The other day I came across a TED Talk video by Nick Hanauer. It was entitled "Beware, fellow plutocrats, the pitchforks are coming." I was struck and impressed by it for any number of reasons, not least for the complete contrast that he makes to our president elect. He begins his talk with the admission that "You probably don't know me, but I am one of those .01 percenters that you hear about and read about,and I am by any reasonable definition a plutocrat." Our president elect would assume -- probably rightly so -- that every did know him, and he would never describe himself as "one of those .01 percenters," in part because it is the language of the more democratic opposition, in part because he is the anti-Kardashian. He is "a proud and unapologetic capitalist"and has been rewarded obscenely for that with a life that most of you all can't even imagine: multiple homes, a yacht, my own plane, etc., etc., etc." The point of his TED Talk, however, is not to make my inability to imagine his life irrelevant by parading it before the cameras, nor is it to market the secrets to his success. By his own admission he was "not the smartest person" nor "the hardest working. He was "a mediocre student," and was "not technical at all," which he proves by saying he can't "write a word of code." His success rather was "the consequence of spectacular luck, of birth, of circumstance and of timing," none of which can be replicated. It is perhaps not surprising then, that Tim Worstall of Forbes would object. Forbes' business is, for the most part, marketing the American dream, the idea that you too can be successful if you possess the right character, have a good idea, and sufficient grit to make the idea a reality. Those who have been "rewarded obscenely"are paraded on their pages for envy and emulation. If Hanauer risks coming off as "some liberal do-gooder," Worstall and the writers of Forbes risk coming off as "some conservative booster." There was some controversy about the posting of Hanauer's talk to the TED site -- a controversy in which I am deeply uninterested -- but apparently, according to Worstall, they didn't post it because it was "categorically mediocre." Worstall takes it a step further, saying "I'm afraid I must disagree. It was worse than mediocre: it was deeply ignorant of the very subject under discussion," and he sets out to demonstrate and respond to that deep ignorance.
So there you have it, point/counter-point. Hanauer's core argument is two-fold. First, here is rising inequality, and "if wealth, power, and income continue to concentrate at the very tippy top, our society will change from a capitalist democracy to a neo-feudalist rentier society like 18th-century France." Second, he believes "no free and open society can long sustain this kind of rising economic inequality," asserting "You show me a highly unequal society, and I will show you a police state or an uprising. The pitchforks will come for us if we do not address this. It's not a matter of if, it's when." This is, in effect, one explanation for the emergence of Trumpism as the initial harbinger of the "uprising." I believe much of the anger is both delusional and misplaced, and to see Trump as the ubermensch to fix it all is equally delusional and misplaced, but there is no denying the anger. It might be something of a worst case scenario, but Trump will betray that anger, either cynically through direct support of policy that further exacerbates the sense that "the other 99 percent of our fellow citizens are falling farther and farther behind," or narcissistically through a political ineptitude that cannot admit failure and, confronted with failure, doubles down with a literal vengeance on those who revolt against the failure. Either way, the betrayal may tip the rally to an actual revolt, and the a failed leadership characteristically invokes the necessity of a police state to reclaim "law and order," casting a wide net of conspiracy and scapegoating blame that may well include the very people who supported him (consider his response to the Carrier union leadership).
There are two assumptions guiding Hanauer's argument. The first, touched on above, is the challenge to the prevailing assumption that the vast differences in wealth are inherently "merited." We cannot do away entirely with the idea of a "meritocracy," and the notion that, with hard work and persistence, we can rise to the level of our dreams is deeply American. If there is an admiration of wealth, it is the admiration bestowed on the self-made man, and it is not surprising that wealthy politicians often down play their inherited wealth while playing the self-made card. The former counts for little in the American psyche, except perhaps a suspicion of the degraded excesses associated with the likes of a Paris Hilton, while the latter counts for "merit," the suspicion that their acquired wealth reveals a man stronger, smarter, and, yes, altogether better than the mass of Americans. We should, however, face facts, and the facts darken the American dream and our admiration of wealth. Social and economic mobility are on the decline, and the decline is not unrelated to the growing disparity of wealth. In today's world, our children are much much more likely to inherent the relative position of their parents. As the gap widens, a few may achieve great wealth on merit alone, but it will be the very few, the .000001 percent. More will receive it simply as a matter of inheritance, and the inheritance of great wealth, along with the social, economic and political power that accompanies great wealth, is simply an aristocracy. We may have done away with the titles of 18th century aristocracy -- the Princes and Princesses, the Dukes and Duchesses along with the Marquis and Counts -- but the "aura" surrounding Ivanka and the Trumps is not at all unlike the "aura" surrounding the aristocracy in a neo-feudalist society.
