FORMER LABOR SECRETARY ROBERT REICH EXPLAINS THE ECONOMY IN LESS THAN 2 MINUTES
Above is a link to Reich‘s explanation of our economic crisis. CLICK THE LINK to hear it. And it only runs two minutes.
It is startling for most of us to see the redistribution of income and assets that has taken place since the eighties. But not for all of us.
Citigroup, one of the four largest banks in America, identified the change in our country as movement to plutonomy. Reich identifies how plutonomy endangers democracy but he doesn’t specifically name the political institution that accompanies economic plutonomy. Its called plutocracy (government by the wealthy). And plutocratic governments are anti-democratic as their priorities are serving the wealthiest members of society and maintaining their hold on assets and income. The recent Supreme Court decision in Citizen’s United, proposals for the complete abolition of capital gains tax and corporate taxation, destruction of Medicare and Social Security as we know them, the adamant Republcan firewall to protect tax cuts for the richest Americans are all examples, in part, of our new American plutonomy expressing its political muscle.
Citigroup is not concerned by this movement away from democracy and a vibrant middle class.Here is an excerpt from Citigroup’s 2005 report created for the its richest clients: “Plutonomy: Buying Luxury, Explaining Global Imbalance”. This report begins:
The World is dividing into two blocs – the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies – economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
Equity risk premium embedded in “global imbalances” are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary “global imbalances”. We worry less. There is no “average consumer” in a Plutonomy. Consensus analyses focusing on the “average” consumer are flawed from the start.
We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.
In 2006 Citigroup issued a second Plutonomy report, titled “Revisiting Plutonomy: The Rich Getting Richer”:
The latest Survey of Consumer Finance data was released Friday 24th of February. It shows that the rich in the US continue to be in great shape. We thought this was good time to bang the drum on plutonomy.
Back in October, we coined the term ‘Plutonomy’. Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US, UK, Canada and Australia). These economies have seen the rich take an increasing share of income and wealth over the last 20 years, to the extent that the rich now dominate income, wealth and spending in these countries. Asset booms, a rising profit share and favourable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries. Also, new media dissemination technologies like internet downloading, cable and satellite TV, have disproportionately increased the audiences, and hence gains to “superstars” – think golf, soccer, and baseball players, music/TV and movie icons, fashion models, designers, celebrity chefs etc. These “content” providers, the tech whizzes who own the pipes and distribution, the lawyers and bankers who intermediate globalization and productivity, the CEOs who lead the charge in converting globalization and technology to increase the profit share of the economy at the expense of labor, all contribute to plutonomy. Indeed, David Gordon and Ian Dew-Becker of the NBER demonstrate that the top 10%, particularly the top 1% of the US – the plutonomists in our parlance – have benefited disproportionately from the recent productivity surge in the US.
Citigroup states it has few worries about the dissolution of the middle class and the resurrection (after a hundred years) of PLUTONOMY. Citgroup‘s report seems to relish the concept. And why shouldn’t they? As international bankers they will be an integral segment of this brave new world by the rich and for the rich. If the middle-class consumer is replaced as a driving force in the economy by a sliver of the most wealthy isn’t that a major shift that should be recognized and addressed in our debate about how to reinvigorate our economy? One hardly hears it in the discussion.
Chicago School economic conservatives, Ayn Rand cultists and supporters of anarchic capitalism might complain that such presentations foment ‘Class Warfare’. (At least, their most demagogic media proponents often use the term as a debate stopper.) What they fail to understand is that capitalism will only survive if it is an economic system seen as instilling credibility, producing stability and adherence to fairness. FDR understood this during the depression: his programs, decisions and actions were created to save capitalism, not as his political enemies claimed to destroy it. For this he provoked the slander among conservatives that he was ‘a traitor to his class’. Talk about ‘class warfare’!
Fareed Zakaria‘s GPS is usually the most adult of the Sunday morning shows. Last week he began the broadcast l with this:
Conservatism (used to be)…rooted in reality. Unlike the abstract theories of Marxism and Socialism, it started not from an imagined society but from the world as it actually exists. From Aristotle to Edmund Burke, the greatest conservative thinkers have said that to change societies, one must understand them, accept them as they are and help them evolve. Watching this election campaign, one wonders what has happened to that tradition. Conservatives now espouse ideas drawn from abstract principles with little regard to the realities of America’s present or past. This is a tragedy, because conservatism has an important role to play in modernizing the U.S.
Consider the debates over the economy. The Republican prescription is to cut taxes and slash government spending — then things will bounce back. Now, I would like to see lower rates in the context of tax simplification and reform, but what is the evidence that tax cuts are the best path to revive the U.S. economy? Taxes — federal and state combined — as a percentage of GDP are at their lowest level since 1950. The U.S. is among the lowest taxed of the big industrial economies. So the case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark, neither one characterized by low taxes.
