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Tuesday, November 18, 2014

Off the Rails Yet?

David Cameron, the Prime Minister in England, warned that "red warning lights are flashing" across the global economy, and there is now "a dangerous  backdrop of instability and uncertainty." "The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too," Cameron writes. 


Cameron endorses deficit spending and massive public job creation?    ------      ---------------      
NO, Definitely NOT.

What is he planning to secure the UK from the Euro fall-out? 
From the article: "He claims that the G20 . . . endorsed Britain's determination to use monetary policy to support growth and he would not waver on his policy of paying down government debt." (A BBC article on Britain's national debt here.)

As a point of clarification, in the U.S., between 1933 and 1937, the Great Depression, the unemployment rate dropped from 25% to under 10% because . . . ? Do you know or remember?

It had to do with creating public jobs and deficit spending. Here's a great article about it by Marshall Auerback. And another article by Auerback refutes Cameron's claim to be attacking the deficit. "The most recent national accounts tell us that Net Debt as a percent of GDP is now 79.1 per cent as opposed to 77.4 per cent in August 2013." And yet another Auerback article explains the nature of the U.K. growth, 3.2% in the past year.

Cameron promises to keep interest rates low, and to squeeze every nickel to repay the worthy and wealthy creditors of the English government debt. With the recent election of a  Republican Congress we will hear much to do about paying down debt. 

Cameron does not endorse my plan, Keynes' plan, nor the plan of Joseph Stiglitz, James Galbraith, or other economists. 

I wrote a pretty good article about the Keynesian response to the Great Depression; you must see my May 11, 2011 article (click here or the list to the right). It is such a good essay. I think my answer is a key to resolving the problem. Here's a snippet: 

In 1933 Franklin Roosevelt faced a nationwide “bank holiday” -- which is a euphemism for total financial system collapse -- in the first days of his administration, the economy was on the brink of freezing up. John Maynard Keynes published an open letter in the New York Times in which he advised the President to seek recovery before he sought reform. And the method to achieve recovery was by massive government spending to re-employ the unemployed. Keynes advised, “Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees...; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money... It is, therefore, only from the third factor that we can expect the initial major impulse.”

--------------------  Do you see the difference between Cameron and Keynes? 


Stiglitz, Galbraith and others submitted an article to Challenge Magazine, July 2014, with an analysis and a remedy. Here is briefly their remedy: 

1 ". . . . national budget policies must be encouraged to provide once more for necessary investments in infrastructures . . . research, and social investments . . .(health care, child care, education and training)."  Note, no mention of monetary policy or paying down debt. 

2. . . . "proposals . . .  aiming to stabilize the market for public bonds. . . . In the meantime, the excessive debt burden of the crisis countries must be reduced through timely and effective debt restructuring." The Federal Reserve bailed-out Texas during the Savings and Loan collapse of the 1980s. Similarly the Euro Central Bank should bail-out Greece. 

3. "Where banks are insolvent they must be resolved." Even today analysts claim that U.S. banks are too weak and could not handle another crisis. See the Jennifer Taub article here. I am reading her exhaustive account of the housing crisis, Other People's Houses. (Read this review.) It is thorough, alarming, and depressing.

4. "A truly active and inclusive employment policy . . . the promotion of collective bargaining at all levels, sufficiently high social investment in education, training and retraining . . ."

5. "Stabilizing the incomes and social conditions of Europe's most vulnerable populations is a vital economic policy measure. . . . We propose . . . creating a social solidarity fund to provide food assistance where it is most needed."

Demand led growth is the name for this model. 

It would work in the U.S. too. 
See Christian Weller's Economic Snapshot, especially his 12th point on aggregate household debt still at very high levels. 

Ready for a Wealth Tax? 

Wealth shares

The creators of Too Much provided in their November 17, 2014 edition, above, a graphic display of wealth gain and loss in the past century in the U.S. The poorer 90% recently lost its wealth share, falling from 37% to 22.8% in 25 years, a drop of 14.2%, while the top 0.1% gained 14.5% (from 7.5% to 22.0%) in 32 years.

A 4% tax per year on personal wealth above $20 million would generate $721 billion per year. (With $82 trillion in total household net worth, 22% is $18 trillion, and 4% of that is $721 billion.) In 2014 the federal "On Budget" deficit was 23% of all "On Budget" spending, $669 billion of red ink out  of $2,939 billion expended (see here, page 25). The federal government collected $2300 billion and spent $3000 billion, a $700 billion deficit, approximately 23% out of balance. The country could use additional tax revenue to balance its budget. Then a public jobs program as I described in the last essay would be realistically funded. This wealth tax would balance the federal budget. From my last essays readers may remember that $25 trillion was added to total private household net worth in the past six years. The nation's households, on average, own  $665,000. The graph above states in fine print below that $662,000 is the threshold for the 90th percentile. Therefore, only 10% of households are "average" or above.  Much of the new $25 trillion went to the highest wealth holders. This wealth tax would reduce to zero the 6 year windfall of newly created financial wealth of  $18 trillion in a short 25 years. 4% time 25 years = 100%.  

Soaking the Rich? Or Saving the Rich? 

Here's a quote from the former Chair of the Federal Reserve, Marriner Eccles: 

It is utterly impossible, as this country has demonstrated 

again and again, for the rich to save as much as they have 


trying to save, and save anything that is worth saving. They 

can save idle factories and useless railroad coaches; they can 

save empty office buildings and closed banks; they can save 

paper evidences of foreign loans; but as a class they can not 

save anything that is worth saving, above and beyond the 

amount that is made profitable by the increase of consumer 

buying. It is for the interests of the well to do – to protect 

them from the results of their own folly – that we should take 

from them a sufficient amount of their surplus to enable 

consumers to consume and business to operate at a profit. 

This is not “soaking the rich”; it is saving the rich. 

Incidentally, it is the only way to assure them the serenity and 

security which they do not have at the present moment."

Ask yourself, What good to anyone is that $18 trillion? As my last essay showed, fixed investment is still off its historical par. 

We are facing a global glut of unused surplus. It's time for a model that will take the surplus out of the hands of billionaires and place it in the hands of entities that do not need to generate profits -- democratic governments, perhaps. 

Of course, not many people will give a "thumbs up" to this proposal.  Yet, someday it may become a normal standard, I would hope. I've said earlier, in various ways, on this long blog,  

extreme inequality

                       is destructive, counter-productive,

                                   and anti-thetical
                                                     to a thriving economy. 

A look at the Income distribution over a century also corresponds with the wealth distribution graph above. Again from U.C. Berkeley professor Emmanuel Saez and team (see this report). 

Emmanuel Saez report on income inequality