As the American economy slowly continues its long, tepid recovery in the wake of the Great Recession of 2008, policymakers in Washington remain strangely aloof from problems, long in the making but made worse by the economic collapse, that have become impediments to returning to full employment growth. These problems are threefold: financialization of the U.S. economy, growing economic inequality, and a torpid U.S. labor market that is not matching jobs with workers either efficiently or effectively.
Financialization means the economic model we’ve adopted since the Reagan administration that gives unfettered freedom and increasing economic and political power to financial capital – i.e. Wall Street and all the sundry parasites “characters” it encompasses – over all other economic actors
Since the 1980s, these particular actors – investment banks, commodity speculators, currency traders, and so on – have been given increasing freedom to trade, truck, and barter pieces of paper, both domestically and internationally, in the theory that global financial liberalization, if allowed to flood the world with freed investment funds, would create an economic tide that would lift all boats.
This has proven to be folly. Indeed, a better metaphor than the hoary tide might be a tsunami that drowns all except those at the top of the economic ladder. By any measure, unfettered finance – assisted by misguided central bankers, an intellectually bankrupt economics profession, and corrupted politicians eager to see the campaign cash roll in – has been a disaster.
Financial panics, once thought a relic of history with the imposition of both strict banking regulations and capital controls in most Western countries at the end of the Second World War, have become so common that within the last two decades we’ve had at least three major, economically ruinous financial bubbles.
Flying high in the speculative clouds
Financial markets are, quite simply, much more volatile and much more ruinous than they used to be because so much of the U.S. – and the West’s – economy is tied up in finance, insurance, and banking that it is literally sucking the life out of the rest of the economy. This has manifested itself in many ways.
First, and most obvious, it has channeled money away from making money the old-fashioned way – e.g. actually working for it by providing better goods and services – to speculating on the world’s electronic exchanges.
Indeed, U.S. airlines and car manufacturers were, before the collapse, so dependent upon their financial arms for profitability that it was hard to tell whether their main function was to move passengers, make cars, or push paper.
Profit-seeking firms will obviously put the most resources into those areas where they can make the most money, but the rise of speculative finance as a serious, big-money force in the overall U.S. economy has translated into more economic resources being spent on finding creative ways to profitably gamble on speculative assets and not on making better automobiles or getting passengers to their destinations on time.
As a result, less is invested by private firms and investors in making the U.S. economy more productive through the development of new resources, the implementation of new technologies, or the creation of productivity-enhancing infrastructure that benefits everyone. Instead, what develops from this dynamic over time is the slow starvation of the real economy – e.g. Main Street – of the resources it needs to survive and thrive.
Wall Street’s colonial occupation – of Main Street
This, in turn, hurts everyone not connected directly to the financial sector. Factories are not built, roads are not improved, children are not educated, and, worst of all, the growing economic imbalance between finance and the rest of us quickly translates into a political imbalance – meaning that in short order our politicians have not only been bought off, but are now actively working against the interests of average people by wholly serving the interests of the financial elite.
This makes the problem worse. A rigged economic game means that, more and more, the playing field is tilted further in favor of the financial sector and its handmaidens in corporate suites. This emasculates workers by decreasing their bargaining power – which reduces wages – and creates a situation where most find their standard of living stagnant or declining and society more unequal than ever before.
If this sounds like a situation that is found in most developing countries, that’s because it is – developing societies very often find that their economies are rigged to benefit the politically-powerful at the expense of most individuals.
The only difference between the U.S. today and, say, Peru, is that the elites controlling the economy in Lima are intimately linked to foreign interests – thus economic game rigging there looks like colonialism. In the United States we’ve effectively allowed finance to run amok through our own stupidity and, by doing so, effectively colonized ourselves.
By being taken in by the flimflam men who continually preach the gospel of the unfettered free market, we’ve seen more and more places in America, starved of investment by the parasite class on Wall Street, begin to look like the developing world. We’ve been bamboozled by economic messiahs who turn wine into water and call it a miracle.
Finance, therefore, can be likened to a cancer that has metastasized and spread – consuming the rest of the economic body politic in the process. If this cancer is to be put into remission, if not excised altogether, then it is going to take strong chemotherapy to knock it back sufficiently far for the rest of us to recover.
Strong medicine is needed, but so is restorative medicine – to simultaneously rebuild what the financial cancer gravely weakened but failed to destroy.
Two policy ideas that were once disregarded as idealistic dreams too impractical to ever implement, may – if used in combination – be just the policy medicine our country needs to not just kick our financial cancer, but set us up for a return to long-term, widely shared economic growth.
The first policy, originally suggested by James Tobin – winner of the Nobel-Prize in 1981 for his work on how outcomes in financial markets influence the rest of the economy – is a financial transaction tax.
The tax would work by levying a small – almost infinitesimal – fee on every stock traded, bond sold, derivative swapped or currency purchased. This would have three positive effects.
First, a financial transaction tax would lessen market volatility and increase market stability by making it uneconomic for traders to buy and sell repeatedly in a short amount of time financial assets of any type.