The second assumption, the one Forbes disputes, is that the current policy environment that allows, even encourages the riising economic inequality is "stupid and ultimately self-defeating." We need to "put behind us the trickle-down policies that so dominate both political parties" and embrace what he calls "middle out economics." Hanauer's argument is part plea, and ultimately he is pleading with the capitalists to save capitalism. He invokes the example of Henry Ford, who "famously introduced the $5 day, which was twice the prevailing wage at the time, he didn't just increase the productivity of his factories, he converted exploited autoworkers who were poor into a thriving middle class who could now afford to buy the products that they made." It is this act of noblesse oblige that created a virtuous cycle, where bulging wallets of the workers increased demand, which in turn the increased production and sales, which in turn increased the need for and competition for workers, which in turn created the wealth of a burgeoning middle class. Increased production and sales, of course, also meant increased profits, not only making the rich richer, but also the capital needed to invest in further expansion of production to meet human needs real and imagined. As Robert Reich and Paul Krugman in the popular press, and Piketty in the academic press, all have reminded us, to use Hanauer's words, "an economy is best understood as an ecosystem and characterized by the same kinds of feedback loops you find in a natural ecosystem, a feedback loop between customers and businesses. Raising wages increases demand, which increases hiring, which in turn increases wages and demand and profits. Everyone benefits.
There are two aspects to the current policy environment, however, that have put us in a vicious cycle -- one might call one aspect the labor and the other the tax policy. Both the Trump and the Sanders campaigns brought attention, rightly, to the prevailing "bi-partisan" consensus on trade, and the prevailing notion, as the Schumpeter columnist put it in the October Economist, that "globalization is both inevitable and irreversible -- the product of technological forces that mere human decisions cannot reverse." The focus on trade was less about trade, more about jobs and wages, more about the politically sanctioned export of American jobs to low wage areas of the world, and this, in part, has created a vicious cycle for the American worker. Although it shows some signs of improving, demand has been soft for some time, and its uncertain whether current up-ticks can really be sustained, and as a consequence "productivity growth is dismal in the west," and "the more business copes with uncertainty by delaying investment or moving money abroad," the more returns on what little growth remains are "captured by an ever narrower section of society," the more powerful the populist appeal to "do something," the more likely the people will fall victim to a demagogue who promises to "make America great again" on the strength of unsustainable promises, misplaced blame, and a messianic narcissism. In the meantime, everyone wants to retain the wealth they have, few want to give it away in taxes, because, yes, most citizens have no choice but to live from paycheck to paycheck, from day to day, indulging the small pleasures and burgeoning necessities of the moment. "Everyone," of course, includes the wealthy, facing diminished returns on investment, not unreasonably want to hang on to what they have and pass it on to their children. It is, essentially, the same feedback loop between customers and businesses, but diminishing wages has diminished demand, which in turn diminishes hiring, which in turn diminishes wages and demand and profit. No one benefits, except perhaps those who have "made a science of gaming the system to produce private benefits."
It is here, on taxes, that Forbes objects. They quote Hanauer as saying "That’s why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer." Forbes objects as follows: "It isn’t actually true that the claimed link is between taxes on the rich and job creation. Rather, that marginal tax rates have an effect on labour supply: raise those marginal rates too high and people will decide to do something else rather than go to work. Appear unpaid on stage at conferences to make a video perhaps." First, let me say that snark is not an argument, and his off-hand dismissal of Hanauer's exercise in political commentary is neither clever nor to the point. It IS actually true that the claimed link is between taxes on the rich and job creation as in, to paraphrase the 1001 iterations of the claim, "decrease taxes on the rich, increase the supply of capital available for investment in enterprises that will, in turn, create jobs." There is, to my knowledge, little evidence that the supply of capital accumulating at the tippy top of the scale necessarily creates investment in enterprises that produce jobs. Quite to the contrary, there is considerable evidence that it is invested in financial instruments that bear interest or produce "rent." Think of it this way. Middle Americans like to believe they have ownership of their homes, their cars, their "stuff" in general, but in reality a good deal of that "stuff" is merely "rented." If you don't believe this, stop making payments and see what happens. When middle Americans pay interest as debt service on their homes, on their cars, on their credit cards, where does that money go? It goes, of course, to those financial institutions that hold the debt, and to a certain extent, those financial institutions DO increase demand, debt fueled demand that allows people to "rent" homes, cars, stuff for a small monthly payment. As the recent recession has demonstrated, however, there are limits to how far one can fuel demand with debt, and when that small months payment exceeds the debtors ability to pay, it all tends to collapse in on itself.
