Illustration by Tim Lahan
By James Livin
A poll conducted by the New York Times and CBS News in 2009 tells us what is wrong with the debate on how to deal with the economic crisis.
When asked about President Barack Obama’s plan to increase taxes on personal incomes of more than $250,000, 74 percent of respondents approved. Then they were “presented with the possibility that taxing those in the higher income brackets might hurt the economy.” Only 39 percent still backed the plan. These results were reproduced almost exactly in another poll published by the Times on May 2.
Now where did this notion of hurting the economy come from? Most of us have been trained to believe it is common sense: Everybody knows you have to provide incentives to the wealthy in the form of lower taxes if you expect them to invest properly and create jobs. And everybody knows that if you redistribute income by taxing the wealthy, their incentives disappear, they stop investing, unemployment rises and a bad situation gets worse.
This “common sense” tells us that growth requires private investment. After all, everybody knows that an unequal distribution of income is a requirement of comfortable existence for the masses.
As British author John Lanchester explained, when the “jet engine of capitalism was harnessed to the oxcart of social justice” after World War II, the lives of ordinary people got better, and the “most admirable societies that the world has ever seen” were born. Everybody knows that “the prosperity of the few is to the ultimate benefit of the many.” To which I say, baloney.
Growth has happened precisely because net private investment has been declining since 1919 and because consumer expenditures have, meanwhile, been increasing. In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production -- and wasn’t invested in goods production.
In terms of classical, neoclassical, and supply side theory, this shift should have produced more investment and more jobs, but it didn’t. Paying attention to historical evidence allows us to debunk the myth of private investment and explain why the redistribution of income has become the condition of renewed, balanced growth. Doing so lets us see that public-sector incentives to private investment -- say, tax cuts on capital gains or corporate profits -- are not only unnecessary to drive economic growth; they also create tidal waves of surplus capital with no place to go except speculative bubbles that cause crises on the scale of the Great Depression and the recent catastrophe.
Robust, balanced growth requires a more equitable distribution of income that favors consumers over investors, with all that implies for public policy, social theory, and, yes, moral philosophy. But to see this last requirement clearly, we have to rid ourselves of the conventional wisdom on the heedless extravagance of consumer culture.
Why do we accept the commonsense notion of how growth happens? The short answer is that the mainstream theories of prominent economists and the conventional wisdom of serious journalists constantly reinforce the myth. But the culprits are not just the supply-side insurgents who stormed the Keynesian citadel in the 1970s, then planted their flag inside the Beltway. The Democratic Party that reinvented itself in the 1990s now shares the same assumptions that guide the Republican Party -- the same assumptions that let the liberal New York Times scare its poll respondents off taxing the wealthy.
This collaboration of mainstream economic theory, conventional journalistic wisdom and political expedience has installed a common sense that bypasses reality. Good examples of how the three converge are on display every day in the media, from the manic talking heads at CNBC to the dignified pollsters at the Times. Here is an example from the Wall Street Journal.
On Oct. 23, 2008, the editorial board of the Wall Street Journal forewarned its readers against the policies of an Obama administration by touting the results of George W. Bush’s tax cuts: “After the dot.com bust, President Bush compromised with Senate Democrats and delayed his marginal-rate tax cuts in return for immediate tax rebates. The rebates goosed spending for a while, but provided no increase in incentives to invest. Only after October 2003, when the marginal-rate cuts took effect did robust growth return. The expansion was healthy until it was overtaken by the housing bubble and even resisted recession into this year.”
But even leading advocates of capitalism such as commentator Martin Wolf and former Federal Reserve Chairman Alan Greenspan have shown, much to their own dismay, that rising corporate profits and higher incomes for the wealthy didn’t flow into the sacred precinct of “productive investment” after 2001. Instead, they flowed into the speculative channels offered by the housing bubble. Wolf noted in 2007 that a “household deficit” of consumer debt “more than offset the persistent financial surplus in the business sector,” where, for six years, corporations “invested less than their retained earnings.” Greenspan concurred the same year in his book, “The Age of Turbulence”: “Intended investment in the United States has been lagging in recent years, judging from the larger share of internal cash flow that has been returned to shareholders, presumably for lack of new investment opportunities.”
Now Wolf and Greenspan, two advocates of free markets, free trade and vigorous growth, treated this absence of investment as a deviation from an unstated norm -- as something to be repaired. Both have urged less consumer debt, more personal saving and increased private investment as cures for what ails us. In this respect, they, too, are peddling the common sense that bypasses economic reality.
