The National Attack Authorization Act?

We all know that the National Defense Authorization Act (NDAA) signed by President Obama on New Year’s Eve contained a now-struck-down provision to authorise the indefinite detention of American citizens on US soil.

But did you know that the NDAA also paves the way for war with Iran?

From Dennis Kucinich:

Section (6) rejects any United States policy that would rely on efforts to contain a nuclear weapons-capable Iran. Section (7) urges the President to reaffirm the unacceptability of an Iran with nuclear-weapons capability and opposition to any policy that would rely on containment as an option in response to Iranian enrichment.

This language represents a significant shift in U.S. policy and would guarantee that talks with Iran, currently scheduled for May 23, would fail. Current U.S. policy is that Iran cannot acquire nuclear weapons. Instead, H. Res. 568 draws the “redline” for military action at Iran achieving a nuclear weapons “capability,” a nebulous and undefined term that could include a civilian nuclear program. Indeed, it is likely that a negotiated deal to prevent a nuclear-armed Iran and to prevent war would provide for Iranian enrichment for peaceful purposes under the framework of the Non-Proliferation of Nuclear Weapons Treaty with strict safeguards and inspections. This language makes such a negotiated solution impossible.

At the same time, the language lowers the threshold for attacking Iran. Countries with nuclear weapons “capability” could include many other countries like Japan or Brazil. It is an unrealistic threshold.

The Former Chief of Staff of Secretary of State Colin Powell has stated that this resolution “reads like the same sheet of music that got us into the Iraq war.”

The notion of a “nuclear weapons capability” seems like a dangerously low standard. Let us not forget that Mossad, the CIA and the IAEA agree that Iran does not have a bomb, is not building one and has no plans to build one.

But the bill clearly spells out its intent:

SEC. 1222. UNITED STATES MILITARY PREPAREDNESS IN THE MIDDLE EAST.

Section 2 (A) pre-positioning sufficient supplies of aircraft, munitions, fuel, and other materials for both air- and sea-based missions at key forward locations in the Middle East and Indian Ocean;

(B) maintaining sufficient naval assets in the region necessary to signal United States resolve and to bolster United States capabilities to launch a sustained sea and air campaign against a range of Iranian nuclear and military targets, to protect seaborne shipping, and to deny Iranian retaliation against United States interests in the region;

(D) conducting naval fleet exercises similar to the United States Fifth Fleet’s major exercise in the region in March 2007 to demonstrate ability to keep the Strait of Hormuz open and to counter the use of anti-ship missiles and swarming high-speed boats.

As Kucinich notes:

This is an authorization for the use of military force against Iran. It ignores the warnings of both current and former U.S. top military brass who have spoken in opposition to the use of military force against Iran, including former Secretary of Defense Robert Gates, and current Secretary of Defense Leon Panetta. A February 2012 poll demonstrated that less than 20% of the Israeli public supports an Israeli strike on Iran if approved by the United States. Congress must avoid the same mistakes it made in the Iraq war and reject any language that can be construed as authorizing war against Iran.

It seems like the framers of the bill are exceptionally keen on striking Iran as quickly as possible. Maybe they are receiving lots of money from defence contractors?

Unsurprisingly, the biggest Congressional recipient of donations from defence contractors was Howard “Buck” McKeon, the chairman of the armed services committee who also happens to be the sponsor of the NDAA:

The fact that Ron Paul is the number two recipient is a sign that not all defence contractors are keen to hit Iran. But some are.

Still, even though the bill hints very strongly toward it, it doesn’t mean that it is going to happen. Congressmen might be hungry for a war but the military — already overstretched — isn’t. Admiral Fallon was reportedly the force that kept Bush from hitting Iran, and it would not be surprising to see the Pentagon put up fierce opposition to a future war with Iran. It would be a long, expensive war, with the potential of massive negative side-effects, like dragging in other regional powers, disrupting global trade, and squeezing the US economy by spiking the oil price.

