Paying for the Free Market

I read in the Winter 2016 issue of THE WHEEL (a new journal of Orthodox literature and thought) the article by Anthony Artuso, “On Dominion and Progress: Sacramental Action in a Secular World.”     Artuso makes a few interesting claims that I piqued my interests.  He says that …

“The original political idea of the  Enlightenment was to create a religiously neutral public sphere where governments supported by the will of the people, would make decisions to enhance  overall welfare.”

The proponents of the 18th Century European Enlightenment and their successors felt some oppression from the existing religious structures in Europe and the wars between Christians which were frequent at that time.   The movement toward separating church and state was an effort to disentangle society, government and religion in the hope that people might behave more rationally and less passionately in disagreements.  By pushing religion to a more private sphere, some thought people would behave more rationally.  The reality is that people don’t need religion to become passionately driven on issues as a number of communist atheist tyrants have shown.  Religion does not automatically lead to irrationality, nor does the absence of religion guarantee humans will be reasonable.

But relying purely on human reason, allowed them to imagine that commerce/ the market/ capitalism would serve the people by keeping individual greed in check.  The market had an interest in a moral order and in spreading the benefits it brought about to a wide range of people (or so they believed).   Artuso says the market was to be

“always under the guidance and management of the state, which alone was entrusted with safeguarding the interests of all.”

The state was in their idealist view the preserver of reason.  This may have been the ideal, but this ideal  in the 18th and 19th Centuries for Enligtenment advocates, but it must not have been working which led President Reagan to identify the government as the problem, not the solution to the problem.  But then, even under Reagan, the government grew and the national debt doubled.  The government may have been the problem, but his policies enlarged the problem.

Artuso says the drive for deregulation of the market was a response to a feeling that the government wasn’t in fact a benevolent guide for the free market but could be turned into a monstrous tool of political interest groups.  So the new idea came to be to free the market from government oversight.  Artuso puts it this way:

“We have entrusted ourselves to the invisible hand of the market which we vaguely conceive as being wielded for our benefit by the god of progress.”

Therein is a dilemma.  Adam Smith, the patron of the free market, apparently thought the government was to manage the market for the public good.  But in modern America, the government came to be viewed as part of the problem because the government proved not to be a neutral force in the free enterprise system.  It was a huge force that could be manipulated by interest groups to carry out agendas other than the general welfare.

But, the market freed to move as it wishes without government oversight becomes a large and largely undirected force.   What or who guides the market and for what purpose?   Perhaps we are to think that the unguided force of commerce is always benevolent, but what would make us believe that is not clear.  The market can be manipulated by organized forces with particular agendas.  Is it too big to allow it to go where it will?  Or in fact  will some clever folks be able to guide it to their own benefit without regard to the general welfare?

The market is driven by greed if by anything, and certainly does not want to keep greed in check.  The market imagines unbounded growth which, at least in recent years, certainly has benefited the wealthiest people.  Unbridled growth in the market (as well as in the government!) seems to fit the American attitude that wealth is a god which we should always serve.

Our money says on it, “In God we Trust“, but perhaps the god we trust in is money itself.   St. Paul warned that “the love of money is a root of all kinds of evil” (1 Timothy 6:10).  We tend to think on the other hand that money is THE solution to every problem.  [Think also about how much money gets invested in our elections – some do think money can influence the direction of governement].   Wealth and more wealth are assumed to be always a good, the more the better.   The notion of any kind of self-control by individuals, commerce or the government is out of favor these days, or perhaps in America always is.

Wealth of course is not a god, is not infinitely wise and can, as we have experienced throughout history, suddenly disappear throwing the world into depressions and recessions.    Wealth is not a neutral force unaffected by the greed and powerlust of people.   It certainly is a major force in human life and history, but it never claims to be benevolent towards humans.   It is always being pushed and pulled in various directions.  And to imagine that ever increasing wealth can only produce more good, we might ask: Would an infinitely rich Hitler have created a better world?  To imagine that wealth or the market are simply neutral, and unmanipulable is to ignore history where people were always striving to use the market for their own goals.

Besides all of this, studies have continuously shown that increasing wealth does not automatically equate with people being  happier.   Certainly it doesn’t guarantee people being wiser, kinder, more generous, more humane, more civic minded.  Money can be a good servant, but it is a bad master.

People are attracted to power, and the free market represents a huge power in the world.  People have and will continue to attempt to use government, wealth, the market, for their own ends  This is the fact that we have to be aware of and prepare for.

It’s Only Money

I have through my blog shared ideas – mostly things I’ve read.  I read mostly materials related to Orthodox Christianity, but do peruse other things.  I read the article, “The United States of Insolvency”, by James Grant in the 28 April 2016 issue of TIME.  THE 2016 United States debt is

$13,903,107,629,266.00.

As Grant writes, “Let us pause to reflect that a billion is a thousand million, and that a trillion is a thousand billion – or alternatively, a million million.  It’s a measure of fix we’re in that the billions hardly seem worth talking about.”  Them’s lots of dollars.  The magazine reports that currently every man, woman and child in the US would have to pay $42,998.12 to erase the national debt.  As another comparison, Grant says if the US government were a typical American household it would have an annual income of $54,000/year and it would be spending $64,000 a year and carrying a credit card outstanding balance of $233,000.  Most of us can understand that math doesn’t work.    Grant goes on:

“I merely observe that sound money and a balanced budget were two sides of the coin of American prosperity.

