1. Definition of capital (as per Marx) is self increasing value. There is a lot to unpack here, as it is a Hegelian definition, but let's set it aside. The point is that if you accept that the way capital increases is profits, and profits are derived from added value, labour theory of value yada yada, you of course arrive at suppressed wages. If you drop the labour theory of value requirement, you end if profits being derived from wherever, for example, from exploiting externalities (pumping sewage into rivers for free for example). This lifts the constraint of capitalism destroying itself in the particualr manner predicted by Marx, leaving the general conclusion intact - trees don't grow to the sky, capital can't increase indefinitely.
2. There a very compelling school of thought, that gathers substance in terms of evidence day by day, that FDR and social democracy in general was a conscious reaction to Communism. FDR wasn't the first, btw, social democratic reform started everywhere in Europe, in particular in England, after the War and the Russian revolution, US was a latecomer to the party. To put it simply, the ruling class got so scared by what happened in Russia and almost happened across Europe, that they had to react. This reaction got irreversible after the Great Depression and WW2, where Soviet Union and its system was a clear winner and thus became attractive once more.
3. Another MAJOR appeal of Marxism after WW1 was its prediction of the Great War. That was as clear as day, one of the rare occasions where a societal theory can be tested in reality. And it also provided a recipe for the prevention of this horrors repetition, with such prevention being foremost in the mind of any thinking person back then.
Which leaves me personally quite pessimistic this time around - there is no challenger to the system. China is not communist, Russia is thouroughly capitalist, so we are hurtling towards a WW1 style of conflict, where the economically exploitable world has become too small, and in order for capital to grow (see above), you have to take that growth space from someone else.
Maybe we should stop fighting wars all over the world.
Wages are growing across the board, but it is offset by inflation and those without (inflating) assets are left behind.
But inflation is a necessary feature of our debt based monetary system. The money supply has to grow by the blended interest rate of the outstanding debt or face collapse.
As I see it, our problems are the result of out of control spending, not lack of taxation.
That is why western industry is uncompetitive and the East will eat our lunch.
There is no example of a society having improved its prosperity through higher taxation.
I would argue that the supply side phenomenon of inflation is 99% political. It’s not a necessary feature of monetary architecture by all means; inflation is the result of policy error, ignorance of financial literacy and indoctrinations institutionalized by Central Bankers. The origin of inflation is derived from rent-seeking policies, when new money is created for refinancing existing assets, because no work was done to earn and receive the credit. Only the money that exists in circulation should be used for refinancing existing assets, this would essentially remove the assets from the inflation equation and reduce access to credit that sustains higher rents.
The monolithic dollar system is designed and geared via monetary policy, which varies domestically to maintain its hegemonic devices over global trade flows, and to extract exuberant rents and capital gains from the worker; 2-3% target inflation (headline, not actual) is essentially the rate of usury, or more bluntly, the architecture that enables the theft of production and savings, its policies are fraudulent from its outset.
Germany and China for example were permitted and facilitated by the Central Bank Hierarchy to create thousands of small banks that would concentrate allocations of capital, creating money to support productive manufacturing, coupled with supportive government policy. The shift of industrialization is the result of policy error and theft, manufacturing as a share of GDP was declining in all developed countries because the weight of inflation (usury) eventually tipped the scale, reducing productivity in the face of ill-gotten rents and gains, just more quickly in the United States.
Wearing the Marxist hat, this is because the capitalist mode of production in the developed world is no longer capable of contributing as much productive growth to the world economy. But Marx fails to recognize the deficiency of capital allocation that causes the decline of productivity. The key contributor to the flattening the decline of manufacturing as a % of GDP globally has been the introduction of China into the global marketplace. It is no surprise that living standards were rising most quickly in this area of the world (manufacturing is synonymous with economic sovereignty), for it is here where the bulk of productive growth is occurring.
In order for monetary architecture to facilitate usury, it needs to exploit fresh markets where it can rotate industrialization capitalization policy, but the world is getting smaller and geopolitical tensions are becoming more dangerous because the overproduction of usury cannot be sustained, and warring elites will jockey their positions to fight for the wealth and power and the system architecture that enables them to steal from their people and abroad.
