Thursday, June 2, 2011

Unraveling 40 Years Of Economic Failure: Part 1

There is a reason that economists often seem disassociated from reality...and the reason is that they, in many ways, are actually disassociated from human reality...the reality of everyday life. This isn't a unique condition, however, and can be equally applied to most people when discussing the mathematical reality of economics. There is a disconnect...because the subject too easily lends itself to emotional reactions based on personal experience or political philosophy. When the numbers are in the trillions, and the ebb and flow of wealth becomes divorced from anything we can connect to, we seek out meaning and connection...even imposing false meaning atop empirical evidence to the contrary. Reality, especially with regard to a mathematical absolute, is far less digestible than patented buzzwords and comforting slogans. The purpose of this exercise is to reacquaint at least some small number of people with fiscal realities that may have political ramifications...and may be philosophically repugnant...but remain absolutely true just the same, without regard for finer sentiments.

An economy is, at its core, the financial actions of millions upon millions of people, interacting on small scales and large, simultaneously and constantly. In addition to its classical origin, our new era of information transfer and high speed communication has lent itself to the swift movement and calculation of immeasurable wealth...with fewer human involvements than ever before. The dynamics of past eras cannot be said to have remained unchanged by this leap forward in technology. To postulate otherwise is the manifestation of desperate desire for a grounding in the familiar. The way in which our economy can be called 'managed' has changed radically in a very small number of decades...and the results have been measurable. The very wealthy have grown considerable more wealthy, with a corresponding increase in influence...while the more average worker has experience an increase only in hardship, a loss of opportunity, and a diminished relevance politically and socially, with corresponding stresses in other facets of their lives.

To begin in earnest, lets dismiss the concept of a 'free market'. The popular imagination has absorbed the two words with an attached meaning implying few or no interferences by attempt to move back to a time when markets ebbed and flowed with little involvement by outside forces, which is ludicrous after even a short historical study of economics. There has never been a time when the choices of governments, be they theocracies, monarchies or democracies, have left markets theoretically untouched and allowed to flow freely. Government, in all its forms, is always a powerful mover of capital, shifting wealth from place to place, sometimes toward industrialization and modernization, sometimes toward military conquest, sometimes to art and science and faith. The degree of involvement may vary, but its impact has always (and will always) be massive. The only issue at stake is where its influence is most effective and generates the most positive overall effect. Some weigh 'positive effect' differently than others. For my purpose, I consider the most positive effect to be a broad involvement of as many people as possible in the economic system of a nation. More is better in my view. 350 million involved people generate greater results economically than 100 million involved people. The greater their level of involvement, the greater the corresponding gain on a national scale. This is not an unreasonable assumption.

No market has ever been truly free. Once we accept this, we move unerringly to the understanding that what marks a healthy 'unfree' market from an unhealthy 'unfree' market is the degree of accessibility and level of accountability to legitimate civil authority. The worst examples of poorly regulated, ill managed economies have given us visions of hell on Earth. Pre-revolution France, pre-Soviet Russia, modern Haiti etc etc. These markets and nations suffered from both an excess and a shortage of freedom at the same time. Freedom became a limited commodity available only to those who could wrest it away from others...and with no civil authority strong enough to maintain a balance and no means to equitably involve a wide array of people in the economy, revolution, violence and chaos ensued.

Again, it is just my view, but as far as I am concerned Communism failed utterly in its attempts to create a more just system of governance that would level the playing field. In every case where it has been attempted, the system has always been subverted by a limited group of powerful players who diminished access for others and enriched themselves, recreating a new class struggle even while railing against it. We can assume safely that class will always be an issue, that some will have more and others less, but it is how we manage and balance that difference between classes that determines if we spiral into anarchy and bloodshed...or if we trundle along with comparative contentment.

By way of example, lets consider an automobile. Imagine a car with countless rules thrust upon it and its driver. Its every function is micromanaged and carefully controlled until minimal risk is achieved. It is utterly stagnant, slow, and nearly valueless as a means of transport or personal freedom of movement. Imagine a second car and driver, on which no controls of any kind are placed. It careens wildly from place to place with no nod toward safety or even survival, at speeds that would normally be considered suicidal in the hands of any but the most expert, and ultimately crashes spectacularly. Neither of these is a desirable outcome. Somewhere between the two exists a harmonious acceptance of limits that allows both modest usefulness and likely safety. Somewhere between the extremes lies a long term path to success. This is also true in economics.