Then came magical thinking. Maybe you had a taste of modern economics in school. If so, you probably learned that the federal budget needn’t be balanced–it’s nothing like a family budget, the teacher would say–and that gold is a barbarous relic. To manage the business cycle, the argument went, a government must have the flexibility to print money, to muscle around interest rates and to spend more than it takes in–in short, to “stimulate.”

Oh, we have stimulated.”

I actually never took economics in college.  The idea of a balanced budget for the government always made sense to me.  But I’ve not found many politicians to vote for, who seemed to share that idea.  Rather what I heard was that President Hoover was criticized for trying to balance the budget at the time of the Great Depression, and his actions are even blamed as the cause of that depression.  When Reagan was president, I heard many say a balanced budget wasn’t needed as long as the economy was growing.  So apparently whether the times are economically good or bad it is never a time for a balanced budget.   That doesn’t make sense to me.

Eight years ago there was all kinds of talk about the growing national debt and what to do to stop it, but this year it has not been the main focus of the presidential candidates.  Candidates probably are glad that Americans have attention deficit minds when it comes to politics.  The hot issues of a few years ago are put on the back burner even if they need to be a main issue for the country now.  Bringing down the debt may be too painful for politicians to advocate for it as it might have noticeable consequences for all of us – higher taxes and fewer entitlements.  The trouble is we manage to postpone dealing with the problem which makes some think it doesn’t have to be dealt with – and currently few are willing to pay the price for the level of government services we’ve come to expect and few are willing to give them up.  Of course if we think again about Grant’s framing the national debt in terms of an average household, we can easily see that what is required is for the the average household to cut spending by $20,000 and start paying $10,000/year on the debt.  Most householders can understand how difficult and painful that would be and probably wouldn’t want to do it either, especially if it seemed possible to keep deficit spending going until some vague future reckoning.

In the 23 May issue of TIME a new analysis of American capitalism is offered by Rana Foroohar excerpted from her book, Makers and Takers: The Rise of Finance and the Fall of American Business.   Foroohar says there is a reason why American capitalism is sick:

Debt is the lifeblood of finance; with the rise of the securities-and-trading portion of the industry came a rise in debt of all kinds, public and private. That’s bad news, since a wide range of academic research shows that rising debt and credit levels stoke financial instability. And yet, as finance has captured a greater and greater piece of the national pie, it has, perversely, all but ensured that debt is indispensable to maintaining any growth at all in an advanced economy like the U.S., where 70% of output is consumer spending. Debt-fueled finance has become a saccharine substitute for the real thing, an addiction that just gets worse. (The amount of credit offered to American consumers has doubled in real dollars since the 1980s, as have the fees they pay to their banks.)

As the economist Raghuram Rajan, one of the most prescient seers of the 2008 financial crisis, argues, credit has become a palliative to address the deeper anxieties of downward mobility in the middle class. In his words, “let them eat credit” could well summarize the mantra of the go-go years before the economic meltdown. And things have only deteriorated since, with global debt levels $57 trillion higher than they were in 2007.

Easy money and debt maybe just too tempting for Americans to resist – the instant benefits have fed a monster whose insatiable appetite keeps demanding more.  And we become slaves of feeding the monster because it seems to perpetuate the system.  Maybe we really do believe the myth of the ouroboros  and believe the system is self-perpetuating.  We will be surprised to find it really is a myth and not sustainable at all.

 

 

 

When the Good News Isn’t

I have used this blog to share things that I am reading, have read or am thinking about.   Occasionally I read something that just strikes me as pretty funny.

The magazine, Pacific Standard  September/October 2013, had such an article in its recent issue.   There is an article entitled, “The Case of the (Still) Missing Jobs,” written by Timothy Noar.   The article deals with the ongoing recovery from the great recession the U.S. and much of the world suffered through for the past several years.

The humor was in what I think British journalism calls the standfirst – a line designed to intrigue you enough to entice you to read the article.   The standfirst of this article says:

“The good news: Economists are starting to come up with some decent theories as to why this recovery is so bad at generating employment. Now here’s the bad news.”

Bas-relief Commerce and Transportation

I think the line is cleverly funny.   

The only good news about the recovery is that economists are starting to come up with theories about why the recovery is not generating jobs.

Of course whether they have theories or not changes nothing about the economy (except perhaps that coming up with such theories is job security for economists!).

So, the good news about the recovery is pretty underwhelming.  Economist theorize in good times and bad, during recessions and recovery.  The actual economy seems to have little effect on the numbers of theories they generate.   And the relationship between their theories and the improvement of the economy seems equally equivocal.

Anyway, I was amused for Labor Day and hope you all had a safe one.  At least in the U.S.A. this tends to mark the end of summer.  Long ago it was the beginning of the school year, but nowadays most students around here have been in school for a 1-2 weeks already.