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Americans Want Smaller Government and Lower Taxes

From Rasmussen:

A new Rasmussen Reports national telephone survey finds that 64% of Likely U.S. Voters prefer a government with fewer services and lower taxes over one with more services and higher taxes. That’s unchanged from last month and consistent with findings in regular surveys since late 2006. 

In fact, a plurality of Americans have called for small government and lower taxes ever since the days of Reagan.

But it has never worked out like that:

So what’s the difference? Is it that voters outwardly claim to be in favour of smaller government, and then when it comes down to it choose the advocates of big government? I don’t think so — I think it is that voters aren’t being given a real choice.

Here’s the increase in national debt by President:

The reality is that — with the exception of Obama — Americans have again and again opted for a candidate who has paid lip-service to small government. Even Bill Clinton paid lip service to the idea that “the era of big government is over” (yeah, right). And then once in office, they have bucked their promises and massively increased the size and scope of government. Reagan’s administration increased the debt by 190% alone, and successive Presidents — especially George W. Bush and Barack Obama — just went bigger and bigger, in total contradiction to voters’ expressed preferences.

The choice between the Republicans and Democrats has been one of rhetoric and not policy. Republicans may consistently talk about reducing the size and scope of government, but they don’t follow through.Today Ron Paul, the only Republican candidate who is putting forth a seriously reduced notion of government, has been marginalised and sidelined by the major media and Republican establishment. The establishment candidate — Mitt Romney — as governor of Massachusetts left that state with the biggest per-capita debt of any state. His track record in government and his choice of advisers strongly suggest that he will follow in the George W. Bush school of promising smaller government and delivering massive government and massive debt.

As Libertarian presidential candidate and former New Mexico governor Gary Johnson put it:

Pick Obama, pick Romney, government’s going to be bigger. Government’s going to be more intrusive.

So will the American people eventually get what they want? To do that, they have to ditch the hierarchies and orthodoxies of the past. Ron Paul and his tireless band of youthful supporters look set to achieve a strong showing at the Republican convention, as well as so far winning party chairs in Iowa, Colorado, Alaska, and Virginia. The Republican party — currently dominated by ageing tax-and-spend boomer Republicans — is being taken over by the libertarian youth who crave small government at home, as well as a smaller foreign policy. Ron Paul has taken the majority of youth votes in a plurality of states in 2012. And even if Ron Paul is not on the presidential ballot, Gary Johnson — a consistent advocate for lower debt, lower taxes, and smaller government — seems set to take a large slice of the vote in November.

As the mainstream parties continue to defy a majority of voters’ will and accrue more debt and make government bigger and bigger (while failing to address problems of unemployment and underemployment)  it seems natural and inevitable that more and more Americans — especially young Americans (who tend more and more to be unemployed and underemployed) — will abandon the sclerotic big-government Republicans and Democrats.

Trouble is, things may go badly wrong before Americans get the chance to put a practitioner of smaller government into power. Already a majority of Eurasian manufacturing and resource-producing nations have ditched the dollar for bilateral trade. Dollars and treasury bonds have long been America’s greatest export — and the greatest pillar of support for growth in spending and welfare. With the dollar’s downfall, smaller government may not be a choice.

Drone Warfare in America

What would Obama supporters think if they learned that their beloved President was running far-to-the-authoritarian-right of arch-hawk Charles Krauthammer on one particular civil liberties issue?

Sadly, the answer is that most Obama supporters probably wouldn’t feel very much at all, because support for Obama has always been predominantly emotion-driven (he promised change “you can believe in”, not “change that I can logically convince you will be beneficial“).

But I digress. Charles Krauthammer weighed in on FOX yesterday to telegraph his opposition to bringing drone warfare to the skies of America.

Krauthammer said:

I’m going to go hard left on you here, I’m going ACLU. I don’t want regulations, I don’t want restrictions, I want a ban on this. Drones are instruments of war. The Founders had a great aversion to any instruments of war, the use of the military inside even the United States. It didn’t like standing armies, it has all kinds of statutes of using the army in the country.

I would say that you ban it under all circumstances and I would predict, I’m not encouraging, but I am predicting that the first guy who uses a Second Amendment weapon to bring a drone down that’s been hovering over his house is going to be a folk hero in this country.

