Or, “In the short run, are we all toast?”
Thursday mornings are a good time for me to really peruse the internet and soak in the news and blogs and so on. It’s usually pretty depressing, today especially so.
Brad Delong writes “Future Economists Will Probably Call This Decade The Longest Depression” in The Huffington Post, and lays out the challenge confronting Western economies:
What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.
The second task will be one of political organization. For until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, “not rooted in economics, but in politics and ideology.”
Stiglitz is, as usual, completely right. But looking at the (beautifully presented) material over at the Peter G. Peterson Institute on “The Fiscal and Economic Challenge” you’d think it was rather a simple matter of choosing an optimal mix of spending cuts and tax reforms to restore economic growth. For me, the problem with that view is painfully obvious: people in lower income brackets resent those with higher incomes, and so want them to pay higher taxes; conversely, people in higher income tax brackets want to cut spending, in particular social welfare spending that redistributes income to people in lower income brackets. Businesses, especially large and/or wealthy businesses, are forever arguing that their taxes are too high – which is why most of the Federal government’s revenue comes from personal income taxes.
In my view, what needs to be taxed at a higher rate is wealth, not income. And, following Piketty, only a global wealth tax would be effective, since otherwise people would simply move stores of wealth out of jurisdictions that would tax them, i.e. the Bahamas, Switzerland, and so on. That is, on the one hand, a Utopian solution to a very immediate problem, but on the other hand, every other solution seems to rely on reactionary populism. Dani Rodrik, in a piece over at Project Syndicate, writes:
The appeal of populists is that they give voice to the anger of the excluded. They offer a grand narrative as well as concrete, if misleading and often dangerous, solutions. Mainstream politicians will not regain lost ground until they, too, offer serious solutions that provide room for hope. They should no longer hide behind technology or unstoppable globalization, and they must be willing to be bold and entertain large-scale reforms in the way the domestic and global economy are run.
If one lesson of history is the danger of globalization running amok, another is the malleability of capitalism. It was the New Deal, the welfare state, and controlled globalization (under the Bretton Woods regime) that eventually gave market-oriented societies a new lease on life and produced the post-war boom. It was not tinkering and minor modification of existing policies that produced these achievements, but radical institutional engineering.
A major problem here is that 1) voters in the United States are not at all prepared to radically reconfigure existing institutions and 2) current political organization is arranged around actually existing institutions. The political crisis in Illinois is instructive here: the Governor has besieged the legislature by rejecting the possibility of a State budget without disenfranchising labor unions. The unions have been the basis of political organization for the Democratic Party in Illinois for decades – what the Governor is essentially demanding is that the Democratic legislators voluntarily betray their constituents, or he will simply achieve austerity by fiat (or, in this case, veto). Within the conventional political framework there isn’t any way to break the stalemate – higher income voters resent lower income voters, and vice versa. And although in the short term privileged higher income voters may be better prepared, in the medium and long term they also stand to lose a great deal. As State funded universities (as well as public schools generally) close, as social stability is eroded by the lack of steady employment and public investment in basic infrastructure, everybody will be effected in one way or another.
One thinks of a segment of the American population angered by the eight years of Barack Obama’s presidency, a group that is now feeling vengeful. And one also thinks of the white supremacist, segregationist, nativist strain represented by former Ku Klux Klan leader, David Duke, whose noisy support Trump was so hesitant to reject last week and for whose constituency Trump may be a make-or-break candidate.
One easily gets the sense, when trying to take seriously what little is known about the Trump platform, of a country turning in on itself, walling itself off, and ultimately impoverishing itself by chasing away the Chinese, Muslims, Mexicans, and others who have contributed to the vast melting pot that the most globalized country on the planet has alchemized, in Silicon Valley and elsewhere, into prodigious wealth.
But, as is so often the case with the United States, there is in the Trump phenomenon an element that extends beyond the American national scene. So one is tempted to ask whether Trumpism might not also be the harbinger – or perhaps even the apotheosis – of a truly new episode in world politics.
Meanwhile, I think Bernie Sanders has turned a corner with his victory in the Michigan primary. Hillary Clinton looked desperate in the Univision debate last night, attacking Sanders, making promises she can’t keep on immigration reform, and coming across like the moderate establishment politician (that she is) that many voters this year are clearly rejecting. The fact that the polls were wrong about Michigan really feeds the narrative that the establishment is being rejected by voters. Sanders appears poised to stage an inspiring come-from-behind victory in the Democratic primary. Of course, once he takes down Hillary Clinton, he will have served his purpose to capitalism, and will be summarily crushed in the general election, whilst conveniently serving as a perfectly divisive figure for American liberalism. The lower-middle class will want the party to represent their resentments for the upper-middle class, and the upper-middle class will resent them for it. Are we witnessing the end of the Party system? It sure looks like that to me – but I’ve been wrong before, so maybe not.
Fiscal austerity is certainly the wrong policy for anyone who desires political and economic stability, but there doesn’t seem to be any way around it. The United States is today in a perfect position to engage in public investment programs, but it won’t, because of political resistance to anything of the sort. In my view, before any forward progress can be made on this front politically, this fact must be recognized and understood. But beyond that, it must also be acknowledged that a program of public investment capable of catalyzing a sustained economic expansion would constitute a political realignment, and a substantive change in the basic structure of society.