Stock exchanges are strange, strange places
Why? As the recent Twitter “flash crash” this past April and the 2010 flash crash, caused by an errant keyboard entry, demonstrate, so much money is traded so quickly by computers via preprogrammed electronic trading that any unexpected market fluctuation can cause, within moments, a potentially devastating market collapse. This added volatility caused by high-speed trading benefits absolutely no one – except the elite Wall Street trading firms who can afford the high-speed exchange connections, high-end computing power, and the intricate programming needed to make these lightning-fast trades profitable.
To give one a sense of just how out of control this trading has gotten, consider this animation of just one half-second of trading of Johnson & Johnson stock on our various national exchanges on May 2, 2013, or this half-second of trading of Mastercard stock on May 16 of this year.
If all that high-speed trading occurring with nary a human being in the loop terrifies you, imagine one’s retirement portfolio in that maelstrom. Or, better yet, imagine what happens to it if it isn’t. Stopping this madness – and its resulting computing arms race that only benefits the richest trading firms – is another key benefit of a Tobin Tax.
Second, as the sheer number of trades suggest, an infinitesimal tax on such high-speed trades offers up a literal gold mine for cash-starved governments, including ours. According to one study, a half-percent tax on just U.S. stock trades would net the government an additional $100 – $200 billion a year.
If extended to all U.S. financial asset transactions, the total increase in annual tax revenues could add up to $170 – $350 billion. To give one a sense of just how big a chunk of change this is, annual U.S. military spending in 2011 was $684 billion, meaning a financial transaction tax that would affect nearly no one would cover anywhere from 25% – 51% of the entire U.S. defense budget.
Third, this tax would bring not just additional revenues but, just as importantly, bring equity to a tax system so riddled with loopholes written for the rich and politically influential that only the super-wealthy, corporate America, and the tax law and accountant lobby benefit from its complexity.
Even the poorest Americans are taxed on the purchases they make at the local grocery store, and it is beyond the pale that a similar sales tax is not imposed on a vampire-like financial sector.
Combined with a return to Clinton-era tax rates on the wealthy, eliminating corporate tax loopholes, and a cracking down on tax fraud and evasion by threatening tax havens with massive penalties if they do not comply with new U.S. tax rules, we could go a long way in shifting the balance away from Wall Street and the wealthy and back towards Main Street and average Americans.
Milton Friedman, socialist?
If better engineered taxes more squarely targeted on Wall Street evils like high-frequency trading represents the chemotherapy portion of our policy medicine, then the body-building restorative can be found in another idea, this time from the opposite end of the political spectrum – a guaranteed minimum income.
What rabble rousing communists suggested this hair-brained idea? Why, none other than those vanguards of the revolution – Milton Friedman and Friedrich Hayek. Yes, that’s right; the two most beloved of conservative free-market types across America and winners of the Nobel Prize in Economics in 1976 and 1974 (respectively), suggested that society should provide everyone with a universal, guaranteed minimum income.
To be fair, and to help your exploded mind put itself back together, Hayek and Friedman were not the only economists to tout this idea, and it has received support from economists of all political stripes and varieties. Why this is the case highlights both the elegance of basic economic theory and the substantive, near-universal agreement by most economists about a conclusion of their science.
One must first understand that a fundamental conclusion of economics, based on its most basic mathematics, is that allowing individuals to trade the resources at their disposal freely with one another effects the most efficient, society-side distribution of resources once trading has concluded.
Left to their own devices, people will truck, trade and barter until no more bargains can be made – in other words, until everyone is satisfied and no additional trade can be made without making someone worse off in the process.
This outcome is known as Pareto optimality and the distribution of goods across society that results once free trading between individuals is complete is called a Pareto efficient distribution. The hitch in economic thinking arises, however, when distributions that result are highly unequal.
How to bake morals into your economic cake
If free trade results in all goods and income being mostly held by one or a few people, that outcome is deemed as efficient as one wherein free-trading results in equal access to all goods by all members of the community. Free trade, then, is nothing but a process that results in efficient outcomes given an initial distribution of individual income and preferences, but has nothing to say about the relative fairness of such outcomes or the initial distributions that led to them.
Free trade is thus just a morally ambivalent tool that leads, efficiently, to morally ambivalent outcomes. It is a cooking device that makes cakes, but what type of cake it makes depends upon the ingredients, and the proportions of said ingredients, put into it.
What type of cake our economic oven eventually spits out for us should matter a great deal, because a cake that pleases only a very small minority is, in turn, a recipe for social discord and, in short order, a busted-up cake-making machine.
So the type of cake matters. The question then is how to get the free-trade cake machine to make something everybody can live with. Here, economic science and basic mathematics once again has a solution.
A corollary to the finding on Pareto optimality is that you can rearrange the initial distributions of good and services all you want and then, once individuals are left to trade freely with one another, the outcome of the trades that result after this process is completed is Pareto-optimal, too. Thus, says elementary economics, if you know the proper ingredients to make the cake you want then you simply input the right ingredients in the right amount – or rearrange initial distributions of wealth and goods so as to make them more egalitarian before trade begins – and free trade will still make everyone better off.