The Great Depression and the Great Recession (2)

This blog is the conclusion of The Great Depression and the Great Recession (1) in which we consider two articles which compare and contrast the 20^th Century’s  Great Depression with the 21^st Century’s Great Recession.  In this blog we are looking at “The Debt Bomb” by Louis Hyman from the Winter 2012 edition of the WILSON QUARTERLY.   Hyman sets the scenario:

“In the last hundred years, economic inequality in America has peaked twice: in 1928 and in 2007. It is no coincidence that our periods of greatest inequality have coincided with excessive lending. An industrial economy based on mass production requires mass consumption. Either credit or wages must be provided to keep the wheels of industry turning. When wages stagnate and inequality widens, debt gains nearly unstoppable momentum.”

The Great Depression came to an end during WWII after which there was a great economic boom in America and other parts of the world.

“Living in mortgaged homes, driving in financed cars, postwar Americans relaxed at new shopping centers. They borrowed more but also earned more, which meant that while the habit of borrowing grew, debt as a share of income remained relatively stable. Consumer credit kept factories humming, and those well-paid industrial jobs kept the debt burden contained. Banks and finance companies rather than capital markets funded the borrowing, which kept a leash on the credit available. The lender always had skin in the game.

The origins of the shift from a relatively egalitarian manufacturing economy to an unequal financial economy can be seen in the midst of this prosperity.”

The boom, as history has shown in capitalist countries is only part of a cycle which also has a down side.  The prosperity following WWII  changed as “…consumers also began to rely more on borrowing to make ends meet. The careful balance between rising debt and rising income was coming undone.”

The modern American economy began to shift away from manufacturing and more toward profit making through financing – investing and lending which tempted people with potential huge profits over short periods of time.

“As profits in other parts of the economy receded, the profits of this kind of lending exploded. And as consumer debt began to crowd out business debt, less money was available to invest in productive businesses and create the kinds of good jobs that had made America’s postwar formula work.”

“When Jack Welch took the helm at General Electric in 1981, largely on the strength of his success in managing the company’s consumer finance division, his vision was clear, he would later write: ‘Finance is not an institution—it has to be . . . the driving force behind making General Electric ‘the most competitive enterprise on earth.”’  Some older divisions, such as the lighting operations, would be continued, but the profits would be reinvested in financial products.”

“While GE’s profits grew, its manufacturing businesses shrank. In 1980, the year before Welch took control, the company had employed 285,000 people in the United States. By 1998, the U.S. payroll was down to 165,000. For Welch, and for successful American corporations generally, profits mattered more than all those well-paid factory jobs. The incentive was plain. CEOs had a responsibility to the shareholders to produce more profit. A dollar invested in debt made more money than a dollar invested in a factory. For the country as a whole, however, the rising profitability of finance came at a devastating cost.

As finance gained in strength and in its importance to the American economy, bankers increasingly complained that their creativity was being hampered by those pesky regulations that had safeguarded the economy since the 1930s.”

To me what Hyman is portraying is that manufacturing creates jobs that pay well and thus prosperity is spread to a great number of people (the workforce).  On the other hand, the movement in an economy to becoming increasingly based in financial products reduces the workforce thus causing  a loss in good paying jobs and concentrating wealth in the few.   The effects on the nation’s economic well being is negative – as was seen in the 1928 and 2007, both years in which the American capitalistic economy collapsed.

“Contrary to what many politicians and pundits have claimed, the upsurge of securitization was not simply a product of ‘deregulation.’ Regulations may have changed to promote a certain kind of financial system, but at no point did the state abandon the market to itself. It was the interplay of public and private purposes and mechanisms—Freddie Mac, S&Ls, mortgage-backed securities—that made these new sources of capital possible.”

Hyman offers a warning that there are lessons to be learned, or history will simply repeat itself.

“That structural connection between economic inequality and the nation’s financial crisis is still largely ignored. The dangerous investment choices that precipitated the crisis are but a symptom of this underlying cause. Income stagnation continues, pushing Americans toward greater borrowing and less saving. Unemployment remains extraordinarily high. And those who do find work often have to accept lower wages.

Meanwhile, as those at the bottom hang on, profits continue to concentrate at the top. Without a good alternative, capital continues to be invested in consumer debt rather than in the businesses—big and small—that provide jobs. Bankers are once again skittish about lending. If we are to find solutions to the crisis, it is more important to ask why so much money flowed into mortgage-backed securities and so little into productive businesses than to search for villains to blame for what went wrong.

During the Great Depression, New Deal policymakers figured out ways to harness the resale of debt, but they recognized that increasing the supply of credit without also increasing wages would only lead to another crash. But in the last 40 years, debt levels have climbed while wages have remained stagnant because securitization made it much easier to lend to consumers than to businesses. That continuing imbalance is a threat to the long-run stability of the American economy.”

ECOnomics

Whenever I blog on economics or statistics, I know I make some folk uneasy with my comments.  But the joy of blogging is commenting on things I read or think about for which I don’t have to be right.  That appears to be the job of the rest of the world, who lets me know where my economic thinking goes astray.

Super Committee inaction

First a comment on the failure of the “Super Committee” to come up with a budget reduction plan which supposedly now will trigger mandatory cuts in government spending, including mandatory cuts for the military (this last phrase,  I think, is always thrown in to make conservatives nervous).

