ECONOMICS 101 - Class in now in session. Turn off your cell phones. Turn on your brains.
A healthy capitalist economy has a set amount of money circulating in it. Taking money away from the system is supposed to increase the value of the money remaining. Putting more money into the system devalues the money.
This should be obvious. But only the latter happens. The former does not. The value of money remaining in the system does not go up when money is removed from the system. That means there is less money available in the system to buy things. Where did the money go? Into the pockets and "investments" of the wealthy.
"So what?" you ask. "It's their reward for working hard."
Taking money out of the system and parking it in bank accounts, investor accounts and such reduces the amount of money left behind. Without a concurrent INCREASE in the value of the remaining money, the money flowing isn't enough to sustain a healthy capitalist economy.
"Okay, prove it," you say.
In 1980, the wealthiest 20% of Americans controlled approximately 65% of the nation's total wealth. This left 35% or so for the remaining 80% of Americans. Today, the wealthiest 20% of Americans control over 93% of the total wealth of America, leaving a paltry 7% at best for the other 80%.
"Again, so what?" you say. "The wealthy got wealthier. The money's still there."
Ah, but it is NOT there. And in order to understand where "there" is, we need to look at how the money flows in a healthy capitalist in order to actually understand the ramifications of this shift in wealth. (Which, by the way, was the largest shift in human history).
Money only circulates when it reaches all levels of the economy from consumer to business and back to consumer, with some going up the tree to the wealthy to eventually come back down. So Joe Average American, who spends the majority of his income, has to spend money. That money goes into a business for their goods and services. That money then goes into the pockets of another Joe Average American in the form of wages, to be recirculated again. Toss in a few hundred million Joe Average Americans, and you have a healthy capitalist economy. The money that goes up the tree is used to improve the business model to make things cheaper and more affordable. (This is the THEORY behind supply-side economics and ideally what's supposed to happen.) That then presents a boon for the Joe Average American's wallet and spending is stimulated. The more people spend, the more demand is generated and the more demand is generated, the greater the chances of having new jobs open up, thus creating more wages to be spent and the great circle of Capitalism is put into action.
It's important to note one more thing: Although the wealthy do spend quite a lot (comparatively speaking), they do not spend enough in enough places to maintain the economy. The overwhelming majority of their income is banked or invested. Neither circulates money inside the economy by creating any substantial demand across a wide enough spectrum of businesses to impact overall economic growth. It never has in the past. It never will in the future. The wealthy just aren't spenders like Joe Average American is. If they were, money would be circulating and that wealth inequity would be a lot less unequal than it is today.
Let's now go back to what's happened in the last 33 years and how that impacts our capitalist model.
The money has been moved up the tree. It isn't coming down. The investments made in business mostly only pad the profits, or were used to off-shore jobs - especially in manufacturing and product support. That put a lot of JAA's out of work. They don't spend money because they have none. Instead they rely on the unspoken third tier of OUR capitalist economy - the government - for unemployment and other public assistance to survive. While this has a positive effect on the economy in the short-term, taxes are used to pay for it, and with more people out of work, taxes are needed most when there are fewer who can pay.
Except the wealthy, of course, who have been taxed as much as 96% during times of national emergency.
Without money circulating in the system, the system as a whole withers up and dies. Austerity further cuts taxpayer assistance, reducing the money circulating in the economy. it keeps money that would otherwise flow in the system locked up because the vast amount of that circulating money is now not circulating the same way in the hands of the wealthy, who, as has been pointed out, aren't spending enough of what they have to do any good for the economy. Increasing taxes across the board takes money away from those who actually do the spending, leaving them with less to spend and further locking up more funds in the accounts of the non-circulating wealthy. In today's dollars, the difference that 28% of total national wealth which went up the tree from the 80% to the 20% and stayed there amounts to about $54 trillion dollars that Joe Average American no longer has control of to spend. That's a lot of money not circulating anymore. If you put even 10% of that into the pockets of Americans, the economy would take off like a rocket.
Let's face it, if businesses actually hired more people when they have money to do it, we'd have no unemployment problems today. Right now, it's an unsustainable circle-jerk where the wealthy gives money to businesses for investment returns and the businesses basically give it back to the wealthy. Howsoever you care to envision it, that money is NOT being spent in a way that generates demand. The money doesn't flow that way in investment or even banking. Unless it's paid out in wages to be spent, it never circulates in a way that helps the economy.
And without money being spent to generate demand, this economy will not go.
This is why austerity is not a sound economic principle. And all evidence proves it. Further, the prime "evidence" conservatives have been endlessly using that austerity is better than deficit spending in an unhealthy economy has been busted. It had a major math error in it. And this has caused a lot of consternation among the Europeans who have been using that evidence upon which to base their economic policies while watching the EU disintegrate around them.
The other side of the coin here is that if people have a lot of good, well-paid jobs (which are NOT opening up these days), and with reasonable government spending, deficits can be eliminated by prudent budgets, and debts can be paid off, because more taxes than ever before will be generated.
As it appears, "tax and spend" is a much more sound economic policy for a capitalist economy than cutting taxes or advocating austerity. But it must be done with proper moderation in both who and what you tax and how and where you spend to be most effective. Putting money into the pockets of the primary spenders on a reliable basis will do it best. The best proposition is, bluntly, wealth redistribution. Take the non-circulating money and put it back into circulation - likely through an increase in capital gains for above a certain income and by eliminating the maximum taxable income cap on social security, while concurrently lowering taxes on taxpayers below the upper 20% threshold. Business are cash-flush now. They don't need the investments. Capital gains can be increased massively to help put more money in the pockets of the WORKING poor, and stimulate the economy. As for the elimination of the Social Security caps, call it helping your fellow Americans who have also paid into that and, by getting paid from it, helped the wealthy become wealthy in the first place through their spending.
This ends the class. You must know and research this material on your own time. There will be a test in the future.
I now offer for your consideration, the following observations:
Whether future congresses will be responsible and pass socially progressive, fiscally responsible budgets is arguable, but best evidence is that if we get a moderate like Clinton (Bill, not Hillary), during times of prosperity, the deficit can be eliminated and the debt reduced. He did it twice in his presidency.
What makes me wonder about the conservative commitment to the idea is why the conservatives haven't done it - ever - in the history of the nation. Maybe because when you eliminate sources of spending revenue through austerity, and favor tying up circulating (as in spending) funds through favoring the less economically helpful wealthy, you kill a capitalist economy.
This is, however, reminiscent of another kind of economy - a dictatorship.
Extra credit will be given for anyone who can successfully, and intelligently, refute any idea or theory posted above.
Good luck with that.
Class dismissed.