In another respect, however, Forbes is correct, or so it seems to me. The marginal tax rate is important, but we need to think of "taxes" a bit differently. Think of it this way. There are two sorts of taxes, public and private. The first is what we would normally call taxes, money paid to government for government services. The second we wouldn't normally call taxes, the money paid to private enterprise or business for to maintain a certain standard of living. In both cases, we get stuff. In the first, we get stuff like police and military protection, roads and other infrastructure, education and the programs that provide a social safety net. In the second, we get stuff like our homes, cars, and TVs. There are differences. The first seems compulsory, the second voluntary, but in a democratic society the taxes paid to government are compulsory only to the extent that the people allow.* Assuming a debt free, pay-as-you-go government, the people and their representatives could choose to forego, say, the social safety net and the taxes that support it. Typically, however, governments, no less than private citizens, have some difficulty living within their means. The demands of election tends to support "over-promising," and as the Schumpeter columnist put it, "democracies overspend to give citizens what they want in the short run, whether tax cuts or enhanced entitlements." Governments take on debt to pay for the services they provide, which means of course that a portion of our tax dollars goes to interest and debt service. Private taxation, likewise, is only voluntary to the extent that we are willing to do without. It too is a negative freedom in the sense that one could live wholly within one's means. One is perfectly free NOT to mortgage a home, free NOT to finance a car, free NOT to swipe the visa for that TV, but to do so means giving up most of the conditions of modern life and most would prefer not to do so. I am suggesting, of course, that we think of "taxes," not as the money paid for stuff, the principle, but as debt service, the interest. For those who are biblically minded, there was a reason why usury was considered criminal (Deuteronomy 23:19). Those of modest or moderate means are not in a position to lend money. Those of considerable means, however, are in a position to lend money, and they do so to those of modest or moderate means. Interest is "money for nothing." For those of modest or moderate means, it is money paid out for "nothing." For those who hold the debt, it is money received for "nothing," neither goods nor services nor labor. So, yes, the marginal tax rate does have an impact on the labor supply. For those of modest or moderate means, usually fixed modest or moderate means, as interest consumes more and more of the available income, the less is invested in principle, diminishing the demand for goods and services that fuel job creation.
So, yes, when you have a tax system, in the usual sense of the word "tax," where most of the exemptions and the lowest rates are assigned to the sorts of income derived from "nothing," it tends to benefit the richest, those who hold the debt. It tends also to punish those of modest or moderate means, with a double whammy. They pay the lion's share of interest on private debt, but also the lion's share of both the principle and interest on public debt, and as interest consumes more and more of the available income, the less is invested in principle, the actual distribution of government services. Indeed, those of modest or moderate means may not even have access to the sorts of government services (e.g. medicaid) that would make a real difference in their lives, fueling a resentment of those who do have access, the poor, who do get the services and get them for "nothing." In many respects, it is easier to resent the poor who get their "money for nothing," than the rich who likewise get their "money for nothing." The poor are closer to home and more visible in their penury. One sees them at Walmart, paying with food stamps. We see them in the waiting room at the hospital, getting free care for their sniffles when the same visit would take $150 from a hard working American-- actually more, because the cost of the visit will likely go on the VISA with interest. In a society that wants to believe in virtues of the self-made man, that wants to believe that the poor can and should do "something" to relieve their condition, the poor, if we are honest with ourselves, elicit repugnance. We cannot help but feel they should be ashamed of themselves, taking "money for nothing" from hard working Americans. The rich, however, live "in a gated bubble world." We never see them in Walmart or the waiting room. If we are given glimpses into their world, the rich, if we are honest with ourselves, elicit envy and perhaps just a twinge of shame. In a society that wants to believe riches follow character, it cannot be that those of us who play by the rules, those of us who work hard, those of us who have aspirations -- it simply cannot be that we suffer a lack of character. And so, the rich are what we would be if only the poor didn't rob us blind, if only the system weren't rigged against us, if only the immigrants didn't take our jobs, if only the liberal elite weren't so smug and self-serving, and the list goes on, bubble bubble, toil and trouble, into a toxic potion of populism, the attempt to relieve a growing sense of shame with blame.