But you don’t have to be an advocate of free markets to peddle this product. Take, for example, Joseph Stiglitz, a proud liberal critic of both the financial sector and globalization, and -- not incidentally -- a Nobel Prize-winning economist. In 2009, he told National Public Radio that we need more consumer spending to increase aggregate demand and cause a proper economic recovery, but then reiterated received wisdom by saying that in the long run we need a fundamental shift in priorities, away from consumption, toward saving and investment.
David Brooks, a moderate conservative, exactly echoed Stiglitz on the following day in his regular op-ed column for the New York Times. Here he wrote that “indulgence and decline,” the disappearance of “the country’s financial values,” and a “slide in economic morality” are all attributable to an eclipse of “personal restraint.” According to Brooks, that eclipse was plainly visible in the explosion of “personal consumption” sustained by debt. Brooks called for a new era of “public restraint,” maybe even a new culture war on behalf of less spending, more saving, in a word: austerity.
In fact, if we want to create the conditions of robust, balanced growth rather than suffer through serial crises on the order of the Great Depression and the Great Recession, we need to empower consumers, and, by the same token, embrace consumer culture. More consumption is the key to balanced growth. That’s right: We need to save less and spend more.
Just to begin with, a much larger dose of consumer spending is absolutely necessary to prevent the kind of economic catastrophe that still racks the domestic and international economies. That new dosage requires a redistribution of national income away from profits, which don’t always get invested, toward wages, which almost always get spent. This treatment does more than invert the supply-side cure for our ailments; it assumes that profits won’t be productively invested. That’s right: Higher profits almost never lead to more investment, more jobs, and more growth. In fact, there’s no demonstrable link between private investment and economic growth, so cutting taxes on corporate profits is pointless at best, and destructive at worst.
But, as the chastening of Brooks and Stiglitz makes clear, consuming goods is frightening to our conventionally cautious souls. This is indisputable, despite the fact that work as such is less important than, say, buying and driving a car, or choosing and wearing that little black dress. We have reached the point where we have to confront our fears about consumer culture, because the renunciation of desire, the deferral of gratification, saving for a rainy day -- call it what you want - - has become dangerous to our economic health.
When asked about President Barack Obama’s plan to increase taxes on personal incomes of more than $250,000, 74 percent of respondents approved. Then they were “presented with the possibility that taxing those in the higher income brackets might hurt the economy.” Only 39 percent still backed the plan. These results were reproduced almost exactly in another poll published by the Times on May 2.
Now where did this notion of hurting the economy come from? Most of us have been trained to believe it is common sense: Everybody knows you have to provide incentives to the wealthy in the form of lower taxes if you expect them to invest properly and create jobs. And everybody knows that if you redistribute income by taxing the wealthy, their incentives disappear, they stop investing, unemployment rises and a bad situation gets worse.
This “common sense” tells us that growth requires private investment. After all, everybody knows that an unequal distribution of income is a requirement of comfortable existence for the masses.
As British author John Lanchester explained, when the “jet engine of capitalism was harnessed to the oxcart of social justice” after World War II, the lives of ordinary people got better, and the “most admirable societies that the world has ever seen” were born. Everybody knows that “the prosperity of the few is to the ultimate benefit of the many.” To which I say, baloney.
Growth has happened precisely because net private investment has been declining since 1919 and because consumer expenditures have, meanwhile, been increasing. In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production -- and wasn’t invested in goods production.
In terms of classical, neoclassical, and supply side theory, this shift should have produced more investment and more jobs, but it didn’t. Paying attention to historical evidence allows us to debunk the myth of private investment and explain why the redistribution of income has become the condition of renewed, balanced growth. Doing so lets us see that public-sector incentives to private investment -- say, tax cuts on capital gains or corporate profits -- are not only unnecessary to drive economic growth; they also create tidal waves of surplus capital with no place to go except speculative bubbles that cause crises on the scale of the Great Depression and the recent catastrophe.
Robust, balanced growth requires a more equitable distribution of income that favors consumers over investors, with all that implies for public policy, social theory, and, yes, moral philosophy. But to see this last requirement clearly, we have to rid ourselves of the conventional wisdom on the heedless extravagance of consumer culture.