My contention would be that, in part by design, and in part by accident, the United States briefly stumbled upon that happy medium. Even a cursory glance at its changes through the Twentieth Century would show a country that shifted gears from a largely rural, isolationist nation of modest an economic powerhouse that unquestioningly dominated the global scene by any measurement that one cares to use. Note that this article isn't about the countless small inequities which have occurred along the way. Inequities arise...always...and can and have been dealt with in any number of ways for better or worse. What is being reviewed and examined here is the impact of economic policy on the United States...and what portions of those policies have resulted in great gain for many...and what portions have resulted in great gain for few at the expense of many.

Let's consider money supply in the most simple possible terms. There is money. The supply of same is not and has never been based solely on the basis of limited precious metals. For those who imagine a rosy era of gold standards absolutely determining the total amount of wealth a nation can possess...the bad news is that this is a modern fiction when weighed against the history of global economics. It had been a factor...not an absolute, and it remains a factor, not an absolute. The wealth of a nation is in part its goods and services, its productivity and the countless tiny exchanges of materials and services and wealth. The supply of money allotted is loosely based on the approximate total value of all that is transpiring at a given time...and this is both reasonable and true. What isn't reasonable is expanding the supply of money infinitely or excessively for mere convenience. In this, popular conservative views of economic policy are absolutely correct, even if they rarely apply this truth when it's inconvenient for them. It should be agreed upon that any increase in the theoretical supply of money based on anything other than actual value is essentially a devaluation of the existing currency, stretching and flattening dough until it becomes thinner and thinner...ultimately creating less value for all (especially for those who possess quite a bit already, and have no desire to see the real time value of a billion dollars become something more like 600 million.)

Having asserted that there is, and should be, a limited supply of money at any given time (with room for adjustment as the combined value of economic activity changes), let us move to how that total wealth is managed and measured, and what difference it makes. Government, be it elected or unelected, for better or worse, looms large in its ability to organize and accomplish large scale tasks. How trustworthy it is...that is another issue...but every monumentally large task undertaken throughout history has always returned to government. The Great Wall, the Pyramids, Hoover Dam etc...leaving aside the religious connotations and connections as inspiration, the actual work was organized and executed by act of government. Government rarely ever has managed all wealth in a nation, but has always been involved in the controlled movement of wealth...determining the means by which wealth is measured, the value of the available money, the terms under which the money is used and distributed and the taxation of property, goods, services and other forms of economic activity. In this era, where finance is crucial and goals incalculably more complicated than in the past, government finds itself with more on its plate than ever before. No highly successful or internationally relevant government is lax and divorced from the process of oversight.

Management and measurement of capital and wealth are, in fact, the primary task of government. In measurement, it is a matter of maintaining an accurate picture of the value and nature of the accumulated wealth and influence of a nation...and in management it is the determining of where that wealth is best directed or supported...and for what gain. With the measurement of gain being considered as a vibrant economy in which the widest possible number of people are included and involved (purchasing goods, services, property and making investments), it becomes obvious that government's ideal part in the process is furthering that goal and moving to include as many people as possible in the economic activity...which furthers gain for both government and business as a pleasant side effect.

Obviously (to most), the money cannot be simply gathered up and doled out perfectly equally. This is as abhorrent and pathetic a concept as its opposite (the money simply being piled at the top with zero accessibility to others). As soon as money begins to move, whenever value is allowed to change hands, it begins to accumulate in greater or lesser amounts that wildly vary from person to person. Capitalism, for all its faults, acknowledges this simple reality. No successful attempt has ever been made to equitably deal with this reality...only failed attempts that stifled opportunity and led to a gangsterish clique with near total control of the supply of wealth...a grotesque mirror parody of capitalism at its worst. The only realistic approach is to accept that money will accumulate in specific places as it changes hands...and then take action to force that money to continue moving. Whether this is ethical or not is is still less horrifying than the consequences of letting money stagnate. Ask the Russian monarchy about it...if you can find any who are alive.