In our pluralistic society, the “consent of the governed” is going to mean that those who govern have to come up with compromises so that they can form majority coalitions to approve of legislation.  But in America this also has come under criticism as “business as usual” and Americans politically are perpetually in favor of change.    So the legislators can’t compromise and they can’t get anything done (which means they can’t govern reasonably either).  So  mandatory cuts in government spending are the only kind of cuts that are going to be agreed upon.  Americans are fed up with this political gridlock as well, at least based upon polls rating Congress (I heard one commentator note that communism gets a higher approval rating in America than Congress – 11% to 9%).

Cutting both the annual deficit and the national debt seem like proper goals to me.  The deficit can be cut/eliminated by cuts in spending, but to reduce the national debt, I believe, is going to require some tax increases (even if temporary).   Since I favor a balanced budget for the government and a reduction in the national debt, I believe we have to talk both spending cuts and tax increases.     I think that means talking about how to make Medicare and Social Security solvent as well.  Apparently none of these ideas is very popular with our national legislators and so they cannot come up with a reasoned planned and only seem to be able to acquiesce to a mandated reduction in spending (and even at that some are not comfortable with the mandatory reductions and seem to want to avoid them as well).    It seems obvious enough that continuing on the current path is not going to reduce the national debt, so the legislators decided to take those decisions out of their own hands and allow mandatory cuts to do their work for them.  But it is also true if we send our elected congressional leaders to Washington and tell them not to compromise to resolve the deficit and debt we are going to get what we got: an inability to govern reasonably.   In a democracy, compromise is not always a bad word as it means bi-partisan.   We might remember that ‘partisans’ from one point of view are ‘terrorists’ from another point of view.  Governments are said not to negotiate with terrorists.

What isn’t needed is more blame, but there always seems plenty of that around; a super  abundance of blame will not reduce the national debt or deficit one penny.  We waste our money when we send to congress people who have nothing to offer but blame.

My intent in this blog is not to belabor our government (“we the people”) and our inability to reasonably solve problems because of our ideological rigidities.

Instead, I want to comment on was a graph I saw in the 14 November issue of TIME with an article by Stephen Gandel titled “The Deregulation Myth.”   The gist of the graph is that despite a popular notion in the US that government regulations are hurting economic growth, worldwide the statistics show a different picture.  For the five years ending in 2010, the US is ranked 4^th out of 183 countries as being the most business friendly (Singapore is 1^st, Hong Kong 2^nd, New Zealand 3^rd).   In that time period the US had an increase in GDP of 15%.   But in that same time period China had a GDP increase of 160%, Russia of 94%, Brazil  135%, and Indonesia 147%.   These are countries in which businesses  are more regulated than US businesses.   Being more business friendly and government deregulation of business do not automatically create jobs or economic growth.  Capitalism moves money to where capitalism believes there is money to be made.   It is an oversimplification for politicians to promise Americans significant economic growth by further reducing government regulations.  America is already one of the most business friendly nations on earth.

The reality is America cannot control all of the economic factors in the world.   Politicians have limited powers as to what they are able to do to improve the economy.

If America cannot control world economics, what is our best strategy for living with, in and as part of the family of nations (which maybe we can influence even when we can’t control them)?   If politicians really have limited power to change the American economy, what are our best domestic strategies for creating sustainable economic growth?

Things to ponder.

For me there are also ethical questions regarding the relationship between profit and greed and the balance between sustainable economic growth and environmental stewardship.  We are after all not merely consumers on earth, but stewards of the earth.   God so loved the world, we believe, and we too are to love His creation, not just greedily use it for profit but for the benefit of all.   We Americans certainly believe that no tyrant anywhere on earth should control its resources.  So too, we have to abide on earth in peace with the rest of the world sharing the earth’s resources following that same principle as well.

See also my blog America and Capitalism: Dr. Frankenstein’s Demonic Lesson

The Cost of Living

The 10 October 2011 issue of TIME had a few statistical graphs giving a financial picture of our lives today.   The statistical graphs I found most interesting were the ones dealing with how we Americans allocated our personal budgets through the last 60 years.  The statistics were measuring the “Percentage of Total Personal Consumption Spending.”

In 1950 Americans spent :

22% of Personal Consumption Spending on Food,

13% on housing,

10% on clothing,

3% on health care,

3% on financial services and insurance.

By 1970 we were spending

17% on housing,

16% on food,

7% on clothing,

7% on health care,

5% on financial services and insurance.

In 1990 our personal consumption spending looked like this:

18% on housing,

13% on health care,

10% on food,

7% on financial services and insurance,

5% on clothing.

Finally by 2010 our spending looked like this:

18% on housing,

16% on health care,

8% on financial services and insurance,

7% on food,

3% on clothing.

Of course the stats don’t give us a clear picture as to why these changes.  Obviously the percent of our personal consumption spending on food and clothes has declined significantly.  The stats don’t say whether that is because the actual price of these goods has fallen, or if we choose to spend less on these items, or if we simply have more disposable income and so we can devote a smaller portion of our budget to food and clothes.