Why do we accept the commonsense notion of how growth happens? The short answer is that the mainstream theories of prominent economists and the conventional wisdom of serious journalists constantly reinforce the myth. But the culprits are not just the supply-side insurgents who stormed the Keynesian citadel in the 1970s, then planted their flag inside the Beltway. The Democratic Party that reinvented itself in the 1990s now shares the same assumptions that guide the Republican Party -- the same assumptions that let the liberal New York Times scare its poll respondents off taxing the wealthy.
This collaboration of mainstream economic theory, conventional journalistic wisdom and political expedience has installed a common sense that bypasses reality. Good examples of how the three converge are on display every day in the media, from the manic talking heads at CNBC to the dignified pollsters at the Times. Here is an example from the Wall Street Journal.
On Oct. 23, 2008, the editorial board of the Wall Street Journal forewarned its readers against the policies of an Obama administration by touting the results of George W. Bush’s tax cuts: “After the dot.com bust, President Bush compromised with Senate Democrats and delayed his marginal-rate tax cuts in return for immediate tax rebates. The rebates goosed spending for a while, but provided no increase in incentives to invest. Only after October 2003, when the marginal-rate cuts took effect did robust growth return. The expansion was healthy until it was overtaken by the housing bubble and even resisted recession into this year.”
But even leading advocates of capitalism such as commentator Martin Wolf and former Federal Reserve Chairman Alan Greenspan have shown, much to their own dismay, that rising corporate profits and higher incomes for the wealthy didn’t flow into the sacred precinct of “productive investment” after 2001. Instead, they flowed into the speculative channels offered by the housing bubble. Wolf noted in 2007 that a “household deficit” of consumer debt “more than offset the persistent financial surplus in the business sector,” where, for six years, corporations “invested less than their retained earnings.” Greenspan concurred the same year in his book, “The Age of Turbulence”: “Intended investment in the United States has been lagging in recent years, judging from the larger share of internal cash flow that has been returned to shareholders, presumably for lack of new investment opportunities.”
Now Wolf and Greenspan, two advocates of free markets, free trade and vigorous growth, treated this absence of investment as a deviation from an unstated norm -- as something to be repaired. Both have urged less consumer debt, more personal saving and increased private investment as cures for what ails us. In this respect, they, too, are peddling the common sense that bypasses economic reality.
But you don’t have to be an advocate of free markets to peddle this product. Take, for example, Joseph Stiglitz, a proud liberal critic of both the financial sector and globalization, and -- not incidentally -- a Nobel Prize-winning economist. In 2009, he told National Public Radio that we need more consumer spending to increase aggregate demand and cause a proper economic recovery, but then reiterated received wisdom by saying that in the long run we need a fundamental shift in priorities, away from consumption, toward saving and investment.
David Brooks, a moderate conservative, exactly echoed Stiglitz on the following day in his regular op-ed column for the New York Times. Here he wrote that “indulgence and decline,” the disappearance of “the country’s financial values,” and a “slide in economic morality” are all attributable to an eclipse of “personal restraint.” According to Brooks, that eclipse was plainly visible in the explosion of “personal consumption” sustained by debt. Brooks called for a new era of “public restraint,” maybe even a new culture war on behalf of less spending, more saving, in a word: austerity.
In fact, if we want to create the conditions of robust, balanced growth rather than suffer through serial crises on the order of the Great Depression and the Great Recession, we need to empower consumers, and, by the same token, embrace consumer culture. More consumption is the key to balanced growth. That’s right: We need to save less and spend more.
Just to begin with, a much larger dose of consumer spending is absolutely necessary to prevent the kind of economic catastrophe that still racks the domestic and international economies. That new dosage requires a redistribution of national income away from profits, which don’t always get invested, toward wages, which almost always get spent. This treatment does more than invert the supply-side cure for our ailments; it assumes that profits won’t be productively invested. That’s right: Higher profits almost never lead to more investment, more jobs, and more growth. In fact, there’s no demonstrable link between private investment and economic growth, so cutting taxes on corporate profits is pointless at best, and destructive at worst.
But, as the chastening of Brooks and Stiglitz makes clear, consuming goods is frightening to our conventionally cautious souls. This is indisputable, despite the fact that work as such is less important than, say, buying and driving a car, or choosing and wearing that little black dress. We have reached the point where we have to confront our fears about consumer culture, because the renunciation of desire, the deferral of gratification, saving for a rainy day -- call it what you want - - has become dangerous to our economic health.
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