But to be fair, Forbes is making a slightly more sophisticated argument. The idea that one can raise raise those marginal rates too high and people will decide to do something else rather than go to work is "the Laffer Curve argument in part. Economic production and thus total taxes raised will be maximised by having marginal tax rates that are not too high." I do not want to dispute the Laffer curve, or for that matter defend it. The basic idea, though, is this: at a 0% marginal rate, government obviously collects no tax revenue. Also, at a 100% marginal rate, government "theoretically collects zero revenue because taxpayers change their behavior in response to the tax rate: either they lose their incentive to work, or they find a way to avoid paying taxes. Thus, the "economic effect" of a 100% tax rate is to decrease the tax base to zero. If this is the case, then somewhere between 0% and 100% lies a tax rate that will maximize revenue." There is a certain common-sensicality to the argument across a number of domains. For example, raise the income tax to 100% and I would ask myself "what's the point of working?" At what point between 0% and 100%, however, do I begin to question the validity of working? At what point do I decide to do something else? One suspects that the devil is in the details. If I am working at or close to the minimum wage, that point would come fairly low on the scale, again for commonsensical reasons. If one is actually trying to make a living, at a monthly income of $290, it hardly pays to go to work in the first place. Take away any portion of that income, and there is little incentive to work. If I am working at a seven figure salary that point might come further up the scale. With a monthly salary of just over $80K, would one simply quit working if the marginal rate were even, say, 50%, leaving one with a net monthly income of $40K? Would a surgeon quit performing surgery because, at $40K a month, it just doesn't pay to go to work? It's hard to say, but giving up on $290 a month is qualitatively different than giving up on even $40K a month, and it is this qualitative difference that makes all the difference. It justifies the graduated income tax.
Again, though, let's be fair. We are talking about income derived from actual "work." When we consider "money for nothing" -- that is to say, returns derived from capital gains, dividends, carried interest, et cetera -- one suspects the devil is again in the details. For illustration, think of a one million dollar "savings" account. At a 5% interest rate, it would pay $50K a year. At what point on the scale of 0% to 100% would I say "hell, it isn't worth it," withdraw my money and bury it in a coffee can in the back yard? Would it happen at 50% where one is left with a net income of $25K? Even at 100%, if there were other compensatory services for holding the money in a bank (e.g. security for the one million in principle) it's unlikely that I would resort to the coffee can. Nevertheless, we live in the real world, and the implicit goal in the real world is to maximize the return on capital. If returns on "savings" were taxed at 100% in the US, we might seek other countries with more amenable tax rates -- say 98%, because 2% is better than nothing. Also, if returns on "savings" were taxed at 100%, we might seek other forms of investment, with comparable returns, that are taxed at lower rates -- say real estate, where capital gains are taxed at, say, 50%. Anyone with any sophistication would know my examples are bogus. In the real world, as Forbes implies, the investment opportunities are myriad and the actual tax code associated with them is all a jumble with incentives and disincentives for different types of investment. In truth it takes a team of tax lawyers to keep up with it all.
There are, however, a few points to be made here. First, unlike income earned from actual work, there is no point of diminishing return, only a differential return on capital. A 98% tax rate is "better" than a 100% tax rate, and assuming that all other things are equal (e.g. the risk to and return on one's capital) money would flow to the opportunity taxed at 98% from the opportunity taxed at 100%. Of course, there's an objection to this, so second, in the real world, all other things are not exactly equal, and there is a sort of Laffer curve associated with risk. In a free market, some investments are riskier than others (e.g. the stock market as opposed to savings accounts). Typically, the greater the risk the greater the return, and since all investments carry some risk of loss, it wouldn't make sense to invest at all if the potential returns on capital were taxed at 100%, so again the tax rate should be between 0% and 100%. Where exactly is a matter of dispute. At some point, risk overcomes the potential return. This point is subjective and will vary by circumstance. Professedly risk tolerant investors like Hanauer, who can afford some loss of principle, may accept greater risk in exchange for higher returns. Risk averse investors, like pensioners, may elect safer investments. How much risk depends on a wide variety of factors, but generally taxes diminishes returns and is simply one factor, among others, in the risk/reward calculation.
