Rebuilding the Economy

There is an excellent analysis on rebuilding the economy by James K. Galbraith1 that explains why the economy cannot be rebuilt using the same methods we used in 2008 and in prior recessions. He also explains what we have to do that is different.

Prof. Galbraith goes into detail why the economic recession is different from previous recessions and why that difference will prevent us from using the same tools to recover. I will not repeat his analyses here, but the Cliff Notes version is that the last recession was caused by a financial crisis internal to the economy. More specifically, it was caused by excess speculation in the housing market and financial derivatives based on mortgages that was unsustainable and ultimately collapsed, taking with it vast fortunes, homes, jobs, and a big chunk of the GDP.2

The government response to the recession was to add $1.8 trillion in spending over the 5 year period from 2008 to 20123. Additionally, the Federal Reserve put up $50 billion to prevent a run on Money Market Mutual Funds4. The recovery from this recession was long and slow due to restricted government spending and low consumption as fear induced people to reduce spending and pay off debt accumulated prior to the market collapse. Some elements of the economy never did recover.

The current recession is totally unlike the previous one as it was caused, not by internal economic problems, but by an external problem that neither the government nor the private sector were prepared to deal with, viz., the COVID-19 pandemic. This resulted, not in the loss of money, but a loss of buyers and producers from the economy. While you can restore an economic collapse due to the loss of money by infusing money into it, you can’t restore an economic collapse due to the loss of buyers and producers by that means. Due to illness from the virus and quarantine requirements, businesses lose employees, customers and revenues. As a result, many businesses that are operating on small margins (the majority of small businesses) will fail. When they fail, more jobs and income are lost, resulting in reduced consumption and more business failures. Rebuilding the economy will require rebuilding these businesses, but that can’t happen without a customer base. You see the catch-22 here?

In his report, Prof. Galbraith outlines eight measures that must be taken if we are to rebuild the economy to its previous level. Unfortunately, Prof. Galbraith’s report does not provide a plan for implementing those measures. (Click here to read about all eight measures.) All, except one, the redistribution of wealth and income, require money and the greatest obstacle to acquiring the money is the unequal distribution of wealth and income. Unfortunately, wealth and income inequality are the chief obstacles to acquiring the money to implement the others. Reducing inequality is not sufficient to restore the economy, but it is absolutely necessary. (Without, or with insufficient income the majority of the population lacks the purchasing power to increase consumption and thereby stimulate production, those being 2/3 of the GDP.)

So how do we go about redistributing wealth and income? Unfortunately, it will not self correct under laissez faire capitalism5. Realistically, there are only two ways that rising inequality can be reversed. The first is with government intervention and the second is with social upheaval.6

The most effective way for the government to redistribute wealth and income is through progressive tax and spending policies. Progressive income taxation in which extremely high incomes are taxed at very high rates7 proved very effective at redistributing income during WWII and after without impairing the life styles of the rich. Wealth taxes and inheritance taxes are also produce revenues for government spending. (Contrary to some propaganda spiels, wealth taxes are NOT unprecedented as I don’t believe there is a single county or city in the United States that doesn’t impose wealth taxes on it’s citizens – they are called property taxes.) Progressive tax rates can be adjusted to prevent hardships on anyone while ensuring that everyone contributes a fair share to the costs of government. Another progressive tax would be a sales tax on financial transactions. (This would not only yield substantial revenues, it would have the added benefit of reducing the volatility of the stock market).8

Unfortunately, Republicans have successfully sold Americans the Kool-aid that government intervention in the economy is SOCIALIST9 which can only lead us down the path to COMMUNISM. This is obviously BS, but nonetheless has created a mind set among many Americans that persuades them to vote against their own self interests by voting for more conservative politicians. So long as American voters vote against progressive politicians, wealth and income redistribution and the remaining seven measures for restoring the economy will remain out of reach.

In the short run, I see no solution to the problem. I don’t believe Biden (should he win the presidency) will implement any measures other than those taken under the Obama administration which, as has been pointed out, will not do the job10. As a result, I fear a very slow recovery which can only worsen as the length and breadth of the COVID-19 pandemic worsens. Ultimately, and in the long run (if there is time remaining to us), we need to embark on a massive re-education program to erase the Reaganesque mindset that government is bad, Socialism is bad and progressive policies lead us down the slippery slope to Communism and totalitarianism11 if we hope to rebuild our economy fully.

1Rebuilding the Economy”, James K. Galbraith, PhD.

2 Previous recessions have similarly been caused by excessive speculation in specific markets, e.g., the Savings & Loan bust caused by speculation in office buildings, the dot-com bust caused by speculation in internet commerce, the great depression caused by speculation in the stock market.

3 Committee for a Responsible Federal Budget

4 Wikipedia

5 It is a fundamental tenet of capitalism that wealth begets wealth and the more wealth there is, the more wealth is begot. Since that wealth has to come from somewhere, it usually comes from those who have less wealth.

6 I’ll take the first choice, thank you very much.

7 Marginal tax rates on annual incomes exceeding $200K for a single person reached a high of 92% in 1953.

8 Many people decry “big government”, but if you think about it, the expression “a government of the people by the people for the people” implies that the people are the government and it therefore encompasses us all – and by selecting those who represent us in the establishment and execution of policies, we, the people, are determining the policies by which we are governed.

9 Except, of course, corporate bail outs and stimulus spending.

10 And without a doubt, redistribution of wealth and income are not on Trump’s agenda.

11 Another irony is the belief of many that redistribution of wealth is Socialist and will lead to totalitarianism when the opposite is actually the case. Extreme inequality leads to totalitarianism. Given that wealth is power, when all the wealth is in the hands of a few, it is they who will rule. (“Golden rule”: he who has the gold, rules.)