Crisis comes before revolution and revolution according to Tolstoy is a moral one and I hope this time around we can expose the lies.
“There can be only one permanent revolution — a moral one; the regeneration of the inner man. How is this revolution to take place? Nobody knows how it will take place in humanity, but every man feels it clearly in himself. And yet in our world everybody thinks of changing humanity, and nobody thinks of changing himself.”
Good post - worry that it is already too late. We're bound to live through a world created by the unintended consequences of myopic and self-centered decision-making by the boomers and the status-quo-ists. But I do think that a fourth turning / generational conflict happens differently today than it did last time it was around, due to technology and societal changes. Yes, assholes will asshole, old men will push for war and sycophants will do their trade, but perhaps the crisis this time can avoid the worst of our past. Worth hoping for at least.
"Democracy is in crisis throughout the industrialized world because its performance has fallen short of what was promised. Far-right and extremist parties are benefiting from the fact that the center left and center right are now associated with wage stagnation, rising inequality, and other unfavorable trends...."
“Hence, the risk to capitalism is not collapsing wages and a deflationary spiral, but the collapse in government credit worthiness driven by capitalism’s urge to minimise taxes. “
if you go back 50 years to 1974 federal receipts were 17% of gdp and outlays were 17.4%. In the most recent quarter receipts were 16.2% and outlays 22.4%.
So outlays are up 29% and receipts are down 4.6%. Corporate taxes in 1974 were 40 billion. On an inflation adjusted basis that’s about 265 billion dollars. We collected 409 billion in 2023 or more than 50% more than 50 years ago.
It really is the spending. Even doubling corporate taxes without any economic impact at all would barely make a dent.
And yet voters want more money. They are rejecting austerity... so the money has to come from somewhere. Arguments that spending is much higher than in the 1970s won't wash with voters under the age of 30
Well, sometimes reality bites... What's the alternative, we all play make believe until our democracy collapses from wishful thinking?
"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury." (attributed to Alexander Fraser Tytler)
That's the weird thing... it's corporates that have worked out that they can get all the largesse they want - while leaving the average voter worse off.
In the upcoming election in the UK the age at which.the a voter becomes more likely to vote Conservative will be 69. This.up from 45 last time. I would note many 40yo still rent. And this has caused tory voters to naturally decline....
Wondering if you have read David Shor; he was some data whiz kid who went to college when he was 12 and was the Obama campaign's internal Nate Silver at the age of 20. People don't read him closely and just focus on the controversies, but he convinced me that people aren't that "materialistic"... at least in America. People just assert that we are materialistic without looking for contrary evidence.
From a podcast appearance of his:
"And like in 2016, something I really like to say is that it would be really ideologically convenient to say the reason why we lost all these working class white voters was because the Democratic Party pushed free trade and de-industrialization and neo-liberalism and these people were responding to the material conditions.
And that's a good line. It's a good narrative. It's what I would claim if I was on television. I don't know. If I was a politician, that's what I would say. But I think the empirical case for materialism is really weak.
It's definitely true that most of the Midwest really suffered large losses over Obama's term and I think over a 30 year period. There's like one county in Indiana where I think the share of the population that worked in manufacturing dropped by half. And I remember I visited this place and I met someone who used to work at factory and now he works at a chicken farm, he doesn't like working in a chicken farm.
But other parts of the country actually really benefited. Like in Eastern Iowa, the unemployment rate was 2%. And the reason is that they grow soybeans and they can export soybeans to China. So, they were actually doing very well. And I think there's similar places like the Grand Rapids suburbs, they manufactured furniture and they were able to export it.
And those places swung against Democrats just as much as the places that were really wracked by globalization. And if you do regressions, it's very, very hard to find any link between these material changes in conditions and how people voted. The reason people changed their votes were because of these values, whether it's racial, or resentment, or openness or whatever, it was cultural, it wasn't material."