What stands out in my mind is the soaring cost of health care.  As a percentage of total personal consumption spending, health care spending jumped from 3% in 1950, to 7% in 1970, to 13% in 1990, to 16% in 2010.  So while I hear some Americans claim the American health care industry is the best in the world, it appears we will have to add the caveat “for those who can afford it.”    In difficult financial times how many Americans cannot afford to give 16% of their spending to health care.  Health care is rapidly approaching taking up as much of our spending as housing.   Maybe we value our health that much, or maybe we will all have to start choosing between having a home or being able to participate in the American health care system.

Our diseases will be treated but we will have to cope with the “dis-ease” that we can not afford both health care and having a home.

Related to the above numbers, 27% of Americans have gone without health insurance which might indicate that they cannot afford to spend such a high percentage of their personal consumption on health.  But interestingly, having adequate health insurance is less a concern today – only 47%  mention worrying about having adequate health care while 77% are worried about outsourcing jobs to other countries.  Again no explanation is offered as to why people are less concerned about having adequate health insurance – it could be that they feel they can do nothing about it anyway or that health care is so expensive that they know they can’t afford to worry about as it is beyond their reach.

While I know many Americans hate government involvement in things like health care, I wonder has the insurance industry or the health care industry put forth any viable plans which do not involve government and which lower the costs of health care to make them more affordable to and more accessible to more/all Americans?  If health care is driven by wall street, the only concern is going to be profit.  Can the industry create a system whose real concerns are the American people themselves?   Are people more than simply consumers of health care?  How can we create within capitalism a system in which the benefit of the people is the concern and in which this doesn’t end up having to be what government advocates for?   The people often feel when compared to the big money of the health care industry their only hope for an advocate is big government.  What do the health care and insurance industries have to change/do to make the health of the American people the obvious focus of their concern – the real bottom line?

The Economy: Could it get worse?

The economy is stalled, Obama’s approval ratings are sagging.  The Gallup organization is wondering whether it is going to have to use negative numbers to measure Congress’s approval ratings.

Could things get worse?

As the Pessimist says, “Things are never so bad as they can’t get worse.”

This Labor Day, I’ve labored to find some humor in our sad state of affairs.

So time for a comic moment of relief, and since we can’t blame him for conditions any more (or so political wisdom says), here is a quote from memory lane.  Just to remind us of where we were and why we’re here, a quote from President G W Bush, 24 February 2001:

“My plan reduces the national debt, and fast.  So fast, in fact, that economists worry that we’re going to run out of debt to retire.”

I guess that was just politically speaking – a little spin for the party faithful.

But maybe there is yet hope!    Maybe his plan hasn’t fully taken effect yet – I think Congress has kept the Bush tax cuts.  Maybe this is the year they’ll reduce the debt.

And just to add a little more humor, 3 days after promising to reduce the debt on 27 Februrary 2001 GW gave us this Bushism:

“My pan plays down an unprecedented amount of our national debt.”

Ah, those were the days and we thought they’d never end.  Playing down the national debt became a political pastime in America.  Now we are paying for all that pleasure.

So, if the economy has got you down, lighten up a bit, the politicians are promising they will fix it.

Happy Labor Day!

Redistribution of Income Revisited

In my blog The Redistribution of Wealth I made comments about the redistribution of wealth taking place in America, not as a result of taxes or liberal/socialist policies, but as a result of intentional economic policy which seemed to favor the wealthy to become wealthier.  The article in the Summer 2011 WILSON QUARTERLY, shows that from 1976 to 2007, the top 1% wealthiest Americans went from earning 9% of America’s total income to 24% – a sizable redistribution of income.  The article did note that simultaneously the American economic pie got bigger, so even those lower on the wealth scale benefited from the growing economy, but still the growth in income for the top 1% wealthiest Americans  was increasing very rapidly.

In the comments to that blog, Brian searched the Internet to check those facts and found a very different set of numbers which he listed in his comment.  His numbers look at the distribution of wealth between the top 1% wealthiest Americans and the 99% rest of Americans.  There it is obvious that the wealthiest 1% have historically and consistently owned a disproportionately large percentage of America’s total wealth, but then that is exactly what puts them in the wealthiest 1%!

Dn. Marty in another comment to the blog was able to locate the original article referred to in the WQ and reports the article is talking about income not wealth and so those statistics are quite different from what Brian quotes.  Thus is the world of facts and statistics – it isn’t so much a redistribution of the total wealth but the incomes of the top 1% are increasing at a fairly phenomenal and accelerating rate over the 31 year period from 1976-2007.

I think Dn. Marty’s comments solve the legitimate issue and questions raised by Brian.  The two sets of numbers are apples and oranges:  wealth vs. income.

The numbers Brian provided from 1922 to 2007 caught my attention in another way, which is more related to the original point I wanted to make: we see that the top 1% wealthiest Americans controlled a portion of America’s wealth ranging from a low point of 19.9% in 1976 up to a high of 44.2% in 1929.   I know I’ve read from several sources that in terms of American economics, the economy is strongest when a greater number of people share the wealth – this makes sense in an economy driven by consumer spending.  If only the elite few have a lot of disposable income, there won’t be much consumer spending.  When many/most people have income to spend – the economy benefits, and merchants and manufacturers are kept busy and prosperous.

So the numbers quoted by Brian  show (in my mind at least) a kind of Freakonomics thing about the economy.