The Founders were deeply opposed to the militarisation of civil society. There is all kinds of aversions to it and this is importing it because, as you say, it’s cheap, it’s easy, it’s silent. It’s something that you can easily deploy. It’s going to be, I think the bane of our existence. Stop it here, stop it now.

And this is a big deal. A recent report by Micah Zenko noted:

Worried about the militarization of U.S. airspace by unmanned aerial vehicles? As of October, the Federal Aviation Administration (FAA) had reportedly issued 285 active certificates for 85 users, covering 82 drone types. The FAA has refused to say who received the clearances, but it wasestimated over a year ago that 35 percent were held by the Pentagon, 11 percent by NASA, and 5 percent by the Department of Homeland Security (DHS). And it’s growing. U.S. Customs and Border Protection already operates eight Predator drones. Under pressure from the congressional Unmanned Systems Caucus — yes, there’s already a drone lobby, with 50 members — two additional Predators were sent to Texas in the fall, though a DHS official noted: “We didn’t ask for them.” Last June, a Predator drone intended to patrol the U.S.-Canada border helped locate three suspected cattle rustlers in North Dakota in what was the first reported use of a drone to arrest U.S. citizens.

But I’m going to go even further than the threat to civil liberties: I am fairly certain that the militarisation of U.S. airspace by drones is itself a huge national security threat. While Zenko notes that drones “tend to crash”, the downing of a U.S. drone over Iran late last year — supposedly via an Iranian hack — seems to suggest that it is possible for drones to be commandeered by hackers or hostile powers. And if that’s not the case today, then it almost certainly will be tomorrow. Putting drones into the air above the United States is like going to sleep on a bed of dynamite. It’s an invitation to anyone to try and commandeer a plane, possibly one stocked with high-tech weaponry.

The Federal government would do well to quit groping Grandma at the TSA checkpoint, and start worrying about the potential negative side-effects of systems they are putting into place. All the TSA security theater in the world cannot stop a determined hacker from commandeering a drone.

Charles Krauthammer is right (and after the Iraq invasion which he championed I never thought I would say that): it could be the bane of our existence. Stop it here. Stop it now.

Obama Embraces Gay Marriage

Obama and Corzine — A Match Made in Heaven?

Unlike virtually every mainstream media commentator or political talking head I don’t care about Obama embracing gay marriage.

Now I know that a lot of people on the left — disappointed by his banker-friendly, PATRIOT Act-renewing, indefinite-detention-enabling, American-citizen-assassinating regime — are searching for any reason to vote for him, and plausible reason to defend his record. That’s the nature of tribal politics — “anti-war” Democrats will happily protest the Bush war machine, but they seem quiet when Obama is the one using drone strikes to assassinate American citizens without trial. I don’t like Mitt Romney either, but that’s not the point.

Even for those in favour of gay marriage, let’s not forget that Obama is capable of doing absolutely zero to change the law. Want to introduce a Federal law allowing homosexual couples to marry? Good luck getting it through the Republican Congress.

I’m in favour of consenting adults being able to do whatever they like with each other, but the fact that the current push for gay marriage is supported by Lloyd Blankfein and Goldman Sachs makes me very suspicious (does he want to sell securitised gay marriage debt?).

It just seems like an easy issue for Obama to posture on, while trampling the Constitution into the dirt.

When it comes to civil liberties, Obama has always talked a good game, and then acted more authoritarian than Bush. He talked about an end to the abuses of the Bush years and an open and transparent government, yet extended the Fourth-Amendment-shredding Patriot Act, empowered the TSA to produce naked body scans and engage in humiliatingly sexual pat-downs, signed indefinite detention of American citizens into law, claimed and exercised the power to assassinate American citizens without trial, and aggressively prosecuted whistleblowers. Under his watch the U.S. army even produced a document planning for the reeducation of political activists in internment camps. Reeducation camps? In America? And some on the left are still crowing that talking about being in favour of gay marriage makes him “pro-civil liberties”? Is this a joke?