He has some other thoughts that I'll crudely summarize. Lot of left leaning policy changes that poll really well are dem propaganda; they are biased representations of how people really feel and how those things would do in the wild: Medicare for All, Raising minimum wage... you can see this with the failure of the CTC; most left polling has that policy as really popular; he has a poll that done fairly it is really unpopular based on fairness intuitions.
He has also suggested that even if like some policy like taxing the rich is really popular or free insulin, the average voter is pretty susceptible to the corporates ideological bent. Basically, corporates can convince regular people that those are bad policies. People are not that smart or coherent in essence. The fact that large groups of right wingers globally are now pro-Russia is kind of the best evidence that people are easily "influenced" and should be surprising given your Rambo, Rocky IV experience.
Interesting viewpoint but there are some major areas that were unaddressed that are required to form the complete picture. First is the intent of taxes; are these dollars productive for the economy? The point of collective taxation in a free society is to address areas where the value capture of the free market can’t be determined where a collective need exists, or where cost externalities exist but are to dispersed to be covered by the those capturing the value. Think roads or other basic infrastructure as an example. However, governments, having their own interests are often pushed to expand into areas where a private market solution already exists. When that happens, entrenched interests form and consolidate political power. Large corporations often use this to their advantage to keep new competitors at bay. As government takes over large swaths of the economy, the benefits of completion receed and the ability to increase value and lower the cost at the same time disappears. What remains is large pools of funds collected by the government used inefficiently to the benefit of the politically connected. The second part of the picture not addressed is the role of central banks and the money supply. The wealth creation and the widening wealth gap around the world (and the subsequent rise in populist appeal) is due to the long period of Zero Interest economic stimulus. Free money. When there is no cost to capital, risk taking goes way up and the over investment creates large asset bubbles. And who benefits from rapid appreciation is asset values? Asset owners. Who who are the asset owners? They are disproportionately the wealthy. In rue last decade there has been more than a 5 fold increase in billionaires. Well over 2500 around the world. There is a positive rail wealth effect to this as for every billionaire created there are x number of millionaires, and so on. But for the most part, this lengthening of the pyramid was not true economic productivity but just more dollars chasing the same assets.
The true solution is simply the tax code. Take away the places for people to tax advantage of the tax code to legally pay less taxes. This also reduces the advantages of the politically connected. A simplified tax code that does change frequently also provides certainty that clears the road for steady investment. Next is to reduce the size of government to where in doesn’t compete with the private sector where it doesn’t need to. Let the private sector innovate to provide solutions and let the market forces work to improve products and services while lowering the cost. Less Marx and more Millie.
I am a fan of economic theory. But most economic theory is co-opted by politicians for their own agendas. If it's popular then it gets enacted. Keynesian theory was in line with.public mood in 1940s. Milton in the 1980s... and MMT in 2020s? Remains to be seen. There is never a.right answer.... just a politically popula answer
Very interesting analysis. When I think of corporate tax solutions I think that taxing revenue rather than earnings would help alleviate the problem of avoidance better than most things
Effectively (especially if you take Trump's words at face value) the US will return to a pre-20th century system of revenue raising, taxing transactions, gross revenue (vs accounting profits) and trade tariffs.
The problem is that this system is inherently regressive, the punter earning US$50k per annum doesn't pay much income tax as is under the present system and will be slugged heavily on tariffs and stamp/excise duties. Whereas the private equity VP & ophthalmologist earning US$500k per annum will get a very large tax cut. Hardly a pro-labour shift!
I think it highly debatable that the west would have done pro labour reforms without the threat of an anti capitalist revolution, which was real in the 1930’s. I don’t see any such threat today.
Great piece. But when you think about FDR's ability to enact quasi-socialist policies, reduce and power of the corporate sector, rebalance the share of GDP away from capital back towards labour and hold off a formal Socialist govt in the US for a century, i think one must remember that he benefitted from not having a number of constraints that exist today:
1. He did not operate in a hyper-financialized economy e.g where CEO/worker compensation plans were so explicitly linked to higher share prices or where a major % of retirement wealth was held in stock based 401-ks
2. He governed at a time when the potential capacity growth of the US economy was huge (e.g. mining + manufacturing) and could be more straightforwardly unlocked, allowing for nominal GDP growth in the 5-10% range consistently, rather than the 0-5% range we have had for the past 20 odd years.
