The changes in tax, regulatory, and
international policies that have taken place over the past forty years
have led to a situation in which, given the state of mass-production
technology in our economy, the existing distribution of income and current
account surpluses do not provide the mass markets needed to achieve full
employment in the absence of an increase in debt relative to income. Since
it would appear that we have reached a point at which a further increase
in non-federal debt relative to income is unsustainable, the only way the
full employment of our resources can be achieved is through:
1.
continually increasing our current account surplus (reducing our
current account deficit) to compensate for the effects of the increased
concentration of income on our domestic mass markets,
2.
continually increasing federal debt relative to income to offset
the effects of the increased concentration of income, or
3.
reducing the concentration of income.
The only alternative is to allow our domestic mass
markets to shrink and, thereby, reduce our ability to utilize and benefit
from mass-production technologies as our resources are transferred out of
the mass-production industries that serve the bulk of the population and
into those that serve the wealthy few.
As we saw in Chapter 2, running a continually
increasing current account surplus has the effect of increasing the debts
of foreigners relative to their incomes. Given the size of our economy,
continually increasing the debts of foreigners relative to their incomes
is akin to continually increasing domestic non-federal debt relative to
our income. Neither is sustainable in the long run. The transfer burden
from debtor to creditor must eventually overwhelm the system in either of
these situations and lead to a financial crisis that causes the system to
collapse.
It is no accident that the current economic crisis began at home while we
were running a substantial current account deficit in the face of a
speculative bubble in our domestic economy, and that this crisis has hit
the hardest in those countries that were in a similar situation. (Kapner
Dent
Stiglitz)
As for increasing federal debt relative to
income, this poses less of a problem since the federal government can
always simply print the money needed to service its debt and there
is no threat of default on federal debt.Just the same, doing so on a continual basis is not a
long-run solution to our employment problem. A continually increasing
federal debt relative to GDP must eventually overwhelm the federal budget
as interest payments on the national debt grow. This will make it more and
more difficult to fund essential government programs such as Social
Security, Medicare, and national defense.
And even though the federal government has the legal right to print
money it is fairly certain that doing so on a continual
basis in order to meet its financial obligations will eventually
destabilize the system.
But the most important objection to attempting
to solve our employment problem by increasing the federal debt relative to
income is that it increases the transfer burden on taxpayers as increasing
interest payments are transferred from taxpayers to government
bondholders. Since government bondholders tend to be among the wealthiest
members of our society, increasing the federal debt relative to GDP is
likely to have the effect of increasing the concentration of income at
the top of the income distribution and, as a result, is likely to make the
fundamental problem we face worse. (Piketty)
The only way to avoid the kinds of financial
crises we experience in 1929 and 2008 is by producing for domestic mass
markets without a continually increasing debt relative to income while
maintaining a reasonably balanced current account. This, in turn, requires
a distribution of income capable of providing the domestic mass markets
needed to purchase the full employment output that can be produced (given
the state of our mass-production technologies) without the necessity of a
continually increasing debt relative to income and with a reasonably
balanced current account. The tax, expenditure, and regulatory proposals
outlined above are designed to address this problem.
The tax proposals outlined above will not solve
all of our economic and social problems, but they will at least give us a
tax structure that is viable and will help to stabilize the economic
system. If they are combined with a dramatic increase in government
expenditures to rebuild and expand our physical infrastructure, reregulate
our collective bargaining and financial institutions, rebuild our other
regulatory agencies, bolster our social insurance systems, enhance the
educational opportunities available to our children, and restructure
student and mortgage debt in a way that reduces the concentration of
income, current account deficit, and non-federal debt relative to GDP,
there is every reason to believe it will not only increase our physical
infrastructure,
social capital, the rate of economic growth,
and the growth in productivity as it helps to solve our employment
problem, it will also stabilize the federal debt relative to GDP, just as
this debt was stabilized in the 1930s and following World War II. And it
is worth emphasizing again that this cannot be achieved without
increasing taxes. (Amy
Musgrave
Lindert
Kleinbard
Sachs)
It is the incongruous belief that we can have
good government—and all of the essential services and benefits that
only good government can provide—without
collecting the taxes needed to pay for these services and benefits that
led us to where we are today. The only way we can have these services and
benefits is by strengthening the institutions that provide them, and the
only way we can strengthen those institutions is by raising the taxes
needed to provide the government services and benefits that people
deserve and then demand that our elected officials provide these services
and benefits: quality
public education; effective
public health programs; an effective and
efficient
personal healthcare system; safe
streets and neighborhoods; a clean and safe
environment; safe
food, drugs, and other
consumer products; safe
working conditions; fair and just
legal and
criminal justice systems; efficient
streets, roads, highways, and other forms of public transportation;
an effective
national defense; a viable
social insurance system; and a financial
system that facilitates a stable, growing economy that is not plagued by
cycles of booms and busts that drive our country and people deeper and
deeper into debt and lead to economic catastrophes brought on by epidemics
of fraud, recklessness, and irresponsible behavior on the part of those in
charge of our financial institutions.
It is only by way of collective action through a
democratically elected government that we can “establish
Justice, insure domestic Tranquility, provide for the common defence,
promote the general Welfare, and secure the Blessings of Liberty to
ourselves and our Posterity.”