Here are a few metrics that we should be judging Obama on:

People not in the labour force is spiking:

The public debt keeps soaring and soaring from eyeball-watering multi-trillion dollar deficits:

Meanwhile India, Iran, China, Russia, Saudi Arabia and Japan have all ditched the dollar for other currencies in new bilateral trade agreements — which lest us forget is America’s biggest export, and the product that keeps goods and oil flowing into America. This is an extremely dangerous time. While we cannot lump Obama with the blame for the entire U.S. economic system — the system we have was accumulated via Bush, and Cheney, and Paulson, and Clinton, and Bush, and Reagan, and Carter, and Brzezinski, and Nixon, and Kissinger, and Johnson, and Roosevelt and Wilson and Lincoln and probably most significantly of all the father of central banking Alexander Hamilton — Obama certainly has not improved matters.

And it should be obvious to anyone paying attention that Romney — who claims he would support the NDAA and the PATRIOT Act, that he wants to attack Iran, and has hired many ex-Bush staffers, as well as winning the endorsement of both Jeb and George H.W. Bush, and bizarrely claiming to want to start a trade war with China — is cut from the exact same cloth as Bush and Obama.

This is a dead election. Here’s hoping that Ron Paul — who continues to pick up delegates in the Republican race even while being ignored by the mainstream media who would rather talk about Obama’s posturing on gay rights — can cause some mayhem.

Paul vs Paul: Round #2

Bloomberg viewers estimate that Ron Paul was the winner of the clash of the Pauls (Ron Paul fans, of course, are very studious at phoning in their support him for). But that is very much beside the point. This wasn’t really a debate. Other than the fascinating moment where Krugman denied defending the economic policies of Diocletian, very little new was said, and the two combatants mainly talked past each other.

The first debate happened early last decade.

To wit:

And so, round two. Krugman wants more inflation; Paul is scared of the prospect. From Paul’s FT editorial yesterday:

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

Or, as Professor Krugman sees it:

Would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recover.

Ron Paul believes that inflationary interventions into the dollar economy will have unpredictable and dangerous ramifications. Paul Krugman believes that a little more inflation will spur economic activity and decrease residual debt overhang. Krugman gives no credence to the prospect of inflation spiralling out of hand, or of such policies triggering other deleterious side-effects, like a currency crisis.

The prospect of a currency crisis is a topic I have covered in depth lately: as more Eurasian nations ditch the dollar as reserve currency, more dollars (there are $5 trillion floating around Asia, in comparison to a domestic monetary base of just $1.8 trillion — the dollar is an absurdly internationalised currency) will be making their way back into the domestic American economy. Will that have an impact?

I don’t really know how much of this is to do with the Fed’s reflationary policies, and how much is to do with the United States’ endangered role as global hegemon. I tend to think that the dollar hegemony has always been backed by American military force, and with the American military overstretched, the dollar’s role comes into question. If America can’t play the global policeman for global trade, why would the dollar be the currency on global trade?

However it must be noted that America’s creditors do believe that their assets are threatened by the Fed’s inflationism.

As the Telegraph noted last year:

There has been a hostile reaction by China, Brazil and Germany, among others, to the Federal Reserve’s decision to resume quantitative easing.

Or as a Xinhua editorial rather bluntly put it:

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

Of course, China may be totally bluffing, or getting it wrong on the danger of inflation to its assets.

If the reflationism is angering the exporter nations perhaps it is a cause for concern. After all, if America’s consumption-based economy is dependent on China’s continued exportation, and Krugman is advocating inflating away their debt-denominated financial assets, then to what extent do Krugman’s suggestions imperil the trans-Pacific consumer-producer relationship?

And this is a crucial matter — there is nothing, I think, more crucial than the free availability of goods and resources through the trade infrastructure. Getting into a fight with China is risky.

As commenter Thomas P. Seager noted yesterday:

[The situation today] is directly analogous to the first Oil Shock in 1973. In the decades prior, the US had been a major oil producer. However, efficiency gains and discoveries overseas resulting in an incrementally increasing dependence of foreign petroleum. Price signals failed to materialize that would caution policy makers and industrialists of the risks.