3. He did not operate in such a globalized world as today where (corporate and HNW) capital can move so frictionlessly and quickly between different jurisdictions to optimize marginal tax rates and where corporate lobbyists were able to so well perform 'regulatory capture' in their place of domicile.
Point 1 is important because it underlines that whereas FDR came to power after had collapsed by 85% between 1929 and 1933 (and therefore arrived at a point where he could 'direct' the distribution of gains from the recovery that followed), today's politicians cannot at all afford for the stock market to collapse, given that about half of the country's retirees are counting on that paper wealth to fund their retirements in an otherwise bankrupt retirement system.
Point 2 is important because it underlines that whereas FDR governed a country accelerating towards peak maturity and hence able to rebalance the capital/labour shares of a faster and sustainably growing pie, today the US is a post-peak-maturity economy much less able to generate supply side driven growth (except via immigration which is in itself causing negative political feedback loops)
Point 3 is important because it underlines just how much inertia exists in the present system against overturning corporate power and their regulatory capture. We have already seen some signs of this in the Europe for example when both Panasonic and Sony relocated their European headquarters to Amsterdam from London after Brexit in 2016. Or for a more recent example, we can ask why Rachel Reeves and a supposedly 'centre-left' new Labour govt in the UK has been ingratiating themselves with the UK corporate sector and giving them platitudes, instead of instructing them to reduce operating margins and increase real wages to workers?
I'm sure there are many other differences between the setup FDR found himself in and the setup currently - but I think these are the critical ones. And the upshot in my view is that even someone as charismatic as a modern day FDR would not be able to overturn the weight of the current financial system as it is constructed.
My point is, the trends of history and economics are tending towards the only outcome that would actually be able to rebalance wealth away from corporates and to labour - a truly far-left or far-right govt and the incipient social revolutions they will bring, as they always have through human history.
By definition every political crisis is new. FDR was able to convince everyone needed to sacrifice something to solve problems. The outlines for a modern FDR are pretty clear- politicians have been working on them - but have failed to implement then. I will write a modern FDR manifesto for you.
Think that would make another great piece. I don’t disagree that the outlines for a policy manifesto are clear - my question is why they haven’t been implemented yet and what would need to change for them to be implemented. Eg We got close to something very interesting happening in the US in 2015/16 when Bernie Sanders was effectively blocked from winning the Democratic nomination by the DNC - in a Presidential Runoff vs Trump that national polls had him winning. Since that point, wealth share of capital to corporates, wealth inequality and social unrest has only increased. The question is, what comes first, major social unrest/internal conflict or a modern day FDR willing to implement the required changes? I would argue the former, because it is almost a precondition of the latter in the inertia of the current system (per my original post)
Really thoughtful piece. I have been looking at the 0.1%-focused 'UberLux' stocks versus the 1%-focused 'AlsoLux' names. Divergence in past 18 months EXTREME!
Honestly given gridlock in the US legislative arena I doubt any meaningful change for the time being. That said, the US has the benefit of the reserve currency, so "tolerance" for fiscal malfeasance should be higher. There is also the added dimension that the majority of US mortgages are 30 year fixed, so the effect of interest rate increases is very much reduced on mortgagee homeowners.
I suspect that rising US yields, as they translate elsewhere -> falling yen, rising EU yields will cause something to break elsewhere. Remember that the failure of the US subprime mortgage market ultimately caused the Eurozone financial crisis and induced austerity in Southern Europe & the UK. I suspect the next shoe to drop, aside from Europe, will most likely come from Japan.
The question is how to position the portfolio accordingly. The yen is uncharacteristically weak, but shows no signs of strengthening. Will the MoF impose capital controls?
Couple of comments/expansions
1. Definition of capital (as per Marx) is self increasing value. There is a lot to unpack here, as it is a Hegelian definition, but let's set it aside. The point is that if you accept that the way capital increases is profits, and profits are derived from added value, labour theory of value yada yada, you of course arrive at suppressed wages. If you drop the labour theory of value requirement, you end if profits being derived from wherever, for example, from exploiting externalities (pumping sewage into rivers for free for example). This lifts the constraint of capitalism destroying itself in the particualr manner predicted by Marx, leaving the general conclusion intact - trees don't grow to the sky, capital can't increase indefinitely.