The movement of money is not unlike the movement of flows fastest where a path is cut for it...or left to its own devices cuts a path for itself and then sticks to precisely that path unless diverted. Since it is untenable to leave money utterly to its own devices, or to assume control of all of it, it is both reasonable and right to make attempts to divert it and control its flow. Let us make for our example a small population of 10,000 people, because it is far more difficult to keep our minds on simple realities of the task when the numbers move into the hundreds of millions. Of that ten thousand people, all desire to live and prosper, and all must find sustenance and shelter in a modern economy. All have access to at least some small amount of money, and some few have access to quite a bit more than others. The ebb and flow of goods, services and property are already assumed to be in place, the presence of jobs and of government may likewise be assumed to be in place. Consider it a tiny, miniature America if you will, in proportion identical to the makeup of the United States. Assume an identical timeline politically and socially as well...and we begin.

At and during the period of its greatest power and influence, government had a heavy hand in taxation and distribution of wealth, as well as in the oversight of commercial activity. This heavy hand came into being after a period of increasing laxity that resulted in extreme losses and considerable harm to many people. The resulting firm hand and excessive involvement came about as a response intended to smooth the flow of wealth and prevent future crises...and to reassure the people that they were invested in the process and should not choose to destroy it in favor of some other political/financial system. Government had its hand in nearly everything...doling out money for education, infrastructure large and small, research, agriculture, defense, and even general employment and oversight of seemingly minute issues. Money was effectively moved from everyone...but most visibly from the very wealthy...and shuffled about in many ways and for many ends...but more important than where it moved...was THAT it moved.

We return to that example of 10,000 theoretical citizens...they have ample access to education and higher education at reasonable prices, sound infrastructure that enables development and transportation, subsidized utilities and a marketplace that remains competitive while keeping competition checked against excess. Legitimate means are available to seek redress of both economic and social grievances. In short...there is balance...certainly not perfect balance, but sufficient to engender an environment of affluence for more people than usual. A larger percentage of the average population can afford what other countries might consider luxuries...and we agree that this is good. Investment is at an all time high...and stability and peaceful transfer of power is more visible than elsewhere in the world.

Popular wisdom has become, largely by advertisement and think tank propaganda, that taxes are wholly onerous...doubly so when placed heavily upon corporations and the wealthy, and that taxes stifle investment and expansion. The conventional wisdom holds that if companies and wealthy individuals have more money...they have more to invest in innovation, expansion and hiring. Despite the fact that the greatest widespread economic growth took place while top tax rates were double or even near triple the current rates, and that considerable regulation and restriction and oversight were in place...the popular myth remains that low taxes lead to greater investment.

The opposite is true. I know its hard to believe after two generations of the same drumbeat...but the exact opposite is true. Taxes breed investment. In fact...they force it into being by default. Lower taxes promote hoarding of capital and flatly discourage any form of investment save for the most spurious and intangible. Why on earth would anyone...anyone at all...with enormous amounts of capital and imaginative ways to increase it with few taxes...turn around and squander that money on hiring, wages, safety, expansion or any other form of civic or civil investment? They logically shouldn't, and just as they don't. Onerous taxes...especially applied heavily to those individuals who build enormous amounts of capital through profit or inheritance, force investment because the money serves them better when invested and tax-free...even when spent on hiring, wages and charitable causes, than it does when withdrawn as profit and made subject to taxation. Who wouldn't choose to take home a 1 million dollar paycheck and lose half to taxes...rather than withdraw 100 million in profit and see 85% of it vanish instead? This is precisely why many of the great 'gifts', bequeaths, trusts and other foundations came into being. The money they were created with would have been devoured by taxes if not given away in a goodwill raising public relations gesture. Taxes built the greatest economic engine, with the soundest wages, and with the most productivity and shared wealth in the history of the planet. Taxes funded the largest public works programs and developed the most modern infrastructure ever conceived by humankind. Taxes developed a quality of life that set one nation apart from the entire world, a model of futuristic potential achievement that all others merely sought to copy.

And then we started slashing them.

No comments:

Post a Comment