The cake analogy, continued
You can therefore have your egalitarian cake and eat it, too, but you have to get the initial allocation of resources and wealth right. The wrong recipe leads to, well, the bitter-tasting, half-baked financial-capital fruitcake that we call modern America. This is where the idea for a guaranteed minimum income comes in.
The reason why a guaranteed income is supported by free-market types like Friedman and Hayek is that if you are concerned with fairness and justice, simply redistributing wealth to achieve a fairer outcome is most efficient when you simply give money to people with no strings attached.
Yes, that’s right, simply giving people money and then allowing them to truck, trade, and barter as they see fit after that money has been given to them is the best, most efficient way to achieve fairer outcomes. Since most governments try to improve economic fairness and poor folks’ income through a variety of regulations and schemes to implicitly shift money from Peter to Paul, a simple transfer payment – facilitated by the government (or charity if charity actually worked as it was supposed to) – would allow the government to do away with all those market-distorting policies aimed at increasing the income of the poor on the sly, thus making the market more efficient and, yes, making everyone better off.
Simple transfer payments of this type are easy to implement, easy to administer, and have the benefit of being easy to judge, too – so long as you call it what it is. Social Security is just such a transfer payment but, because we refer to it as an insurance program and talk about its payments as accrued benefits, we often lose sight of the fact that Social Security is essentially a welfare program for the elderly, disabled and infirm, no more, no less. Individuals “earned” those benefits by being a citizen of a state that gives a damn about their welfare, not because their meager lifetime contributions added up to the amount of benefits they are receiving in their old age.
Other kinds of welfare payments are often not deemed as acceptable as Social Security because their beneficiaries are seen as undesirables, their benefits are seen as undeserved, or their beneficiaries are seen as the cause of economic malaise and stagnation for the rest of the community – which is simply not the case.
As a result, benefits are often delivered punitively, come with multiple restrictions, and are rather paltry compared to the actual needs of most poor people. Furthermore, because poor people are usually politically powerless, politicians rarely take their interests into account when the budget axe falls – which is why today Head Start and Food Stamps get cut first instead of tax benefits for already wealthy oil companies.
You may say I’m a dreamer…
Imagine a system of welfare payments that would help every citizen when they needed it most in terms of affecting their overall life trajectory. What if instead of guaranteeing a basic minimum income for all adult citizens or all our elderly, we instead ensured that each child born in America – a citizen just like you or me – was guaranteed a basic start-up income aimed at providing them the resources they need to be productive, successful citizens in an economy that is increasingly putting a premium on the acquisition of education, skills, and expertise.
Suppose, for instance, that each child in America was, upon birth, granted by the federal government $30,000. This money could not be touched by parents or guardians except to add to it. Instead, it would be placed in an account, guaranteed by the government but allowed to grow with some risk, like a modern 401(k) is.
The child would be allowed to access this account, tax-free, for purposes of funding an education in whatever field he or she chose at age 18. Assuming an average rate of return of 4% a year – a not-unreasonable rate of return – the child would have approximately $60,000 at his or her disposal when he or she came of age.
If no education was desired, then the account would remain untouchable except for certain expenses – purchasing a house, for instance, or starting a small business – until the age of 30, at which time all the funds could be accessed, again tax-free. Collectively, this would mean that every year nearly a quarter trillion dollars would become available to young people to use on their eighteenth birthday. How’s that for an economic stimulus?
How much would all this cost? Surely a staggering amount, right? Well, since approximately four million children are born every year in this country, the annual outlay for this Citizens’ Startup Fund at $30,000 per American child born would amount to $120 billion – about a sixth of what we spend on defense every year and an expenditure that would easily fit within the revenues collected by a new financial transaction tax of the sort advocated James Tobin.
How much good could it do? Think back on how much, when you started out, you could have used $60,000 – a nice gift indeed from your Uncle Sam. Think of all the young entrepreneurs, students and idealistic do-gooders who could have done so much with all that start up cash, and then multiply that by four million people, every year, forever.
Within a generation, our country would be an indescribably better place – and all without sacrificing the market economy or burdening society with stifling economic regulation.
No system is perfect. Such a system would no doubt have many problems. But it might also have immense consequences for the good, too. What we do know at present is that it can be done, is efficient, affordable within the framework of a new tax system like a proposed financial transaction tax, and would give a leg up to millions of young Americans at a crucial point in their young lives.
Can you imagine what our young people could do if they weren’t burdened by crushing student debt, locked out of education due to poverty, and were able to enter the labor market, or start their own business, on their own terms?
Bringing out the dead economists
The great economist John Maynard Keynes once said “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,” and that, “practical men, who believe themselves to be quite exempt from intellectual influence, are usually the slaves of some defunct economist.”
For too long we have been shackled as a society to certain interpretations of dead economists’ thinking by those with something to gain from that interpretation – but that doesn’t mean economics has no ideas or should be abandoned altogether. Indeed, as these two ideas from dead economists demonstrate, there is plenty of intellectual ammunition out there that can be used against the system as it currently exists – we just have to be brave enough to use it.