2. There a very compelling school of thought, that gathers substance in terms of evidence day by day, that FDR and social democracy in general was a conscious reaction to Communism. FDR wasn't the first, btw, social democratic reform started everywhere in Europe, in particular in England, after the War and the Russian revolution, US was a latecomer to the party. To put it simply, the ruling class got so scared by what happened in Russia and almost happened across Europe, that they had to react. This reaction got irreversible after the Great Depression and WW2, where Soviet Union and its system was a clear winner and thus became attractive once more.
3. Another MAJOR appeal of Marxism after WW1 was its prediction of the Great War. That was as clear as day, one of the rare occasions where a societal theory can be tested in reality. And it also provided a recipe for the prevention of this horrors repetition, with such prevention being foremost in the mind of any thinking person back then.
Which leaves me personally quite pessimistic this time around - there is no challenger to the system. China is not communist, Russia is thouroughly capitalist, so we are hurtling towards a WW1 style of conflict, where the economically exploitable world has become too small, and in order for capital to grow (see above), you have to take that growth space from someone else.
Government spending is out of control.
We never demobilized after WWII.
Maybe we should stop fighting wars all over the world.
Wages are growing across the board, but it is offset by inflation and those without (inflating) assets are left behind.
But inflation is a necessary feature of our debt based monetary system. The money supply has to grow by the blended interest rate of the outstanding debt or face collapse.
As I see it, our problems are the result of out of control spending, not lack of taxation.
That is why western industry is uncompetitive and the East will eat our lunch.
There is no example of a society having improved its prosperity through higher taxation.
I would argue that the supply side phenomenon of inflation is 99% political. It’s not a necessary feature of monetary architecture by all means; inflation is the result of policy error, ignorance of financial literacy and indoctrinations institutionalized by Central Bankers. The origin of inflation is derived from rent-seeking policies, when new money is created for refinancing existing assets, because no work was done to earn and receive the credit. Only the money that exists in circulation should be used for refinancing existing assets, this would essentially remove the assets from the inflation equation and reduce access to credit that sustains higher rents.
The monolithic dollar system is designed and geared via monetary policy, which varies domestically to maintain its hegemonic devices over global trade flows, and to extract exuberant rents and capital gains from the worker; 2-3% target inflation (headline, not actual) is essentially the rate of usury, or more bluntly, the architecture that enables the theft of production and savings, its policies are fraudulent from its outset.
Germany and China for example were permitted and facilitated by the Central Bank Hierarchy to create thousands of small banks that would concentrate allocations of capital, creating money to support productive manufacturing, coupled with supportive government policy. The shift of industrialization is the result of policy error and theft, manufacturing as a share of GDP was declining in all developed countries because the weight of inflation (usury) eventually tipped the scale, reducing productivity in the face of ill-gotten rents and gains, just more quickly in the United States.
Wearing the Marxist hat, this is because the capitalist mode of production in the developed world is no longer capable of contributing as much productive growth to the world economy. But Marx fails to recognize the deficiency of capital allocation that causes the decline of productivity. The key contributor to the flattening the decline of manufacturing as a % of GDP globally has been the introduction of China into the global marketplace. It is no surprise that living standards were rising most quickly in this area of the world (manufacturing is synonymous with economic sovereignty), for it is here where the bulk of productive growth is occurring.
In order for monetary architecture to facilitate usury, it needs to exploit fresh markets where it can rotate industrialization capitalization policy, but the world is getting smaller and geopolitical tensions are becoming more dangerous because the overproduction of usury cannot be sustained, and warring elites will jockey their positions to fight for the wealth and power and the system architecture that enables them to steal from their people and abroad.
Crisis comes before revolution and revolution according to Tolstoy is a moral one and I hope this time around we can expose the lies.