So third, what Forbes calls the big blooper. Hanauer writes, "the extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists, and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification." Forbes takes exception, saying "the actual rates can be argued over for sure but the idea that there should be a difference between the tax rate on returns to capital and the returns to labour is not a privilege it's just plain common good sense." Why so? He goes on to write, "These are not taxes on the rich. They are taxes on the return to capital. And it is most assuredly so that it is the investment of capital that creates jobs. Which is why, if we'd like to create jobs we'd really rather like to have lower tax rates on those returns to capital." The syntax is a bit difficult to follow, but I believe he is saying "the investment of capital creates jobs." Well, yes, but not all investment creates jobs. For example, it is hard to see how the capital gains derived from the appreciation of real estate, in and of itself, creates jobs. As another example, it is hard to see how return from derivatives, in and of itself, creates jobs. It strikes me that many profited, both by a derivative fueled escalation of housing costs and by its collapse. Job creation does require investment, but for job creation, demand will out. Business thrives and hires employees in climates of greater demand. Business retrenches and fires employees in climates of weak demand. Neither the hiring nor firing of employees, however, in and of itself, affects the return on capital. Indeed, the profitability of a company may actually increase during periods of retrenchment and firing, which in turn raises the demand for and the price of their stocks, which in turn makes those invested in the company just a bit richer. An investor, in short, may actually profit from job losses, which, given off-shoring, automation, or the like, may never be recovered, in part because labor itself is an expense impacting on profits. By equating job creation with investment, however, Forbes implies, that the 15% tax rate on "money for nothing" is in reality a tax on job creation, but that is most assuredly not necessarily so. They are, as he implies, taxes on the return to capital, and the return to capital may or may not derive from the creation of jobs, and indeed the return on capital may actually increase when productivity is improved without the bother and expense of an actual labor force.
Forbes too has something of a point when they write that the taxes on "money for nothing" is not necessarily a tax on the rich. Most Americans do have some form of "investment," but if I have $100 in savings and $100 balance on my credit card, I am going backwards in terms of actual returns. Having said that, low tax rates on "money for nothing" disproportionately favor the rich, particularly the very rich. It doesn't take a genius to see how or why? For those of modest or moderate means, savings and investments are all about deferred consumption, generally an anticipated retirement when one is no longer part of the labor force. For those of modest and moderate income, high taxes on both earned income and investment income simply makes it more difficult to save for a comfortable retirement. The tax code recognizes this, and provides low tax incentives for such savings. For those of substantial means, however, investment is not about deferred consumption, at least not in the way that 99% of the population thinks of deferred consumption. It is about the limits of consumption. Forbes poked fun at Hanauer when he suggested that "I earn 1,000 times the median wage, but I do not buy 1,000 times as much stuff, do I? I actually bought two pairs of these pants, what my partner Mike calls my manager pants. I could have bought 2,000 pairs, but what would I do with them? (Laughter) How many haircuts can I get? How often can I go out to dinner? No matter how wealthy a few plutocrats get, we can never drive a great national economy." Forbes suggests, "Hanauer seems to be complaining that as his consumption doesn't make up for the fall in other peoples' consumption there is something wrong with the system." Again, the syntax is a bit hard to follow, but I don't think he is complaining about his consumption. He does consume, and consume lavishly, with "multiple homes, a yacht, my own plane, etc." No doubt he would like to continue consuming in that way. He is merely suggesting that the very rich, although they consume lavishly, still do not consume enough to drive demand across a broad economy, and it is demand, not his "richness" that creates jobs. He is also suggesting that there is, literally, an end to consumption. At some point, for the very rich, one has consumed all that one can consume, the accumulation of wealth beyond that point is, well, pointless. The money is invested because, well, they have nothing else to do with it.