In 1929, the top 1% wealthiest Americans possessed 44.2% of Americas wealth.  That is the all time high on the chart.   What happened in 1929?   The Great Depression.   The concentration of wealth in the hands of the few was bad for the economy as a whole.

In those same statistics, in 1976, the wealthiest 1% of Americans owned only 19.9% of Americas wealth, the lowest on the chart given.   This occurs in the years right before America went on an unabated 25 year period of economic growth; this was an unprecedented period of growth for the country.

But this growth was accompanied by the wealthiest 1% gaining possession over an ever increasing portion of America’s total wealth, peaking between 1995-1998 at just over 38% of America’s wealth.  In that same time period (1976-2007) the share of the nation’s income of the wealthiest 1% increased from 9-24%.    And then we come to 2007 when the wealthiest 1% controlled just over 34% of the nation’s wealth (and those numbers were on a annual upward trend) AND now earned 24% of the nation’s income.  Result again?  The Great Recession of the 21st Century.

There are so many factors that enter into this picture, many events outside the U.S., but still the notion that the economy does benefit when wealth is shared by a greater number of individuals seems to be in these statistics.   From 1976 to 1995, the top 1% wealthiest Americans doubled their  share of America’s wealth from 19% to 38%.  Remember the pie also got bigger so many people lower on the scale also owned “more” but relative to the whole pie, the bottom 99% had a much smaller share of the larger pie to divide up. (see also my blog American Ingenuity and Re-inventing of Government).

It is something to think about – a freakish co-incidence or Freakonomics?  When the total of America’s wealth or income gets concentrated in the top 1% of wealthiest Americans to the tune of 34-45%, is that a good predictor that the country is in for another great recession/depression?

If it is, then the question becomes, since the economy is totally human made, and we can recognize the warning signs that the economy is reaching a point where a great recession/depression is imminent, should we form policies that prevent this scenario from ever arising by insuring that wealth and income are spread over a greater portion of the population?

America became immensely wealthier through the years, but even that gargantuan increase in wealth/capital could not prevent the economic collapse/disaster which hit the country over the past few years.   Could better economic policies have helped by recognizing the signs that the system was getting out of balance?

The economy is a human made product.  Are there not ways that humans can help regulate it so that it better serves us all?   I know today government regulation has a bad name, but the economy is not mother nature, it is completely human made and responds to and is  shaped by human speculation, human fears, lack of confidence, human error, human greed, political gridlock, and world events.  And while many don’t trust government to do any better with the economy than investors or Wall Street or the banking industry, government of, by and for the people is a potential force to check other forces we’ve created.

American Ingenuity and Re-inventing our Government

This blog offers some concluding thoughts to my previous blog, Redistributing Wealth.

In analyzing the political partisanship and implacable ideologues Fareed Zakaria  writing in the 15 August 2011 issue of TIME offers some thoughts about why the American system of government is not able to solve our current fiscal problems:

“American parties now function like European parliamentary ones, ideologically pure and with tight discipline. But we don’t have a European system. In parliamentary systems, power is united so that when, for example, the British Prime Minister’s coalition takes office, it controls the legislative branch as well as the executive. The Prime Minister is, in effect, chief legislator as well as chief executive. The ruling party gets a chance to implement its agenda, and then the public can either re-elect it or throw the bums out. The U.S. system is one of shared and overlapping powers. No one person or party is fully in control; everyone is checked and balanced. People have to cooperate for anything to get done. That is why the Tea Party’s insistence on holding the debt ceiling hostage in order to force its policies on the country–the first time the debt ceiling has been used this way–was so deeply un-American.

The strength of the Tea Party is part of a broader phenomenon: the rise of small, intensely motivated groups that have been able to capture American politics. The causes are by now familiar. The redistricting of Congress creates safe seats, so the incentive is to pander to the extremes to fend off primary challenges, rather than to work toward the center. Narrowcast media amplify strong voices at the ends of the spectrum and make politicians pay a price for any deviation from dogma. A more open and transparent Congress has meant a Congress more easily pressured by small interest groups and lobbyists. Ironically, during this period, more and more Americans identify as independents. Registered independents are at an all-time high. But that doesn’t matter. The system in Congress reflects not rule by the majority but rule by the minority–fanatical, organized minorities.

These dysfunctions have reached crisis levels at the very time the U.S. faces intense pressures from an aging population, technological change and globalization. We need smart policies in every field. We need to pare spending in areas like health care and pensions but invest in others like research and development, infrastructure and education in order to grow. In an age of budgetary limits, money needs to be spent wisely and only on projects that are effective. But in area after area–energy, immigration, infrastructure–government policy is suboptimal, a sad mixture of political payoffs and ideological positioning. Countries from Canada to Australia to Singapore implement smart policies and copy best practices from around the world. We bicker and remain paralyzed.

Some of those best practices used to be American. The world once looked at America with awe as we built the interstate highway system, created the best public education in the world, put a man on the moon and invested in the frontiers of knowledge. That is not how the world sees America today. People watched what happened over the past month and could not comprehend it. We have taken something that the world never doubted–the credibility of the U.S.–and put it into question. From now on, every time the debt ceiling has to be debated, the world will wonder, Will America honor its commitments? Will it keep its word? Will the system break down? We have taken our most precious resource, the trust of the world, and gambled with it. If, as a result of these congressional antics, interest rates on America’s debt rise by 1% –in other words, if the world asks for just a little bit more interest to lend us money–the budget deficit will rise by $1.3 trillion over 10 years. That would more than wipe out the entire 10 years of cuts proposed in the debt deal. That’s the American system at work these days.