Then, the disruption of oil supplies from the Middle East caused tremendous economic dislocations.

Manufacturing is undergoing the same process. The supply chain disruption from the Japanese earthquake and Tsunami was merely a warning shot. Imagine if S Korean manufacturing were taken off-line for any length of time (a plausible scenario). The disruption to US industry would be catastrophic.

In the name of increased efficiency, we have introduced brittleness.

Time will tell whether Krugman’s desire for more inflation is wise or not.

Krugman, Diocletian & Neofeudalism

The entire economics world is abuzz about the intriguing smackdown between Paul Krugman and Ron Paul on Bloomberg. The Guardian summarises:

  • Ron Paul said it’s pretentious for anyone to think they know what inflation should be and what the ideal level for the money supply is.
  • Paul Krugman replied that it’s not pretentious, it’s necessary. He accused Paul of living in a fantasy world, of wanting to turn back the clock 150 years. He said the advent of modern currencies and nation-states made an unmanaged economy an impracticable idea.
  • Paul accused the Fed of perpetrating “fraud,” in part by screwing with the value of the dollar, so people who save get hurt. He stopped short of calling for an immediate end to the Fed, saying that for now, competition of currencies – and banking structures – should be allowed in the US.
  • Krugman brought up Milton Friedman, who traversed the ideological spectrum to criticize the Fed for not doing enough during the Great Depression. It’s the same criticism Krugman is leveling at the Fed now. “It’s really telling that in America right now, Milton Friedman would count as being on the far left in monetary policy,” Krugman said.
  • Paul’s central point, that the Fed hurts Main Street by focusing on the welfare of Wall Street, is well taken. Krugman’s point that the Fed is needed to steer the economy and has done a better job overall than Congress, in any case, is also well taken.

I find it quite disappointing that there has not been more discussion in the media of the idea — something Ron Paul alluded to — that most of the problems we face today are extensions of the market’s failure to liquidate in 2008. Bailouts and interventionism has left the system (and many of the companies within it) a zombified wreck. Why are we talking about residual debt overhang? Most of it would have been razed in 2008 had the market been allowed to liquidate. Worse, when you bail out economic failures — and as far as I’m concerned, everyone who would have been wiped out by the shadow banking collapse is an economic failure — you obliterate the market mechanism. Should it really be any surprise that money isn’t flowing to where it’s needed?

A whole host of previously illiquid zombie banks, corporations and shadow banks are holding onto trillions of dollars as a liquidity buffer. So instead of being used to finance useful and productive endeavours, the money is just sitting there. This is reflected in the levels of excess reserves banks are holding (presently at an all-time high), as well as the velocity of money, which is at a postwar low:

Krugman’s view that introducing more money into the economy and scaring hoarders into spending more is not guaranteed to achieve any boost in productivity.

As I wrote last month:

The fundamental problem at the heart of this is that the Fed is trying to encourage risk taking by making it difficult to allow small-scale market participants from amassing the capital necessary to take risk. That’s why we’re seeing domestic equity outflows. And so the only people with the apparatus to invest and create jobs are large institutions, banks and corporations, which they are patently not doing.

Would more easing convince them to do that? Probably not. If you’re a multinational corporation with access to foreign markets where input costs are significantly cheaper, why would you invest in the expensive, over-regulated American market other than to offload the products you’ve manufactured abroad?

So will (even deeper) negative real rates cause money to start flowing? Probably — but probably mostly abroad — so probably without the benefits of domestic investment and job creation.

Nor is it guaranteed to achieve any great boost in debt relief.

As Dan Kervick wrote for Naked Capitalism last month:

Inflation only reduces debt overhang in a significant way for households who are fortunate enough to see their nominal wages rise along with the general rise in prices. In today’s economy, workers are frequently not so fortunate.

