This just in...D&S reads the news (#3)

by Dollars and Sense

The third in a new series of blog entries by D&S collective member Larry Peterson.

Max Fraad Wolff of Global Macroscope has a knack for keeping his eye on what's absolutely essential:

...tax rates on the highest income earners fell starting in the 1970s...tax rates actually rose for the middle fifth of the income distribution in the 1970s, only to fall back again in recent years to about where they were in 1960. Both Democratic and Republican Presidents and Congresses presided over these trends. Debt has kept the realities suggested by our internet enabled, cutting edge, early 20th Century economy from being widely understood. The Federal Government borrows back the taxes it fails to collect while spending freely. Toiling multitudes follow suit. They borrow the wages they didn't get and then some. Thus, consumption booms to 70% of GDP as wages fall as a percentage of our overall economy.

Once again, he reminds us that, in important ways, policies allowed to work their effects for decades without serious interruption play as important a role in, and in important respects even undermine, aspects of our economic performance which seem more important when considered in isolation. And while many commentators manage to do this to some extent, Wolff is really proficient at remembering to enumerate all the most important variables, rather than simply noting single ones. We're all so used to regressive tax incidence these days that it's perhaps not easy to connect such policies with federal, personal, and current-account deficits, technological booms and falling wages as breathlessly as Woolf does here. Ant yet, the facts speak for themselves: the Reagan tax cuts led to massive expenditures in defense-related industries, some of which would spin off into the private sector and aid in the birth of the internet economy, while at the same time putting such pressure on the public purse that not only deficit reduction, but elimination was achieved by a Democratic president in the late '90s'. The elimination of the government deficit strengthened the dollar and led to both surging FDI in the US and even greater purchases of imports from outside. The steady inflow of capital aided deregualtory efforts which put pressure on employment conditions and redoubled the assualt on wages, which was an effect of the deregualtion and concomitant liberalization of markets. As wages failed to keep up, but with all that capital coming in, easy money was made available for consumer purchases, in spite of the wage lag. The maturing technologies then aided in the process by keeping prices down.

Unfortunately, the credit cycle eventually turns, interest rates go up, companies go bankrupt and capital flees the country. This happened in 2000-2001. But the Fed then stepped in, lowered interest rates in no time at all some 500 basis points, and investment resumed. Not in technology or capex, of course, but in housing and, well, consumer spending again. Thus, as Wolff notes, consumption increases as wages stagnate; and by this point, the government surplus was being tapped, and reversed, partially in response to 9/11 (adding Department of Homeland Security, fighting 2 wars, etc.), but just as much due to...more (this time hyper-regressive) tax cuts! So this gets the whole thing going again! More divergence between wages and consumer spending; more government deficits; greater foreign inflows of capital (this time more on the part of foreign central banks concerned about keeping their imports locked into the system by boosting the value of the dollar, rather than private investors looking to capitalize on American productivity or access to our markets); and, consequently, interest rates that, seemingly, will never go up, in spite of the crazy demand. One of the reasons for this being, of course, that wages never rise!

Now that the housing bubble is starting to deflate, and political tensions in oil-producing regions threatens to disrupt production significantly, the ability of external shocks to punch a hole in this dysfunctional perpetual-motion machine is more evident to many of us as well as to policymakers. But, Wolff's analysis is great precisely because it reveals the contradictions that characterized the running of the system even without the shocks. And he shows how what many consider the sine qua non of the conjuncture, namely technological change, cascades out from tax policy decisions made decades ago, in tandem with the operation of a few other, essential macroeconomic variables. And the analysis challenges us, in turn, to look to the political sphere to reverse it, rather than hoping the technology can somehow break free of the contradictory dynamic, which, while strangely resilient, is still subject to shocks.

For readers who would like to see more of Wolff's work, I recommend this article: The US, the World's Hedge Fund, Asia Times, February 27th, 2007. In it Wolff characteriastically finds a simpler, institutional answer to a question that had been dogging academic economists so much that some of them even looked to subparticle physics for a metaphor to describe it: the US current account deficit.

Labels: deficit, globalmacroscope, Max Fraad Wolff, regressive taxation

 

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4/13/2007 04:00:00 PM