Old Senate Chamber

Maybe we can rethink what we are doing.  American ingenuity both invented and grew out of the changing political world of the 18th Century.  That same ingenuity if it is allowed to thrive rather than be throttled by ideologues can re-invent the government which helped make America great.

If it is the case that our political system is becoming polarized to the point of being paralyzed, a former congressman offered his opinion about how we got to this point.

Congressman Jim Cooper (D-TN) first elected to congress  in 1982 made observations about a big change that occurred in congress that contributed to the polarization in congress and inability to work together.   Cooper writing in BOSTON REVIEW (May-June 2011) as reported in the Summer 2011 WILSON QUARTERLY commented to the effect:

“Speaker of the House Tip O’Neill (D-Mass.) saw himself as leader of the entire House, not just the Democratic caucus.  O’Neill’s was a House intent on making policy, not partisan mischief,’  Cooper recalls.”

There even was a time when “a group of elite staffers known as the Democratic Study Group provided authoritative memos before each important vote listing the pros and cons of the bill.  The quality of these reports was so high that even some Republicanss subscribed.”

Cooper says the system changed a great deal  “under the leadership of Newt Gingrich (R-Ga.)”.  “Gingrich centralized power in the office of the Speaker and politicized the position.   Committee chairs, powerful under O’Neill, were ’emasculated, their authority redirected to the Speaker.”  It was in this time the Democratic Study Group mentioned above ceased to exist.

It is possible that Gingrich made these changes to correct what were perceived as problems of congressional dysfunction in his day.  Don’t know that story, but I’m just following Cooper’s line of thinking.

The changes that Cooper claims occurred are still in effect to this day, and it has not mattered whether Republicans or Democrats have been in power, they now follow the precedent set by Gingrich.   Cooper notes, “The truth is that the [Gingrich] model works … if you are only interested in partisan control of Congress.”

This of course gets back to Fareed Zakariah’s point above that the U.S. political system is not a European parliamentary system.   So those who are demanding that we return to the Constitution in determing how government is to operate, maybe we have to demand that we abandon the polarizing parliamentary European system and return to our democratic system where disagreeing politicians are forced to sit down together and work out a compromise that solves our problems.

Cooper’s “solution” is that our congressmen get “merit” pay based on their ability to co-operate to make the system work – including merit pay for those who eliminate obsolete laws  and who work to cut spending.  Not sure how that idea would work.

I want to also acknowledge that some think the rancorous process which we witnessed in dealing with the debt ceiling problem is nothing but democracy at work.  Charles Krauthammer (Washington Post, 12 August 2011) thinks the system is working fine and we should quit complaining.  He notes what is an obvious truth of American politics, voters do react against both ideas and politicians they don’t like.  Thus we see swings in voters moving left and right whenever they think politicians have gone too far.  He feels confident the system is doing what it is supposed to do and the results in the debt ceiling debate did what they could do.  He wrote: “It was a triumph of democratic politics – a powerful shift in popular will finding concrete political expression.”

There is no doubt since the time of the election of 1800 in which Thomas Jefferson using dirty tricks defeated incumbent President John Adams.  It was a rancorous campaign that caused Adams and Jefferson, two of the heroes of the revolution and founding fathers of our country,  to have a complete falling out and become bitter political rivals.    There have been major issues at stake that endangered the American political system soon after its birth.   It exploded in the election of 1860 when Lincoln became President and American became a divided nation at war.

Enjoying the Quiet of the Library

And though this is nothing new, I personally don’t find the process to be to my liking at all.   But there is little doubt that the pitfalls of a bickering democracy are preferable to the dictatorship of a one party system.   I silence the negative campaign cacophony by living TV and commercial radio free.  I noticed that even a couple of my sons have basically quit watching TV and don’t have cable subscriptions.   There is hope for America!

It seems to me that since both political parties seem to think they have to play to the extremes of their constituencies in a circus media driven political culture,  most of what we receive from the partisan leadership is all heat and no light.  Maybe that is the only way politicians can get anything done public accusations but behind the scenes some effort to reach a solution.   But I know I would prefer hearing reasoned proposals rather than partisan rhetoric.

At one time some of the leaders of the two parties did agree that $4 Trillion in debt reduction was the goal.  That was a huge step forward.  But the resulting agreement was only about half that, which means we are going to have to listen to the rancor twice, and probably twice as much before they will come up with a package that will convince the world that the US is a safe place to invest your money because it is backed by the full faith and credit of the US government.

Next:  The Redistribution of Income Revisited

The Redistribution of Wealth

[My note – there is a discrepancy in facts between an article I mention, and some facts that are quoted in the comments from Brian attached to this blog.   The discrepancy as explained in the comment from Dn. Marty appears to be that the original article refers to income, not wealth, while the charts Brian refers to are talking about wealth not income.   The difference is significant and certainly which statistics one is looking at changes the conclusion one can make.  I have edited my original comments to better reflect the facts being offered in the original article.  Probably need to retitle this blog to “The Redistribution of Income.”   Thanks to Brian and Dn. Marty for their comments.]

