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THE RISE OF ACCUMULATION AND FALL OF DEMOCRACY (PART VII)

July 9, 2014

THE RISE OF ACCUMULATION AND FALL OF DEMOCRACY (PART VII)
We have seen in Part VI that while the inflation tool may work in reducing debt, it is too hard on investor and ordinary citizen alike, increases future borrowing costs (if anyone will loan your country money), invites international chaos in financial markets, and is subject to the law of unintended consequences (it could bring on political radicals a la Hitler) etc. Arsenic ends pain, too, but the cure is worse than the condition sought to be ended. So the arsenic of inflation is out as a choice – and that leaves two other possibilities suggested by Piketty for the job of public debt reduction – taxes on capital or austerity, or some mixture of the two (with perhaps a touch of induced inflation).
Let’s start with austerity economics (which is the almost exclusive method we are using in this country today – with a touch of induced inflation – and one employed in a Merkel-led EU as well), a choice correctly dismissed out of hand by Piketty and 11th on my list of 10. Even induced inflation is a better choice. Austerity in action is the polar opposite of Keynesianism, and I am a Keynesian.
This tool for reducing debt is political to the core and is based on the idea that when you owe too much, you must reduce your expenses. That is a sensible course for over-indebted households to follow, but government is not a household. Even over-indebted households cannot go without food or shelter, nor can government succeed in avoiding Third World status (the equivalent of going without food or shelter in the household sense) by reducing investment in education, infrastructure, public health, trade policies that support domestic employment, and research and development (the frontier of innovation, a frontier in which we must excel in order to be and remain globally competitive). We dare not ignore these “food and shelter” investments in favor of paying bondholders interest instead of taxing them – a double whammy to the public till – and one that you and I have to make up for in trying to pay for investments of government. We don’t need cuts in investments; we need more income.
It is especially galling to see the political hounds for austerity in Congress (typically though not always Republicans) who trumpet austerity “because we don’t have enough money” on the one hand and then vote for “getting less money” on the other by giving more and more tax breaks to their patron rich campaign contributors – an illogical response. It’s as though these politicians want us to increase our indebtedness rather than reduce it. The “households” they erroneously use to compare, when over-indebted, get a second job to bring in more income, not less, so they are wrong by their own reckoning. Government cannot get a second job; it is government, not an employee. As noted by Piketty and set forth in a preceding part, government has two main sources of income – taxes and debt – and the economic/political battlefield has to do with their respective apportionment.
Thus austerity plus tax cuts result in further debt, which I suspect Republicans secretly like because it gives their patron bondholders greater investment opportunities and with such new debt gives the austerity hounds in Congress additional fodder to reduce our social safety net even further – more bonded debt for the superrich to invest in, more interest you and I have to pay, and less food for the rabble – what a policy! Perhaps worse, the additional interest we have to pay on such government bonds to the superrich further erodes our ability to invest in education, infrastructure and other “food and shelter” items noted above which in turn accelerate our downward spiral to Third World status. Given such a cause and effect scenario, it is plain to me that austerity as a tool to reduce debt if accompanied by tax cuts in fact INCREASES debt, an outcome that unmasks the real motive of the austerity hounds, which is to make the rich richer and the hungry hungrier and increase the interest you and I must pay as the twin tandem of more tax cuts and campaign contributions go their merry way.
We have been told repeatedly by Joseph Stiglitz, Nobel Prize-winning economist (and others) that “Austerity has never worked in big economies,” and ours is the largest in the world. Piketty also points out that Britain used this austerity tactic for almost a century following the Napoleonic Wars to pay off its huge debts arising from those serial hostilities and that after some 100 years it only succeeded in reducing its debt from 200% of GDP to 100% of GDP. He speculates that as a result Britain suffered decline as it fell behind in education, infrastructure and wage inequality, even though the rich were getting richer with the Industrial Revolution then in vogue. The demands of austerity fell then (as now) on the backs of the poor and gave rise to complaints of child labor and workhouses in print from Charles Dickens and the advent of radicals such as Marx and Engels. Britain and indeed the world has paid a heavy price for adoption of inflation or austerity as policy since, in varying degrees, one can argue that austerity brought on Marx and inflation brought on Hitler. Consider their legacies when rethinking the significance of choice in economic policies. History shows us that wrong choices can lead to unimaginably catastrophic consequences, of which Nazism and the Soviet adventure are illustrative.
The good news is that it doesn’t have to be this way. We can adopt Keynesian policies and persevere though thick and thin until we have reached equilibrium in the distribution of new wealth among those who provided it by, among other things, taxing capital income as we do labor income. After all, why should you and I as labor (doctors, lawyers, truck drivers, clerks, assembly line workers, and anyone who works for a salary or fees) have to pay high taxes while income from capital gets a virtually free ride? Who but we are providing the effort in the real economy that makes for capital profits?
Why are we “wage slaves” required to fund the costs of government and by our efforts simultaneously provide our (usually corporate) masters with virtually untaxed incomes? Why is inert “capital” favored over human sweat in terms of tax (and other) such treatment (such as being paid to come to town to set up a factory with tax holidays etc.)? Where is labor’s “tax holiday?” People do not depend on capital; capital depends upon people. Money without labor makes no profit (income) and is therefore worthless in the scheme of things beyond its face value.
I will discuss some of the tenets of a plan proven to work in the past and which will work now in correcting the misadventures of large economies, Keynesianism, as well as Piketty’s plan to reduce if not pay off public debt in developed countries in Part VIII. Stay tuned. GERALD E

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