Although he claims not to be making "a moral argument that economic inequality is wrong," Hanauer nevertheless uses moral language to describe, not only himself, but also those who "have been rewarded obscenely." He suggests their quasi-deification as "job creators" may ultimately be seen as a sham, and a shame, just as the divine right of Kings was eventually seen as a sham in 18th century France, as an inherited aristocracy indulged themselves beyond "the dreams of avarice," not on income derived from actual work, but with income derived from "interest" and other forms of "money for nothing." Again, as Hanauer reminds us, the extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists" -- that is to say, the various forms of "money for nothing" -- and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification." It is also a tax structure that encourages the sort of aristocratic, rentier society that the founding fathers of this nation loathed. Think of it this way. Given an income of $100K, it is better to have derived that income from investment than work. If one derives that income from various forms of "investment," one is left with 85K after taxes. If one derives that income from work, one is left with 65K after taxes. It makes sense, then, to save and iconvert as much of one's income as one can as quickly as one can to "investments."
One might say it encourages investment, and that's a good thing. Well, it depends. If it is invested in enterprises that actually workers, perhaps, but let us say, just for the sake of argument, that it is invested in "mortgages." One directly or indirectly lends out one's money to those who want to buy property. The poor, of course, do not buy property, so we can ignore them for the moment. The very rich do buy property, but they would simply buy it outright unless debt service on a mortgage provided some other strategic advantage for the increase of profit. Those who take out mortgages are those of modest and moderate means, and consequently those who pay "interest" to those holding the mortgage, the capital. It's a good deal insofar as those paying the interest get a home they would not otherwise be able to afford, and those receiving the interest get a return on their money. The investment does create some employment in banks, mortgage companies, and construction if there is an insufficient supply of housing, but not nearly enough to offset the impact on demand. For those of modest and moderate means, it represents a doubled burden. Since nearly all of their income is derived from work, they not only pay state and federal taxes upwards of 30% on that income, but also the private tax of interest, both of which decrease the income available for demand. Here again, then, it makes sense to save and convert as much of one's income to "investments" as one can -- be on the receiving, not the paying, end of interest.
But ultimately, that isn't what happens. Let's be honest. A person making $7.25 an hour isn't going to save and make investments. They must consume, at a very basic level, simply to survive. In the meantime, those of modest and moderate means are moving in the opposite direction. They are not converting income into investments. They are converting income into more debt. There are any number of explanations for this. Part of it is no doubt invidious greed as we attempt to emulate so-called life styles well beyond our means -- a bigger and better home, a more luxurious car, more electronic bling than we actually need -- but part of it can be attributed to the erosion of real income from wages and its replacement by debt. As Richard Vague reports in the Atlantic, there has been a rapid growth of private debt relative to the GDP, and that growth may actually seem a good thing "until the moment of reckoning." Indeed, "things may seem wonderful. Rapid private-debt growth fueled what were viewed as triumphs in their day—the Roaring Twenties, the Japanese “economic miracle” of the ’80s, and the Asian boom of the ’90s—but these were debt-powered binges that brought these economies to the brink of economic ruin." We think of the 2008 crises as one of mortgage debt -- as Vague put it, "We all know that a growth in home mortgages preceded the crash, and home mortgages are one kind of private debt—along with other consumer borrowing and borrowing by businesses," but it seems that "almost all instances of rapid debt growth coupled with high overall levels of private debt have led to crises." Here again, this is just common sense. Initially, at least, the new credit card is a boon, allowing us one again to consume -- whoopee! -- but there comes a day reckoning when we have reached the "credit limit" and we are left only with the debt. Excess income goes, not into savings, but into debt service, and if "shit-happens," if one has a major illness, if one loses all or a portion of one's income, the house of cards come tumbling down. Those of modest or moderate means are no longer servicing their debt. Those of substantial means are no long collecting "interest." As Vague tells us, "what’s alarming is that, of the two ingredients for an economic crisis—high private debt and rapid private-debt growth—one is still with us even after the 2008 collapse. Private debt in the U.S., relative to GDP, stands at 156 percent. That’s lower than the 173 percent it reached in 2008, but it’s still nearly triple the level—55 percent—it was at in 1950."