“There can be only one permanent revolution — a moral one; the regeneration of the inner man. How is this revolution to take place? Nobody knows how it will take place in humanity, but every man feels it clearly in himself. And yet in our world everybody thinks of changing humanity, and nobody thinks of changing himself.”
Good post - worry that it is already too late. We're bound to live through a world created by the unintended consequences of myopic and self-centered decision-making by the boomers and the status-quo-ists. But I do think that a fourth turning / generational conflict happens differently today than it did last time it was around, due to technology and societal changes. Yes, assholes will asshole, old men will push for war and sycophants will do their trade, but perhaps the crisis this time can avoid the worst of our past. Worth hoping for at least.
This was a good, well thought out one. I think you should check the following article, it somewhat complements your thoughts..
https://www.project-syndicate.org/commentary/us-eu-democracy-challenges-reflect-disappointing-economic-growth-and-wage-trends-by-daron-acemoglu-2024-06
"Democracy is in crisis throughout the industrialized world because its performance has fallen short of what was promised. Far-right and extremist parties are benefiting from the fact that the center left and center right are now associated with wage stagnation, rising inequality, and other unfavorable trends...."
2nd person to recommend this article
I have a hard time agreeing with this statement.
“Hence, the risk to capitalism is not collapsing wages and a deflationary spiral, but the collapse in government credit worthiness driven by capitalism’s urge to minimise taxes. “
if you go back 50 years to 1974 federal receipts were 17% of gdp and outlays were 17.4%. In the most recent quarter receipts were 16.2% and outlays 22.4%.
So outlays are up 29% and receipts are down 4.6%. Corporate taxes in 1974 were 40 billion. On an inflation adjusted basis that’s about 265 billion dollars. We collected 409 billion in 2023 or more than 50% more than 50 years ago.
It really is the spending. Even doubling corporate taxes without any economic impact at all would barely make a dent.
https://fred.stlouisfed.org/graph/fredgraph.png?g=1prBm
https://fred.stlouisfed.org/graph/fredgraph.png?g=1prCe
And yet voters want more money. They are rejecting austerity... so the money has to come from somewhere. Arguments that spending is much higher than in the 1970s won't wash with voters under the age of 30
Well, sometimes reality bites... What's the alternative, we all play make believe until our democracy collapses from wishful thinking?
"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury." (attributed to Alexander Fraser Tytler)
That's the weird thing... it's corporates that have worked out that they can get all the largesse they want - while leaving the average voter worse off.
Especially since most of that spending is now going to Boomers via poorly constructed entitlement spending programs like Social Security
In the upcoming election in the UK the age at which.the a voter becomes more likely to vote Conservative will be 69. This.up from 45 last time. I would note many 40yo still rent. And this has caused tory voters to naturally decline....
Wondering if you have read David Shor; he was some data whiz kid who went to college when he was 12 and was the Obama campaign's internal Nate Silver at the age of 20. People don't read him closely and just focus on the controversies, but he convinced me that people aren't that "materialistic"... at least in America. People just assert that we are materialistic without looking for contrary evidence.
From a podcast appearance of his:
"And like in 2016, something I really like to say is that it would be really ideologically convenient to say the reason why we lost all these working class white voters was because the Democratic Party pushed free trade and de-industrialization and neo-liberalism and these people were responding to the material conditions.
And that's a good line. It's a good narrative. It's what I would claim if I was on television. I don't know. If I was a politician, that's what I would say. But I think the empirical case for materialism is really weak.
It's definitely true that most of the Midwest really suffered large losses over Obama's term and I think over a 30 year period. There's like one county in Indiana where I think the share of the population that worked in manufacturing dropped by half. And I remember I visited this place and I met someone who used to work at factory and now he works at a chicken farm, he doesn't like working in a chicken farm.
But other parts of the country actually really benefited. Like in Eastern Iowa, the unemployment rate was 2%. And the reason is that they grow soybeans and they can export soybeans to China. So, they were actually doing very well. And I think there's similar places like the Grand Rapids suburbs, they manufactured furniture and they were able to export it.
And those places swung against Democrats just as much as the places that were really wracked by globalization. And if you do regressions, it's very, very hard to find any link between these material changes in conditions and how people voted. The reason people changed their votes were because of these values, whether it's racial, or resentment, or openness or whatever, it was cultural, it wasn't material."
