitalist systems. Chris Giles, Economics Editor of the Financial Times, even asserts that in Europe there hasn’t been any inequality, historically. Even though he doesn’t challenge Piketty’s main thesis, that historical returns on capital have outpaced the growth in wage and salary, and even overall economic and population growth.
Conservatives have to be looking out of another window, if they are trying to refute his data, though Giles doesn’t challenge Piketty’s conclusion for the US economy. It has the highest level of inequality of all developed countries per the CIA’s World Factbook, higher even than many developing countries.
For instance, we know that US corporate CEOs’ average CEO-to-worker pay ratio in 2012 was about 350 to 1. In 1960, the average chief executive earned 40 times as much as the average worker. By 1990, the average CEO earned 107 times as much. In the following decade, this ratio rose to 525:1 before settling back to 301:1 in 2003, after the 1991 recession.
That’s in part because average household incomes have been stagnant since 1980 after inflation, whereas the top 1 percent’s earnings have skyrocketed—garnering some 96 percent of total US national income generated since the end of the Great Recession.
British economist Andrew Smithers observes in his new book, "The Road to Recovery," one of the reasons. Stock-related bonuses for executives encourage them to make decisions that boost their share prices in the short term, rather than in the long term. The result is that they spend corporate capital less on long-term investments, which will set their companies up for future profit, and more on shoveling dividends to investors, which props up their shares quarter by quarter.
And that is the very antithesis of what the capitalist system was created to do. Otherwise it is just benefiting the few vs. the many, as we said. For instance, Smithers observed American companies devoted 15 times as much capital to investments as they disbursed to shareholders, until the 1990s. Today the ratio is less than 2 to 1. And we know the top 25 hedge fund managers earned some $24.3 billion in 2013, according to Forbes Magazine.
So will the capitalist systems we know today survive? And if so, in what form, or is there a better, more equitable, economic system we cannot yet see?

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Romney’s 5-Point Plan—Very Primitive Economics

Financial FAQs

Romney’s “Five Point Plan to Grow the Economy” that he touts on his website, is primitive economics almost beyond belief. It returns us to 19th century government of the few by the few with few regulations or insurance against the kinds of events that brought on the Great Depression and Great Recession, for starters.

Conservatives in general and Mitt Romney don’t seem to understand the most basic concept of modern economics--insuring against major disruptions—that is indispensable to run a modern economy. Insurance isn’t only about insuring the many to protect the most vulnerable—whether against physical disasters such as the Midwest drought, or financial disasters such as the Great Depression, or catastrophic illness. It is really about all of our citizens being for one, and one for all. It is why we tax ourselves to pay for a government, because government is really the protector of last resort against the most basic risks in a world grown increasingly complex and uncertain.

Modern economies can’t do without it, yet Romney says he opposes most modern forms of protection in his 5-point plan by continuing to reduce taxes that would starve government of revenues, as well as cap spending on regulation enforcement. He would also repeal the Affordable Care Act that insures 30 million more Americans. Instead he proposes more of GW Bush’s ‘Ownership Society’ which seeks to return us to the era of laissez faire, free, unregulated markets that existed 100 years ago. And we know the damage those institutions which evaded or ignored modern financial regulation did to financial markets.

Then was a much smaller, less complex world where most Americans were still living on farms. But the farming world collapsed in the 1920s when mechanization caused farming prices to plunge, ultimately bringing on the Great Depression. That is when the modern, industrial world came into being, requiring New Deal insurance; including social security, unemployment insurance, and even workman’s compensation to cushion the effects of modern business cycles on the urban unemployed who could no longer return to the farm during tough times. And unions came into being to organize workers so they could bargain for better than minimum wages and benefits.

The centerpiece of Romney’s plan is to continue to cut taxes for both individuals and corporations. This is when corporations have the highest profits as a percentage of GDP in history, while most individual tax cuts have benefited the wealthiest, thus creating the worst income inequality since the 1920s.

Graph: CBPP

And in starving the government of revenues he would  impose a regulatory budget cap, “reform” regulations so that coal-fired power plants would no longer have to control their pollution (thank you, Koch Brothers, for your $millions in contributions), open ANWAR, the Arctic National Wildlife Preserve to oil drilling, and in general continue to support our most polluting, non-renewable energy resources.

Returning the U.S. to an almost primitive society is already happening, of course, with continuing Republican attempts to block Dodd-Frank regulation, privatize Medicare and social security. The Great Recession was a product of Adam Smith’s primitive economic theory that said an ‘invisible hand’ controls markets for the benefit of all.