Private enterprise, guided by the profit motive cannot perform these
functions within society. The only
institution within society that can perform these functions is a
democratically elected government. That’s what democratically elected
government is for, but if we want our democratically elected government to
perform these functions we have to pay the cost, and the way we pay the
cost is through paying taxes. In the end, it comes down to this: Are we
going to increase taxes and, thereby, enhance our government’s ability to
perform the essential functions that
only government can perform, or are we going
to continue to follow the lower taxes, less government, and deregulation
mantra of
free-market ideologues and make it
impossible for our government to perform these functions.
(Amy
Musgrave
Lindert
Kleinbard)
If we do not approach our non-federal debt and
unemployment problems by increasing taxes and government expenditures in a
way that makes it possible to deleverage the system while reducing the
concentration of income and allowing our infrastructure and
social capital to grow, our economic
situation can only get worse. Mass-production technologies depend
upon mass markets to provide the sales needed to justify investment in
these technologies. Where are the mass markets required to justify
investment in these technologies supposed to come from in the absence of a
mass distribution of income to support those markets? If what were
formally mass markets in the developed world are converted into
concentrated markets, and if—in the absence of an expansion of
government—full employment is supposed to be obtained in the long run,
where are the investment
opportunities going to come from if not from building
Mc Mansions and
other
monuments to serve the
needs of the wealthy few? If the demand for Mc Mansions and other
monuments is insufficient to
provide full employment and the government must step in to fill the gap,
where is the government expansion going to come from: expanding social
services and infrastructure or from expanding law enforcement and national
defense? Those who argue for lower taxes, less government, and
deregulation are fighting to prevent the expansion of social services and
infrastructure and are very much in favor of
law enforcement and national
defense. Continuing to follow their lead does not bode well for the
future.
If we continue to
follow their lead our employment problem will persist in the absence of an
increasing debt relative to income, and our ability to produce will be
diminished as resources are transferred out of those industries that serve
the bulk of our population (those that produce for domestic mass markets)
and into those that serve the wealthy few as we travel down a road that
leads toward our becoming a nation of servants, groundskeepers, security
guards, police officers, soldiers, and builders of pyramids as the
magnificence of our cemeteries grow to rival
those of Europe along with other
monuments to the wealthy few.In the meantime, our transportation, water and waste
treatment facilities, education, regulatory, legal, and other governmental
systems will continue to deteriorate, and the standard of living of the
vast majority of our population will continue to stagnate or fall as the
divisiveness within our society increases.
Lower taxes, less government, and deregulation
caused the economic problems we face today, and more of the same is not
going to solve these problems. If we are to solve these problems we must
strengthen our democratic government, not weaken it. We must increase
taxes, not lower them, and we must increase government expenditures as we
rebuild the regulatory systems that have been dismantled since the 1970s
and rebuild the physical infrastructure and
social capital we have allowed to
deteriorate. If we do not do these things and, instead, continue to
follow the
failed ideological mantra of lower taxes, less government, and
deregulation we are most certainly going to end up right back where we
started in the 1930s. And if the political leaders throughout the world
continue to follow this
failed ideological mantra and refuse to come to grips with the root
cause of the worldwide economic catastrophe we face today—namely, the
concentration of income at the top of the income distribution—we are
likely to end up where we ended up
in the 1940s. (Shirer
Bullock
Thames
Piketty)
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Where Did All The Money Go?
How Lower Taxes, Less Government, and Deregulation Redistribute Income and
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Endnotes
The 14 banks that took control of LTCM were:
Chase Manhattan Corporation; Goldman Sachs; Merrill Lynch; J.P. Morgan;
Morgan Stanley Dean Witter; Salomon Smith Barney; Credit Suisse First
Boston Company; Barclays; Deutsche Bank; UBS; Bankers Trust Corporation;
Société Generale; Paribas; and Lehman Brothers. (GAO)
See,
for example,
Smith,
MacKay,
George,
Marx,
Veblen,
Sinclair,
Roosevelt,
Haywood,
Jones,
Fisher,
Josephson,
Keynes,
Polanyi,
Schumpeter,
Boyer,
Galbraith,
Musgrave,
Harrington,
Carson,
Nader,
Domhoff,
Kindleberger,
Cody,
Minsky,
Stewart,
Black,
Zinn,
Stiglitz,
Phillips,
Kuttner,
Morris,
Taleb,
Bogle,
Harvey,
Dowd,
Galbraith,
Baker,
Stiglitz,
Klein,
Reinhart,
Fox,
Johnson,
Amy,
Sachs,
Smith,
Eichengreen,
Rodrik,
Skidelsky,
Graeber,
Kleinbard, and
Mian.
There
can be no doubt that, PWG report or no PWG
report, if the founders of LTCM had the option of starting up another
LTCM and doing it all over again they would start up another LTCM and do
it all over again. Not only would they do it all over again, they did.
On October 22, 2009 the
Financial Times reported that John
Meriwether had embarked on his third hedge fund (JM
Advisors Management) after his second
fund (JWM
Partners which he began less than two
years after the LTCM debacle) went bust in the 2008 financial crisis.
And the world is full of John Meriwethers.