He has some other thoughts that I'll crudely summarize. Lot of left leaning policy changes that poll really well are dem propaganda; they are biased representations of how people really feel and how those things would do in the wild: Medicare for All, Raising minimum wage... you can see this with the failure of the CTC; most left polling has that policy as really popular; he has a poll that done fairly it is really unpopular based on fairness intuitions.
He has also suggested that even if like some policy like taxing the rich is really popular or free insulin, the average voter is pretty susceptible to the corporates ideological bent. Basically, corporates can convince regular people that those are bad policies. People are not that smart or coherent in essence. The fact that large groups of right wingers globally are now pro-Russia is kind of the best evidence that people are easily "influenced" and should be surprising given your Rambo, Rocky IV experience.
Interesting viewpoint but there are some major areas that were unaddressed that are required to form the complete picture. First is the intent of taxes; are these dollars productive for the economy? The point of collective taxation in a free society is to address areas where the value capture of the free market can’t be determined where a collective need exists, or where cost externalities exist but are to dispersed to be covered by the those capturing the value. Think roads or other basic infrastructure as an example. However, governments, having their own interests are often pushed to expand into areas where a private market solution already exists. When that happens, entrenched interests form and consolidate political power. Large corporations often use this to their advantage to keep new competitors at bay. As government takes over large swaths of the economy, the benefits of completion receed and the ability to increase value and lower the cost at the same time disappears. What remains is large pools of funds collected by the government used inefficiently to the benefit of the politically connected. The second part of the picture not addressed is the role of central banks and the money supply. The wealth creation and the widening wealth gap around the world (and the subsequent rise in populist appeal) is due to the long period of Zero Interest economic stimulus. Free money. When there is no cost to capital, risk taking goes way up and the over investment creates large asset bubbles. And who benefits from rapid appreciation is asset values? Asset owners. Who who are the asset owners? They are disproportionately the wealthy. In rue last decade there has been more than a 5 fold increase in billionaires. Well over 2500 around the world. There is a positive rail wealth effect to this as for every billionaire created there are x number of millionaires, and so on. But for the most part, this lengthening of the pyramid was not true economic productivity but just more dollars chasing the same assets.
The true solution is simply the tax code. Take away the places for people to tax advantage of the tax code to legally pay less taxes. This also reduces the advantages of the politically connected. A simplified tax code that does change frequently also provides certainty that clears the road for steady investment. Next is to reduce the size of government to where in doesn’t compete with the private sector where it doesn’t need to. Let the private sector innovate to provide solutions and let the market forces work to improve products and services while lowering the cost. Less Marx and more Millie.
I am a fan of economic theory. But most economic theory is co-opted by politicians for their own agendas. If it's popular then it gets enacted. Keynesian theory was in line with.public mood in 1940s. Milton in the 1980s... and MMT in 2020s? Remains to be seen. There is never a.right answer.... just a politically popula answer
Very interesting analysis. When I think of corporate tax solutions I think that taxing revenue rather than earnings would help alleviate the problem of avoidance better than most things
Effectively (especially if you take Trump's words at face value) the US will return to a pre-20th century system of revenue raising, taxing transactions, gross revenue (vs accounting profits) and trade tariffs.
The problem is that this system is inherently regressive, the punter earning US$50k per annum doesn't pay much income tax as is under the present system and will be slugged heavily on tariffs and stamp/excise duties. Whereas the private equity VP & ophthalmologist earning US$500k per annum will get a very large tax cut. Hardly a pro-labour shift!
I think it highly debatable that the west would have done pro labour reforms without the threat of an anti capitalist revolution, which was real in the 1930’s. I don’t see any such threat today.
Things can change quickly in politics - particularly when "the masses" are involved...
