Our Economy's Two Big Problems (9/14/10)

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Our Economy's Two Big Problems (9/14/10)

Postby Ferguson Foont » Tue Sep 14, 2010 11:21 am

As far as economics is concerned, I am a disciple of the Keynesians, particularly that form of Keynesianism taught by John Kenneth Galbraith, and a staunch opponent of the Chicago School as championed by Milton Friedman. The reason for my bias here is that the macroeconomic models of Professor Galbraith are uncannily accurate in their ability to predict the effects of changes in monetary, tax and industrial policies on macroeconomic systems like national economies, while the predictions of the Chicago School and its various corollaries like the Laffer Curve and "Supply Side" doctrine are consistently and almost hilariously wrong, getting things absolutely backwards in all matters, which requires its proponents either to admit that they are wrong (which they NEVER do), or to come up with ever more clever and inventive (ir)rationalisms, usually involving some clearly bogus claim that their plans didn't work because their tax cuts and deregulation weren't allowed to go far enough. And then they ask for more.

We Keynesians hold that government spending, particularly deficit spending on labor-intensive activities like public works projects, stimulates growth during economic downturns. It always has and it always will. The followers of Friedman corrupt this to claim that it is the deficits themselves that are stimulative, and they will be moreso if those deficits are the result of tax cuts on the income and property of the most productive (read "wealthiest") segments of society. This has never worked and it never will. And there is deductive reasoning to support these inductively reasoned observations.

When you stimulate employment directly through the inception of labor-intensive activities, the people who are now employed by such activities had previously been unproductive. They represent a large backlog of unmet consumer needs. Now that they are employed, the paychecks they receive are plowed directly into the larger economy, because people when initially employed tend to live hand-to-mouth, spending their entire paychecks on necessary goods and services by the time they receive their next paychecks, at which time they proceed to spend that money similarly rapidly. Almost all of their spending is for domestically produced goods and services like housing and food.

The stimulus effect to the overall economy by this kind of churning is obvious. The workers' standard of living rises, the merchants from whom they purchase their goods and services prosper, and the whole society winds up with the added value of the public works that have been built by the effort. This prosperity feeds on itself and snowballs into a very nice bundle of new wealth and security that, if properly administered, can be self-sustaining over the long term.

On the other hand, when you do as Republicans insist and cut taxes in a way that favors the wealthy, and when you cut government spending to pay for a part of the lost revenue, you give the money largely to those whose consumer needs are already well met before the cuts are even enacted. Their additional cash goes into less stimulative purchases, led by extremely high value-added luxury products, foreign vacations, and energy-intensive rather than labor-intensive pursuits. A far larger percentage of the money these people spend goes to the purchase of foreign-made products or into the non-productive banking sector in one way or another (with many of those banks being offshore). It is value lost to the American economy, at the expense of middle class taxpayers and American jobs. By reducing government revenue, you diminish the government's ability to apply stimulus to mitigate the snowballing effect of economic hardship, and you wind up in a vicious cycle of falling demand causing layoffs causing falling demand causing layoffs causing. . . ad infinitum.

Furthermore, tax cuts are a very SLOW way to apply even the modest degree of stimulus that they bring to the economy. That cash doesn't even appear on the books except as an expense that is NOT realized at the end of the reporting period, whereas government spending goes immediately into the economy as actual money.

Furthermore, nothing is created by a tax cut. It builds no bridges, fixes no roads, heals no diseases, educates no students, it's just gone, mostly into pockets that were already full of money.

But the problems in our economy right now run very, very deep. Since Reagan started our grand experiment with Chicago School doctrine, we have seen our major corporations engage in the behavior espoused so forcefully by Milton Friedman, who regarded it as an axiomatic truth that businesses that act in the public interest are stealing from their shareholders if such actions interfere with profits as expressed in quarterly reports. Expenses, including employment expenses, must be cut if the value of resulting production is reduced by less than the amount of the expenses that have been cut. Production must be moved to wherever the overall costs are cheapest. The health of the communities where those businesses had been located, or the well-being of their labor force, is not their concern. Labor is an expense, not a reason for the operation of the business. Workers are not stakeholders in the business.

This has led to a steady decline in American manufacturing capacity and in American ability to turn low-value raw material into high-value finished products, which is the only valid way that "wealth is created" (to borrow a favorite phrase of the supply siders, which they use to mean "create wealthy people," often by transforming a thousand middle class Americans into poor, unemployed ones).