Really? That hasn’t been the case during the past two GW Bush recessions, including the Great Recession. $Trillions were lost during those recessions that were the result of inflated asset bubbles bursting, as regulations were ignored or evaded which controlled financial risk-taking. The Bush record is not pretty, and that is the most recent record to look at that is the result of primitive economic thinking.

Graph: Calculated Risk

The historical graph of economic growth shows most clearly which policies work to grow the economy—primitive economic policies, or using government as an active participant in growth? In fact, all recent recessions since 1980 have occurred during Republican administrations; from President Reagan’s in 1980, 1983, Bush I in 1991, and GW Bush in 2001 and 2007-09. Policies that starve government of what is needed to govern effectively starves all of U.S. Need we say more?

Harlan Green © 2012

The Case for a More Sustainable Economics

Financial FAQs

Recent events have shown that financial markets are still very susceptible to crashes, and economies susceptible to serious recessions, such as the recent Great Recession. But does that have to be? The fault doesn’t only lie with the irrational exuberance of investors who believe that markets (and housing prices) only go up. Such financial gyrations also come from faulty economic thinking, thinking that hasn’t changed for more than 200 years.

Adam Smith, the founder of much of what is called classical economics, thought that an “invisible hand” (i.e., a free market) created maximum conditions for the production of goods and services—which suited the small market economies that existed in 1776, and provided a theoretical blueprint for the Industrial Revolution then sweeping Great Britain. His theories helped to solve the problems of mass production, but not how those goods should be distributed. And that is where the science of economics has fallen down.

In fact, most recessions result from overproduction, including the Great Depression. The current Great Recession resulted from an overproduction of housing, as the 2001 recession resulted from overexpansion of the dot-com sector. That is really the definition of an overheated economy. Some kind of inflationary asset bubble is created, which eventually causes prices to plunge (or crash), which leads to a downward spiral in production and jobs.

Only now are economists beginning to think about the consequences of mass production. They are beginning to look for a more sustainable model for economic growth, one that isn’t susceptible to such wide swings.

Economist John Maynard Keynes was the first modern economist to address this issue. He said in an essay entitled, “Economic Possibilities for our Grandchildren (1930)” that, “assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not—if we look into the future—the permanent problem of the human race.”

We are 20 years away from that date, and yet how close to achieving his utopian prediction, when “…the economic problem, the struggle for subsistence, always has been higherto the primary, most pressing problem of the human race…”?

There is not much research to date on sustainable markets, meaning markets that leave some wealth for our grandchildren, as Keynes wished. The current Great Recession is an excellent example. It left a mountain of debt, due to a massive deregulation of the financial markets and the consequent massive overleveraging of debt.

Even the sustainability of social security and Medicare are in doubt, as well as the credibility of the U.S. Treasury’s ability to repay some $10 trillion in federal debt. We are not the most indebted of developed countries, as this map shows. But the near-failure of our financial system has highlighted the dangers of over-indebtedness.

There are other forms of sustainability beside responsible budgets that provide sustainable social safety nets, of course. There are sustainable production methods that don’t deplete non-renewable resources, and sustainable environmental practices that don’t emit toxic pollutants.

The most sustainable economic theory would still embrace an emphasis on increasing average household incomes, which has actually decreased since 2000 for those under 65 years of age. But that can only happen with an emphasis on job creation, which current economic policies and theories do not foster. In fact, household incomes have fallen back to 1998 levels, so severe has been this recession.

The main problem with the various job creation theories is their total disagreement on methods that create what is called aggregate demand, the engine for any economic growth. That is the demand for goods and services that must grow for producers to have the incentive to produce more, and so create new jobs.

So-called neo-classical (mostly conservative) economists still believe in Say’s Law, for example, that says if more ‘things’ are produced, it will create the demand, per se, which will in turn cause consumers and investors to want to buy/invest more. This is the faulty thinking that still underlies much of modern economics. It justified skewing tax breaks to producers and investors in 2001 while reducing government oversight, in the theory that with less restraints employers will automatically create new jobs.

But the main characteristic of a recession is that a surplus of things drives down prices, and so drives up unemployment, as we have said. This in turn reduces aggregate demand, which economists express as a formula:

where aggregate demand (Yd) is the sum of all personal consumption (C) + private investment (I) + government expenditures (G) + any net of exports over imports (X-M).

We know that during most recessions personal consumption, private investment, and exports tend to fall, so in order to create stable aggregate demand during such downturns government has to step up its spending. Only then will the economy be stimulated by putting enough money in the hands of consumers, who comprise 70 percent of economic activity.

This in turn means taking the focus off individual, self-interest, as a goal of economic development, and focusing on the economic self-sufficiency of families, communities and countries. By focusing on the welfare of the whole, economists can begin to focus on the welfare of future generations, as well as those of past and present generations.

Harlan Green © 2010