Becker Blog

The world according to Brian Becker

Spreading the Wealth Around

Posted by Brian Becker on October 25, 2008

John McCain and Sarah Palin have been throwing around the word “socialism” on the campaign trail a lot lately in reference to Barack Obama’s tax plan. Not only does this show McCain lacks an understanding of basic economics and our own tax code, it shows how desperate they have become. Lets not even consider the fact that the progressive income tax is designed as a way to “spread the wealth around”, the current imbalance of wealth distribution in this country is the reason that the real economy is in such a downward spiral. Its what economists call a vicious circle.

I ran across this exert from Marriner S. Eccles’, Roosevelt’s Fed Chairman during the Great Depression, memoirs. It explains the situation we are in today just as it did then:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers’ loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

So, for the too long didn’t read crew out there, the basic argument he makes for the cause of the Great Depression is that for too long the extremely wealthy few had accumulated so much of the country’s wealth that they couldn’t even spend it all. This money sat in their bank accounts earning interest, but what that effectively does is take the money out of circulation. Since we rely on consumer spending to fuel our economy, and all the money was being funneled to the top, this created a vicious circle. Consumers didn’t have money to buy products anymore because they were in too much debt, thus creating less demand for products that the wealthy were making. In order to stay in business they needed to cut jobs to reduce the price and still make a profit. When people lose their jobs they have even less money to spend so demand falls even further, and then companies are forced to cut even more jobs.

This is relevant today because the distribution of wealth in this country is at its worst since the 1930s. Consumer confidence has dropped off a cliff in recent months as the economy slides closer and closer to recession. Thousands of jobs are lost every month as well. People aren’t buying things, which is partly why companies like GM and Chrysler are losing so much money and laying people off these days. The current credit crisis is independent of this system. We would still be headed toward recession without this sub-prime mess, and until the housing market bottoms out we won’t see the end of that rabbit hole. That’s not to say that it didn’t help to speed up the process.

We aren’t going to fix our economy with John McCain’s way of thinking. As we’ve seen since Reagan’s voodoo economic policies, wages have stagnated despite corporate earnings going up and the economy growing almost every year since. The fact that we have been living in bubble economy after bubble economy since the mid 90’s is real explanation of economic growth during much of the past two decades, not tax cuts. The tax cuts to the super wealthy have not done much to create more better paying jobs, but it has created a lot of money for CEOs and executive board members to give themselves larger and larger salaries, bonuses, retirement packages, and, as we’ve seen with A.I.G., executive outings. All this while the middle class was left to rot with stagnant wages, and fewer benefits. Not to mention that a large portion of the middle class manufacturing workforce in this country was put out of work during our bubbles so that their jobs could be shipped to another country where they can pay their workers less, thus making more profit.

What we need is a new New Deal. It will create a lot of deficit spending, but its the only way we are going to pull ourselves out of this vicious circle that we are in. And yes, that does include taxing the wealthiest in this country more than they have been under President Bush. If you save the middle class, you save the economy from another Great Depression. Simple as that.


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