Right now any discussion of government involvement in the economy — even to build vital infrastructure — is impossible because it is a cardinal tenet of the new conservatism that such involvement is always and forever bad. Meanwhile, across the globe, the world’s fastest-growing economy, China, has managed to use government involvement to create growth and jobs for three decades. From Singapore to South Korea to Germany to Canada, evidence abounds that some strategic actions by the government can act as catalysts for free-market growth.
Of course, American history suggests that as well. In the 1950s, ’60s and ’70s, the U.S. government made massive investments in science and technology, in state universities and in infant industries. It built infrastructure that was the envy of the rest of the world. Those investments triggered two generations of economic growth and put the U.S. on top of the world of technology and innovation.
Zakaria concluded his opening statement with this:
We need conservative ideas to modernize the U.S. economy and reform American government. But what we have instead are policies that don’t reform but just cut and starve government — a strategy that pays little attention to history or best practices from around the world and is based instead on a theory. It turns out that conservatives are the woolly-headed professors after all.
A strategy that is not grounded in the real world, that rests on slogans and shibboleths but also one accepted by the media as foundational for this important debate. Here are just a few:
1. CUTTING THE DEFICIT WILL CREATE JOBS
How? Cutting the deficit will assuredly destroy jobs in the short and intermediate future as government supported programs, government employees on the federal, state and local levels are laid off. Is the parent who now sends their child to a school with an egregiously large class size going to be able to send them to school now in the private sector? Will the individuals who used to count on an effective police force now hire private security guards? Will the networks hire more workers if they are laid off from PBS or NPR? And as the income that these workers spent on material goods and services is lost that will affect other jobs. ONLY INCREASED DEMAND (and/or government subsidy) WILL CREATE JOBS.
2. TAX CUTS WILL CREATE JOBS
Once again, let me repeat: ONLY INCREASED DEMAND WILL CREATE AN INCREASE IN JOBS. Does that sound simplistic? Think about it: If you are a restaurant owner with 12 tables and only 2 of them have patrons each night would you now hire more waiters if you got a tax cut? American business is sitting on between one and two trillion dollars of money. Its not using that extra money to invest in American jobs. In many cases it is used to buy back stock (enriching stockholders– including the corporate officers) or financing mergers or buyouts of competitors.
Farreed Zackaria had a round-table with Eliot Spitzer, Ann Coulter, a Britsh historian and Chrystia Freeland of Reuters.
SPITZER VS COULTER-DEMAND CREATES JOBS
Ann Coulter: “We’ve run this experiment different times in this country, over and over and over again, and every time nothing is done, there is no Keynesian spending, the economy recovers like that and we have a boom. It did in the 20’s, it did in the 80’s, and every time . . .
Chrystia Freeland: “It did in the 20’s?”
Ann Coulter: “FDR and Obama jumps in . . . ”
Fareed Zakaria: “As I recall, a massive increase in defense spending. .
Ann Coulter: “And massive . . .”
Fareed Zakaria: “Tax cuts.”
Ann Coulter: “Cuts in taxes brought more revenue in.”
Fareed Zakaria: “Which are Keynesian. Keynes was in favor of taxation. He never made a particular distinction between government spending and taxes. His point was you need demand in the economy.”
Ann Coulter: “Right, but. . . ”
Fareed Zakaria: “You need to stimulate demand.”
Elliot Spitzer: “Your story would be nice if it were true, but it’s not. The reality is, if you look at the economics, and you look at what the impact is of both credit to marginal rates, government spending, the incentives you create for job creation, Keynes has been right at every turn. In terms of understanding, if you actually sat down with or either were a business person making capital allocation decisions, hiring, you’d understand the way you look at is your return. Right now there is a demand crisis of enormous volume. That’s why we need to create demand in this economy so we can generate things that we can buy.”
Ann Coulter: “And Obama’s been following your policies and that is why we have a crisis.”
Elliot Spitzer: “The executives are sitting on two trillion dollars of capital. The key to getting that capital back into the economy, to hire people, is demand for the products we made. There is not a whole lot of ambiguity about that.”
SPITZER: Explain to me why. If people are sitting on capital, who are sitting on capital right now who are not investing because capital gains rates are 15 percent… You’re saying if you take that fifteen percent, you’re assuming they’re going to invest even when there’s no demand for the product?
FREELAND: Right. What Eliot is pointing out is there’s a lot of money, there’s a lot of money on the sidelines.
Then Spitzer made a huge mistake and veered off into a personal attack suggesting that those who have no business experience don’t understand the importance of demand in job creation. Of course, Coulter was happy to join him on her own turf advantage, i.e. the personal attack and the whole thing descended into hackery and incoherent shouting.
But Spitzer was correct. “Right now there is a demand crisis of enormous volume. That’s why we need to create demand in this economy so we can generate things that we can buy.” And Ann Coulter creates her own version of American history (it seems to be in vogue these days!). The 20’s created the biggest economic boom? I seem to remember that there was a bit of a ‘correction’ in 1929. The same in the 80’s. Anyone remember Black Friday?