Again, I have to bring this back to why we are even talking about debt relief. The 2008 crash was a natural form of debt-relief; the 2008 bailouts, and ongoing QE and Twist programs (which contrary to Professor Krugman’s apologetics really do transfer wealth from the middle classes to Wall Street) crystallised the debt burden born from a bubble created by Greenspan’s easy money policies. There would be no need for a debt jubilee (either an absolute one, or a Krugmanite (hyper)inflationary one) if we had simply let the market do its work. A legitimate function for government would have at most been to bail out account holders, provide a welfare net for poor people (never poor corporations) and let bankruptcy courts and markets do the rest. Instead, the central planners in Washington decided they knew best.

The key moment in the debate?

I am not a defender of the economic policies of the emperor Diocletian. So let’s just make that clear.

Paul Krugman

Actually you are.

Ron Paul

Ron Paul is dead right. Krugman and the bailout-happy regime for which he stands are absolutely following in the spirit of Diocletian.

From Dennis Gartman:

Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 301 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control.

Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

While Krugman does not by any means endorse the level of centralism that Diocletian introduced, his defence of bailouts, his insistence on the planning of interest rates and inflation, and (most frighteningly) his insistence that war can be an economic stimulus (in reality, war is a capital destroyer) all put him firmly in Diocletian’s economic planning camp.

So how did Diocletian’s economic program work out?

Well, I think it is fair to say even without modern data that — just as Krugman desires — Diocletian’s measures boosted aggregate demand through public works and — just as Krugman desires — it introduced inflation.

Diocletian’s mass minting of coins of low metallic value continued to increase inflation, and the maximum prices in the Edict were apparently too low.

Merchants either stopped producing goods, sold their goods illegally, or used barter. The Edict tended to disrupt trade and commerce, especially among merchants. It is safe to assume that a gray market economy evolved out of the edict at least between merchants.

And certainly Rome lived for almost 150 years after Diocletian. However the long term effects of Diocletian’s economic program were dire:

Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.

Have the 2008 bailouts done the same thing, cementing a new feudal aristocracy of bankers, financiers and too-big-to-fail zombies, alongside a serf class that exists to fund the excesses of the financial and corporate elite?

Only time will tell.

Why the Left Misunderstands Income Inequality

There is a widely-held notion on the political left that the key economic problem that our civilisation faces is income inequality.

To wit:

America emerged from the Great Depression and the Second World War with a much more equal distribution of income than it had in the 1920s; our society became middle-class in a way it hadn’t been before. This new, more equal society persisted for 30 years. But then we began pulling apart, with huge income gains for those with already high incomes. As the Congressional Budget Office has documented, the 1 percent — the group implicitly singled out in the slogan “We are the 99 percent” — saw its real income nearly quadruple between 1979 and 2007, dwarfing the very modest gains of ordinary Americans. Other evidence shows that within the 1 percent, the richest 0.1 percent and the richest 0.01 percent saw even larger gains.

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

I mostly agree that income inequality is a huge problem, although I believe that it is a symptom of a wider malaise. But income inequality is an important symptom of that wider malaise.

Here’s the key chart:

However it is just as important, perhaps more important to identify the causes of the income inequality.

I have my own pet theory:

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.

However the dominant explanation on the left is that this is down to the tax structure. I can’t falsify this theory, because the data supports it:

But why has the government chosen to tax corporations less, and payrolls more?

Who owns the government? Political donors — they finance the political system. Before one vote is cast candidates tailor their platforms to meet the criteria of donors. Who are political donors? Well, they are people with spare capital to expend in the name of getting politicians elected.

Here’s a side-by-side comparison of the presumptive 2012 Presidential nominees:

(Even bigger money flows through the Super PACs. A full breakdown of Super PAC donors can be found here; the same donor profile emerges).

So who are the biggest donors? Banks & large corporations: the very people who have benefited most from the post-1971 tidal wave of fiat credit creation.

So not only has an exorbitantly high proportion of new credit gone into corporate and financial profits, but the beneficiaries have used these fruits to buy out the political system, thus ensuring that they keep an even higher proportion of their incomes, while making up for this slump with greater borrowing, and greater taxation of payrolls.

