It has long been my view that most of the seeds of the West’s ills were sown in the 1970s: that was the decade when Western consumerism began to be sated by Chinese imports, and Arab oil, and the decade when America cut the link between the dollar and gold sparked the first flames of the great Keynesian debasement bonfire. Richard Nixon and Henry Kissinger were the chief architects, of all three of these innovations, and the internationalisation of the dollar as the global reserve currency.
In the 80’s, the United States’ trade balance flipped over and the U.S. became a net debtor, sending more and more dollars and debt out to the world as the free lunch got bigger and bigger. But something odd happened from the 70s onwards, as demonstrated by our graphic of the day:
Robert Reich claims that this stagnation began in 1979, but I think it’s obvious from the graph that the wage stagnation began earlier. Ever since Kissinger and Nixon’s innovations wages have been stagnant, while productivity, imports, corporate profits, government debt, the price of gold have all soared.
The reality is that ever since the 70s government policy, and the shape of global infrastructure and industry has favoured the rich over the poor, has favoured the monied over the moneyless, and favoured the powerful over the powerless.
That’s why we get skyrocketing corporate profits:
And no progress on employment:
And even when the policy debate shifts to helping the poor, the great Keynesian experiment has meant that money can easily be printed, and figures massaged instead of tackling the underlying challenges posed by globalisation, and the changing shape of the world.
The answers could be provided by government, or they could be provided by the free market, or both. What matters is that Western nations, increase their energy and food independence, and improve their infrastructure, and supply chains, and that individuals can find work which they are fairly rewarded for, not how that happens.
Of course, we are being held back by vested interests. From Alan Moore:
This is not even capitalism any more. Capitalism employs a rough and ready Darwinian survival of the fittest. The banks have become like monarchies. They are too big to fail, too big to punish. They are above parliament. Banks are treating themselves as if they were a new class of fiscal royalty. The kind of royalty they most resemble is Charles I. He was above parliament and not accountable for his lavishness. He put the pinch upon the country to the point where the poor people simply starved.
But — in truth — the global financial system is not too big to fail: it is too big not to fail. The system will rupture and crack again, possibly in the next few years.
Australia took its eyes off the ball in allowing one of the “big four” banks to buy the fifth biggest bank, and one of the other big four to buy the sixth biggest bank. Thanks Rudd, now they’re too big to fail!
Compelling stuff, Aziz. I think it’s missing other variables to put it in perspective, but it does point out that there’s no such thing as a free lunch, and something has to give somewhere!
If there are any variables you would like to add to the mix, twodogs, please be my guest.
Well first thing that sprung to my mind was that Corporate profits denominated in dollars are not real-inflation adjusted meaning M1/M2/M3 supply. i’m pretty sure that the profits are equal or lower versus 1979
Yes — it basically reflects the money supply. But the key is that wages don’t reflect the money supply. So we have to try and grasp why this disparity of asymmetric inflation relative to the money supply has arisen.
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Could it be possible that wages didn’t move lockstep with corporate profits due to the great influx of labor from China and Eastern European countries? I do think it’s a factor, though not a decisive one.
I haven’t gone in much depth in economics, so I’m rather confused how could this have happened. How does dropping the gold standard, and therefore massive debt accumulation + money printing suppress wages?
Thanks for the great analyses, Aziz. I’ve always silently enjoyed reading your posts 🙂
Thanks for reading. It’s all to do with government priorities: if your methodology for fighting economic problems is to print money, massage the figures, and hope that confidence improves, then that doesn’t guarantee recovery, and very often the real problems actually get worse because the real underlying problems (bad infrastructure, bad energy policy, lack of productivity) don’t get addressed. if your policy is to work with business and society to address the underlying problems instead of printing money, then things tend to get better.
The gold standard takes the “print money and massage the figures” approach off the table.
The tax burden has increased from 25% of the GDP, federal, state, and local, to 45% today. Simply put we get ripped off more by parasites in government. Its a long discussion, and I have explored it on my blog,
Which questions the whole Y = C + I + G + NX GDP calculation.
The second factor is the gold standard, or lack of it.. Inflation kills the middle and lower classes who do not understand or have the resources to protect themselves from inflation. This is a huge reverse transfer of wealth from the middle and lower classes to the upper middle and rich classes.
Third Reich doesn’t understand economics as I have pointed out in my blog,
I would never trust the man for anything. He has never understood economics and never will.
I hope this helps clear up this mystery.
Hi there, and thanks for stopping by!
I agree with point 2 — as covered here.
I partially disagree on point 1. Here’s the top marginal tax rate during the last century. It’s lower now than it has been, even during some “boom” years:
Now, I don’t want to live in a system strangled by taxation, and i think Warren Buffett is very sanctimonious. But the fact is that government has already spent a heck of a lot of borrowed money. That’s why the debt is so high. And we need to repay it. Now there are lots of things we could cut spending on — I wouldn’t immediately cut welfare/entitlements (Ron Paul, for example, recognises it would cause riots), but i would certainly cut a lot of military spending — covered in greater depth here — and corporate handouts.
But the quickest way to minimise the transfer of wealth (interest) from the masses to investors is not only to cut spending, but to tax those who have benefited most from the years of corporatism and military Keynesianism. That is, the corporate class, Wall Street, and the military-industrial complex. They have been the ones who have predominantly received the handouts, and in my view, it is now time for them to pay back what they were given. Once the debt is gone, we can move toward cutting income taxes.
The top marginal tax rate and tax collections are not related. I blogged about that also.
Read the blog and you will understand the top tax rate game is a scam.
I am going to use your graphs and blog about why the lower classes are getting scammed. You do good work.
In terms of top marginal income tax rate not determining total tax collections, yes. You are correct — there is only a very small correlation:
But as we see here — with the rise of social insurance, and the fall of corporation tax/ import tariffs the lower marginal rate today is a transfer of the shape of the net burden (which itself has been stable) from the wealthy to the less wealthy:
Clearly, paying down the debt can be funded from a number of sources, including cuts. Perhaps the best compromise between encouraging business, and quickly paying down the debt might be to only raise income taxes on those in the top band who have directly received money, or work for a corporation who received money from the TARP, TALF, etc, and cut for everyone else?
And by the way thank you for linking to your blog — I am really enjoying it.
I left out the regressive taxes of Social Security and Medicare. Both programs are regressive during the working years, but some argue progressive during retirement years. Some economist argue it “balances out” but lack of wealth accumulation by the poor and lower middle class leads to poverty and reliance on government. Fact is Social Security and the 15.3% payroll tax is one of the biggest impediments, besides a lack of real gold or silver money, preventing the poor from accumulating wealth.
Can I use your graph?
Aziz, perhaps I misunderstood some of your discussion with economics9698, but it sounds like you are in favor of a higher corporate tax?
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Here is the blog using Reich’s graphs. I am a professor so I write like I am teaching my students.
Thank you for keeping up with economics.
Great work, Prof:
— Double Amen.
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In advance alternate
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