3. CORPORATE TAX IS PROHIBITIVELY HIGH
Often cited is the fact that the US has the second highest corporate tax rate in the world. This is true. Only Japan has a higher one. But that is the statutory rate. The effective rate (the rate of taxation actually paid) is far lower. And it is the effective rate that is important rather than the theoretical statutory rate that indicates the highest marginal tax because THAT IS WHAT IS ACTUALLY PAID IN THE REAL WORLD. The same is true of individual income tax rates. (For instance, Obama earned 1.7 million in 2011, paid 450 thousand, a rate of 26%. President Bush earned $735 thousand in 2005, paid 187 thousand, a rate of 25%. Neither paid anything NEAR the highest marginal statutory rate of Federal Income Tax.) As Reich stated above, according to the IRS the 400 wealthiest Americans did even better. They paid an average income tax rate of 17%! But conservatives protest that raising the highest marginal rate of 35% (the lowest historically since 1931 except for 1988-92) would be an egregious burden on those enjoying a plutonomy.
In 2004, the Government Accounting Office reported that the REAL (effective) corporate tax rate was 25%. When we view the US effective corporate tax rate against the rest of the industrialized world that is not the high. It is not even near the highest. It is somewhere in the low middle: higher than France, Russia and the UK but lower than Germany, Japan, Italy and Canada. Here is a chart comparing effective and actual corporate tax rates based upon figures from the World Bank: CLICK TO ENLARGE
Beyond this the rate of corporate taxation can vary wildly from industry to industry, from a low rate of less than 5% for biotechnology industries to a high of 33% for public utilities. Here’s a chart recently published by the NYT:
CLICK TO ENLARGE
Over the last year it was shocking to learn that GE paid NO corporate tax. Newscorp, which owns FoxNews, THE WALL STREET JOURNAL, the NY POST and other conservative media outlets paid only 6% in corporate tax! And the talking heads and writers employed by Newscorp whine about the corporate tax rate!
Now, why do you think the radio hosts, Republican politicians and Teabaggers complain that the US has the highest corporate tax rate when it is NOT a tax rate actually imposed in the real world? The Simpson/Bowles Commission on the deficit recommended LOWERING the corporate tax rate to 26% which would deprive the demagogues of their talking point. A 26% corporate rate would actually INCREASE revenues when loopholes and exceptions are abolished. How could that be if corporations WERE ACTUALLY NOW PAYING THE SECOND HIGHEST CORPORATE RATE IN THE WORLD AT 35%!
It is true that SOME companies and SOME corporate sectors DO pay the highest marginal rate (which can be a bit higher than 35% when state and local taxes are factored in). And this is unfair. The President pointed this out explicitly in this year’s State of the Union. Equalizing corporate taxation (as Simpson-Bowles proposes) creates a more equitable tax policy but there is a price. The country would lose a tool for long term industrial planning losing the ability to offer incentives to green companies, renewable energy development etc. Still the further we have moved away from the grand compromise of SIMPSON-BOWLES the better it looks to me…
4. OBAMA WANTS TO REDISTRIBUTE WEALTH
All economic policies redistribute wealth. The fact that capital gains is taxed at 15% and that labor is taxed at higher rates redistributes wealth. Anti-trust laws redistribute wealth. Copyright laws redistribute wealth. Laws that affect access to education, healthcare, credit all redistribute wealth. The question is not whether we want to redistribute wealth. The question is: Do we want a society with a healthy and stable middle class?
There are many other myths touted as facts that provoke talk-back at the radio speaker or the TV screen:
Lowering taxes raises revenues! (Yeah, if that were true we could lower them to O% and raise the most revenue!)
The stimulus didn’t work! (Almost 40% of the recovery stimulus was in tax cuts. Are tax cuts effective stimulus or not, Republicans?) And tell that to the teachers and policemen who received paychecks for the last two years due to the aid to states.
You must stop blaming Bush economic policies for the recession! Its Obama‘s economy now. (Why? Do you stop blaming cigarette smoking when you get lung cancer? I would try alternatives like a dry herb vape pen instead of staying on the same boat and complaining. Do you stop blaming Osama bin Ladin for the World Trade Center attack?)
This is socialism! (The TARP bailout was created by some of the most ardent free market capitalists in the world and a pale faced, wide eyed president who saw his country teetering on the edge of a cliff. Socialism can only be a tool to save capitalism when its on the verge of collapse?!?)
FDR’s programs didn’t end the depression! The war did! (and what is the economic character of war? Government spending on a massive scale).
The debt is destroying the future for children and grandchildren! (To save their future we cut their present access to education and healthcare?)
And yes the national debt and the budget deficit are two different things! They are related but not interchangeable.
I could go on and on. And I am not an optimist at this time. The American public does not seem to learn lessons and Obama is no FDR or TR with the vigor or stamina to teach them.
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
…and a stupid economy lies frozen between those without conviction and the passionate intensity of those with a surfeit of ideology and a deficit of real-world understanding.