The political left — epitomised, I suppose, by the Occupy movement — often call for “taking the money out of politics”. By this, they seem to mean holding elections that are not funded by private money, where all candidates are given the same resources. The reality of this, of course, is that such a measure would require a change in the Constitution, as privately-funded political advertising is protected speech under the First Amendment.

But let’s assume — just for the sake of argument — that a law “taking the money out of politics” could be enacted by simple majorities in the House, the Senate, and a Presidential signature (after all, President Obama’s legislative program has not maintained much respect for the original intent of the U.S. Constitution). Even under those implausible circumstances, why would Congress pass such a law when the entire political system is dominated by financial donors who want their money to very much be in politics? After all, it is not just for the sake of tax avoidance — government largesse produces lucrative contracts for contractors. The more money the government has to redistribute, the more incentive there is to spend money to get your people into office redistributing it, and government has more money to distribute — both in absolute terms, and as a percentage of GDP — than at any time since World War II.

The other (and simpler) proposed solution from the left is raising taxes on the rich, so that they pay a “fair share”. There are two problems with this. Firstly, that raising taxes during an economic depression is contractionary, and will (like the misguided and destructive European austerity programs, which of course include tax hikes) depress economic conditions further. And even if this was a good proposal (it isn’t), the political class will fiercely resist such proposals. Today, the Democratic-controlled Senate voted down the so-called Buffett Rule, that would have imposed a 30% floor on taxation for incomes over $250,000. (Buffett — as a top recipient of Federal Reserve bailout cash — would have no problem paying such a rate, unlike those far poorer than him who never took a penny of bailout money. Buffett would do well to spend less time in the bath thinking about Becky Quick, and more time using his capital to create jobs, to end this depression.)

Income inequality is a symptom of a grave problem: corporatism.

From Professors Ammous and Phelps:

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

A realistic program to  “take the money out of politics” — in other words, to return America’s form of government to its original constitutional intent, like the program advocated by Ron Paul — would do a lot to decapitate corporate power and the military-industrial-financial-corporate complex, who are mostly dependent upon government largesse, favourable regulation, bailouts, and moral-hazard-creating fictions like limited liability — for their very existence. But that won’t fly with either the political kingmakers, or the welfare-loving hordes of  voters (and often for good reason — many of us have paid taxes toward welfare all our lives, and don’t want to lose out of something we have paid for).

The real conclusion of this is that the status quo is not sustainable. Corporatism and oligopoly is almost never sustainable, because of the dire social consequences. Today, almost 20% of young people are unemployed, wasting on the scrapheap. The median net worth of the young is lower than it was 30 years ago. The number of long-term unemployed has spiked to an all-time-high. Prison populations are at all time highs — and the highest in the world, both proportionally, and in absolute terms. America’s former industrial belt rusts; American manufacturing (what’s left of it) has often been reduced to re-assembling foreign components. America is heavily dependent on foreign oil. The American imperial machine is suffering from a lack of manpower. America’s strengths are melting away in a firestorm of misguided central planning, imperial waste, and corporate corruption. America’s social culture is fiery and combustible and individualistic. Young people denied opportunity by a broken system will do something about it. Occupy Wall Street and the 2012 Ron Paul Presidential campaigns were the first manifestations of the jilted generation dabbling in politics.

The political left misunderstands the causes of income inequality — confused by the belief that government can somehow challenge the corporate and financial power it created in the first place — and thus proposes politically unrealistic (non-) solutions, particularly campaign finance reform, and raising taxes on the rich and corporations. Yes, the left are well-intentioned. Yes, they identify many of the right problems.  But how can government effectively regulate or challenge the power of the financial sector, megabanks and large corporations, when government is almost invariably composed of the favourite sons of those organisations? How can anyone seriously expect a beneficiary of the oligopolies — whether it’s Obama, McCain, Romney, Bush, Gore, Kerry, or any of the establishment Washingtonian crowd — to not favour their donors, and their personal and familial interests? How can we not expect them to favour the system that they emerged through, and which favoured them?

In reality, the system of corporatism that created the income inequality will inevitably degenerate of its own accord. The only question is when…