So here we are. Both Hanauer and Vague are making the same essential claim, "it's demand stupid!" The former reminds us that the middle class "are the source of growth and prosperity in capitalist economies:"
When workers have more money, businesses have more customers, and need more employees. When businesses pay workers a living wage, taxpayers are relieved of the burden of funding the poverty programs like food stamps and medical assistance and rent assistance that those workers need. Low-wage workers make terrible taxpayers,and that when you raise the minimum wage for all businesses, all businesses benefit yet all can compete.
This is not to say that taxes and their reduction are not important. They are, but we need to expand our thinking. It should include not simply and not only taxes, per se, that inhibit growth. A It should also include levies in the form of interest that inhibit growth. Indeed, and "excessive private debt may contribute to one of the great problems of our time: growing income inequality and the hollowing out of the middle class." It shouldn't be surprising, Vague is astonished at
how little attention the global debt problem—the extremely high ratio of private debt to GDP—has gotten. Not only does it leave the U.S. and other countries vulnerable to crisis should brisk growth in that ratio resume, but, quite apart from any crisis, the accumulation of higher levels of private debt over decades impedes economic growth. Money that would otherwise be spent on things such as business investment, cars, homes, and vacations is increasingly diverted to making payments on the growing debt— especially among middle- and lower-income groups that compose most of our population and whose spending is necessary to drive economic growth. Debt, once accumulated, constrains demand.
It is no doubt too late to take Polonius' advice and neither "a borrower or a lender be," and the reason of course is simple -- "removing liabilities from the borrower’s balance sheet means removing assets from the lender’s balance sheet," and the lenders, right now, have political power.
I must admit, I do have a sense of impending doom, but more optimistically speaking, we have reached, I think a fork in the road. On the path to the north, there is little that resembles a paradise, but we escape the doom. We need to drop the illusions that supply-side, trickle down economic policies work. They don't. We need to adopt demand-driven economic policies. This would require democracy to assert itself and save capitalism from itself. People of modest and moderate means, "the lower and middle income groups that compose most of our population and whose spending is necessary to drive economic growth," must reject economic policies that will continue to "hollow out the middle class," to include tax policies that place the burden of debt service on their shoulders, both public and private. They must reject economic policies that encourage the growth of an inherited economic (and political) aristocracy, to include tax policies that favor conversion of income from labor to investment, particularly those forms of investment that do little to promote (and may actually inhibit) job growth. On the other hand, they must accept a certain level of austerity. Government debt is bad, and few I think dispute the need to better balance government programs with tax revenues, which means accepting a certain level of government austerity and perhaps more judicious choices among government programs, to include the military. Government debt is bad, but private debt is even worse. "Rapid private-debt growth fueled what were viewed as triumphs in their day," as Vague points out, "the Roaring Twenties, the Japanese “economic miracle” of the ’80s, and the Asian boom of the ’90s—but these were debt-powered binges that brought these economies to the brink of economic ruin." This means, in part, restraint on the issuance of private debt, and self-restraint has never been particularly effective, either on the part of borrowers or lenders, even when self-restraint is so clearly in one's own best interest.
Having said that, on the path to the south, there is the promise of paradise, easy loans with no credit check, and we rush headlong into doom. It is, of course, as the Schumpeter columnist put it, unmitigated "nonsense that 'the people' are infallible repositories of common sense." It doesn't take a finely tuned historical sense to develop a healthy, Hamiltonian skepticism of the demos, who all to easily fall prey to the latest version of the demagogue with simplistic solutions to complex problems. If the "socialist alternative [to capitalism] that loomed large back in 1942 has imploded," that does not mean the facist alternative to socialism is the answer. It is altogether too easy to blame the victim for their victimization, particularly when the victim has some ethical and moral culpability in their victimization. Think of it this way. Whether out of sheer desire or desperation, one turns to the loan shark, and he gives a way out -- for the moment. In the grip of a loan shark, one pays up -- or else -- and given the option, one pays up only to insure an increase in one's desperation. When the simplistic solutions go south, and they will, what then? The two options that Hanauer sees, the mob with pitchforks or the police state, my money is on the police state. The mob has already materialized, and it has given over power to a plutocrat, one brimming over with simplistic solutions and conspiratorial suspicions, and when the solutions fail, as they inevitably will, we already know that the Russians will not be the targets of conspiratorial suspicion, not when we have jews, blacks, muslims, and immigrants so much closer at hand. Failure will bring, not change, but the enforcers.
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