Great piece. But when you think about FDR's ability to enact quasi-socialist policies, reduce and power of the corporate sector, rebalance the share of GDP away from capital back towards labour and hold off a formal Socialist govt in the US for a century, i think one must remember that he benefitted from not having a number of constraints that exist today:
1. He did not operate in a hyper-financialized economy e.g where CEO/worker compensation plans were so explicitly linked to higher share prices or where a major % of retirement wealth was held in stock based 401-ks
2. He governed at a time when the potential capacity growth of the US economy was huge (e.g. mining + manufacturing) and could be more straightforwardly unlocked, allowing for nominal GDP growth in the 5-10% range consistently, rather than the 0-5% range we have had for the past 20 odd years.
3. He did not operate in such a globalized world as today where (corporate and HNW) capital can move so frictionlessly and quickly between different jurisdictions to optimize marginal tax rates and where corporate lobbyists were able to so well perform 'regulatory capture' in their place of domicile.
Point 1 is important because it underlines that whereas FDR came to power after had collapsed by 85% between 1929 and 1933 (and therefore arrived at a point where he could 'direct' the distribution of gains from the recovery that followed), today's politicians cannot at all afford for the stock market to collapse, given that about half of the country's retirees are counting on that paper wealth to fund their retirements in an otherwise bankrupt retirement system.
Point 2 is important because it underlines that whereas FDR governed a country accelerating towards peak maturity and hence able to rebalance the capital/labour shares of a faster and sustainably growing pie, today the US is a post-peak-maturity economy much less able to generate supply side driven growth (except via immigration which is in itself causing negative political feedback loops)
Point 3 is important because it underlines just how much inertia exists in the present system against overturning corporate power and their regulatory capture. We have already seen some signs of this in the Europe for example when both Panasonic and Sony relocated their European headquarters to Amsterdam from London after Brexit in 2016. Or for a more recent example, we can ask why Rachel Reeves and a supposedly 'centre-left' new Labour govt in the UK has been ingratiating themselves with the UK corporate sector and giving them platitudes, instead of instructing them to reduce operating margins and increase real wages to workers?
I'm sure there are many other differences between the setup FDR found himself in and the setup currently - but I think these are the critical ones. And the upshot in my view is that even someone as charismatic as a modern day FDR would not be able to overturn the weight of the current financial system as it is constructed.
My point is, the trends of history and economics are tending towards the only outcome that would actually be able to rebalance wealth away from corporates and to labour - a truly far-left or far-right govt and the incipient social revolutions they will bring, as they always have through human history.
By definition every political crisis is new. FDR was able to convince everyone needed to sacrifice something to solve problems. The outlines for a modern FDR are pretty clear- politicians have been working on them - but have failed to implement then. I will write a modern FDR manifesto for you.
Think that would make another great piece. I don’t disagree that the outlines for a policy manifesto are clear - my question is why they haven’t been implemented yet and what would need to change for them to be implemented. Eg We got close to something very interesting happening in the US in 2015/16 when Bernie Sanders was effectively blocked from winning the Democratic nomination by the DNC - in a Presidential Runoff vs Trump that national polls had him winning. Since that point, wealth share of capital to corporates, wealth inequality and social unrest has only increased. The question is, what comes first, major social unrest/internal conflict or a modern day FDR willing to implement the required changes? I would argue the former, because it is almost a precondition of the latter in the inertia of the current system (per my original post)
Really thoughtful piece. I have been looking at the 0.1%-focused 'UberLux' stocks versus the 1%-focused 'AlsoLux' names. Divergence in past 18 months EXTREME!
Honestly given gridlock in the US legislative arena I doubt any meaningful change for the time being. That said, the US has the benefit of the reserve currency, so "tolerance" for fiscal malfeasance should be higher. There is also the added dimension that the majority of US mortgages are 30 year fixed, so the effect of interest rate increases is very much reduced on mortgagee homeowners.
I suspect that rising US yields, as they translate elsewhere -> falling yen, rising EU yields will cause something to break elsewhere. Remember that the failure of the US subprime mortgage market ultimately caused the Eurozone financial crisis and induced austerity in Southern Europe & the UK. I suspect the next shoe to drop, aside from Europe, will most likely come from Japan.
The question is how to position the portfolio accordingly. The yen is uncharacteristically weak, but shows no signs of strengthening. Will the MoF impose capital controls?