We no longer manufacture a sufficient percentage of the products we consume to sustain our economy. This results in ever-increasing trade deficits, draining our wealth further and further with each passing month. Indeed, an increasing percentage of the manufacturing capacity we have remaining in the United States is now foreign-owned, draining from the American economy the profits earned by the fruits of those labors.

Until we rebuild our manufacturing capacity right here in the United States we will never see sustainable, broad-based prosperity. It is only through industry that we can fully recover.

So, that's one of our problems. The other is the systematic transfer of our national wealth upward toward the upper economic strata.

A Bob Herbert column today in the New York Times contains the following quotation of Robert Reich, who should be our Secretary of the Treasury but isn't:

"Mr. Reich cites the work of analysts who have tracked the increasing share of national income that has gone to the top 1 percent of earners since the 1970s, when their share was 8 percent to 9 percent. In the 1980s, it rose to 10 percent to 14 percent. In the late-’90s, it was 15 percent to 19 percent. In 2005, it passed 21 percent. By 2007, the last year for which complete data are available, the richest 1 percent were taking more than 23 percent of all income.

"The richest one-tenth of 1 percent, representing just 13,000 households, took in more than 11 percent of total income in 2007."

Read that passage carefully and let it sink in. I've been harping on this point for quite a while (since before there was any such thing as the Internet, actually), but it, along with our diminished industrial infrastructure, is the chief cause of our current distress.

When the richest of the rich take away so much of the benefits of our overall economic activity and wealth and keep it for themselves, the result is a population that cannot afford to sustain not only its own standard of living, but the overall economic edifice that sustains our workers and businesses alike. Businesses begin to fail because they cannot sell what they produce, and the economy crashes.

This can be temporarily papered over with greenbacks, which is what we have done for the past two years, but that cannot work forever, or even for long. Until we address the imbalance between our rich and our increasingly poor and disappearing middle class, we will continue to impoverish ourselves overall (although those at the tippy-top of the scale won't feel it, and will have the comfort and power bought by their accumulated wealth to allow them to ignore it).

The very LAST thing we should do is continue Bush's insane tax cuts for the rich. That only increases the disparity, and it is the disparity itself that is the root cause of the problem. You don't stabilize a top-heavy structure by heaping more weight onto the top.

The weirdest things we have achieved by following the Chicagoans is the growth of our megabanks and the obscene salaries and bonuses they generate. This part of our economy provides absolutely nothing of value to society whatsoever, no products, no helpful services, not even the entertainment provided by other overpaid industries like television, movies and sports. Everything they do that has any good effect could have been done by banks operating under good old Glass-Steagall, or even banks chartered state-by-state. The way it is now, it's just greedy men and women collecting huge quantities of cash for their own luxury, gambling with our money (usually without our consent or even knowledge) and producing nothing.

But they certainly can cause great pain by their cleverness, as we have recently seen. Gordon Gecko is not a good man.

Addressing our industrial problem is an inherently difficult and will require an arduous long term effort to correct. It will require a return to some level of protectionism and considerable direct industrial subsidies combined with heavy-handed regulation aimed at fraud prevention and workforce protection. Addressing our disparity in income and wealth is POLITICALLY difficult but is relatively simple and much quicker to correct, by strengthening the power of labor through unionization and laws that protect employee rights and by the reimposition of genuinely progressive income taxes and perhaps even new taxes on existing wealth (remember, Adam Smith -- a GOD of the right-wing -- proclaimed that the only just taxes were taxation of PROPERTY) that exempts most of the taxes on actual labor that earns weekly or bi-weekly paychecks.

Of course, things have drifted so far out of kilter now that even the most draconian (and least politically possible) steps would take many years to restore our economy to any kind of balance and sustainability, but in any case it is not such things as Medicare and Social Security that are the problem, but instead it is TOO MANY TOO-RICH PEOPLE AND NOT ENOUGH DECENT-PAYING JOBS right here in the good ol' USA.

But, y'know, there is something remotely akin to the elusive "singularity theory" that physicists seek in vain to try to explain everything. In American politics, however, it is less elusive. The root cause of all of our woes, our "Higgs Boson," as it were, is our method of financing political campaigns. Private financing through brib... uhhh, campaign contributions allows the rich to overpower the rest of us for their own exclusive benefit. They own our legislators, control the levels of power in the executive, and now control the vast majority of our judiciary by having their minions in place, appointed for life. We will NEVER solve our other problems until we can solve that one, which lies at their very heart.

It is quite possible, y'know, that our Founders' "Grand Experiment" in democracy has ALREADY failed.
Republicans whine and Republicans bitch: "Our rich are too poor, and our poor are too rich."
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Ferguson Foont
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