In the ears of a number of Americans, “the redistribution of wealth” is an idea which is associated with notions of socialism, or the political left or the tax and spend folk of Washington, D.C.   These fears seems also to feed the anti-tax political movements in America.

Apparently the thinking is that if only the tax rates would go down, more Americans would be or become wealthier.   Statistics analyzed in the book PRESIMETRICS claim however from the time of Presidents Eisenhower to GW Bush that there is no statistical evidence to show “that lower taxes result in higher incomes” and amazingly enough “it is pretty evident” in that same time period that “higher taxes were not hurting people’s pocketbooks” as measured in real median income or net disposable income.   Lower taxes did not yield the higher economic growth some predict and lower taxes “at least by themselves– are not the way to increase economic growth.”   (You can analyze their statistics, pp 116-130 of the book:  Some say numbers don’t lie, others that statistics can be interpreted to mean anything.)

What is perhaps more notable economically, is an article by A. Atkinson, T. Piketty, and E. Saez in the March 2011 issue of JOURNAL OF ECONOMIC LITERATURE  (as reported in the Summer 2011 WILSON QUARTERLY).   According to this article, in the United States, “The top one percent of earners more than doubled their share of income between 1976 and 2007, from nine to 24 percent.”   [The discrepancy is in that the statistics in the comments below show in the increase in wealth going from 19% to 24%,  while the article is claiming “their share of income” increased from 9-24%.  That certainly changes the basis of my comments.]   This means that in this time period the 1% wealthiest Americans  in 30 years had their share of the nation’s income increase from  9%  to 24%.   The top 1% of the wealthiest now own almost 1/4 of  the income generated in America.  This is a redistribution of wealth not engineered by socialism, but certainly the direct result of American economic policies and capitalism as we practice it.

The article goes on to say,  “For the top 0.1 percent of earners, the concentration was even more extreme: They quadrupled their share, from three to 12 percent.”

The rich have been getting richer faster!   America, claimed to be the richest nation on earth, has an ever growing portion of its wealth controlled by one percent of its population.

So a redistribution of wealth actually does take place in America, one that is not the result of leftest policies or of increasing taxes: wealth is moving toward and pooling in the bank accounts of the wealthiest Americans.   Some may say that is just the nature of things, but this doesn’t happen “naturally”, it is purely manmade:  it happens as a result of the intentional economic policies to which we choose to adhere.  It is, I suppose, a form of economic Darwinism:  the strong not only survive, they thrive in the economic world they create and control.   It is a human-made selection that favors those who have created the conditions which determine who thrives.

Now to be fair to the entire picture, in that same time period, the 99% of Americans not in that wealthiest 1% saw their income rise 18% as well. (By comparison, in that same 99% of French citizens, their income rose 26% in that same time period).   So there was an overall income increase in America across the board, but an even faster growth in the income of the wealthiest American 1%.  (The statistics show worldwide the rate of concentration of wealth in the wealthiest few occurred much more in America than in Europe or Japan).

I have not been convinced that the US can reduce its deficit and debt by spending cuts alon; rather I think we actually will need tax revenue increases to pay down the debt.  It seems that also was the concern of S & P in lowering the credit rating of the U.S.:  budget cuts alone are not going to be able to get the U.S. to balance its budget and eliminate its massive debt.  Thus maybe the next impasse is going to be between the Tea Party adherents verse the Credit rating agencies and Wall Street.

I have read before that the U.S. and world economies have tended to fall into the hardest times when a disproportional amount of wealth gets concentrated in the few.  The economy works far better when wealth is widely distributed over a greater number of people.  So the current redistribution of the wealth toward the wealthiest few does not bode well for future economics in the U.S.   Fareed Zakaria  writing in the 15 August 2011 issue of TIME, said:

So far, the national debate has been built around the fantasy that we do not have to choose between big government and low taxes–that we can get both by cutting waste, fraud and abuse. But the money is in the big middle-class items, from Medicare to the mortgage-interest deduction. With federal taxes at 15% of GDP, a historic low, and spending at 24% of GDP, there is really no conceivable way to close the gap without increasing taxes–either raising rates or eliminating deductions and loopholes. And Republicans might find to their dismay that when forced to choose, Americans will decide that they like their government programs after all. Polls show that the public would rather raise taxes than, for example, cut Medicare. (In fact, we would have to do both.) The public may hate government in theory, but it has warm feelings about most individual government programs, from the space shuttle to Head Start to Pell Grants.

Whatever agreement our politicians cobbled together to increase the debt ceiling, they still neither solved the deficit and debt crisis facing the U.S., nor did they show enough good old American ingenuity in how to bring people together to solve a problem.   They were not able enough or bold enough to take on the size of the problem facing us.

Americans often were viewed in the past by the rest of the world with amusement and admiration for their can-do attitudes toward problem solving and our belief in the power of negotiation to create compromise solutions that bring some benefits to all parties.   Time will tell whether we still have that American spirit to solve our problems today.

Next:  American Ingenuity and Re-Inventing our Government