By Thornton (Tip) Parker
This discussion goes beyond MMT and MS, and advocates of those ideas may or may not agree. Much written here is prefaced with “I think”.
Wealth and income concentration: The claim that money in the hands of the wealthy trickles down through the economy is just backward. Money is like cream—it rises to the top. In 2007, the ten percent with the highest incomes received nearly half of all personal incomes in the country. This concentration was not just due to merit, much of it was structural, institutional, and rent seeking. In part because of Occupy, the public is gradually becoming aware of this fundamental problem.
The economy can be depicted as a circular flow of goods and services flowing in one direction from producers to consumers and back as labor, and money to pay for them going in the other. Household purchases account for about seventy percent of the flow. If households can’t earn or borrow enough to keep buying, the flow slows down. Borrowing commits future income and leads to less purchasing power in the future. The Great Recession was partly caused by households, having committed too much of their future income during the credit and housing bubbles, were not able to keep purchasing as they had been.
The economy has evolved to serve mass markets by providing the goods and services that most people need or want. But the spending patterns of the wealthiest ten percent are not like those of most people. A family with ten times as much income as a median family does not eat ten times as much food or buy ten times as many cars and toasters. So the economy now depends heavily on people who get about half of the personal income to make the purchases which are seventy percent of the economic flow. That can’t work for long.
The wealthy use much of their money just to make more money by gambling through hedge funds, leveraged buy-out funds, and other financial schemes. They take some out of the economy by spending in other countries and hiding from taxes with off-shore accounts. They are not using much to make productive investments to create more jobs that would provide good pay and benefits in this country. Too much of what high earners receive leaks out of the Main Street economy to Wall Street, and often to other countries.
I do not think that MMT and MS consider the leak adequately. They explain why the government must create more new dollars to offset private sector and foreign surpluses. But they do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration. I suspect that more dollars flow out of the Main Street economy through the leak than as payments for net imports. Just the need of many middle and lower income families to borrow ensures that some of their income will flow up in the form of interest and finance charges. (Margrit Kennedy has recently estimated that thirty-five to forty percent of all purchases go to interest.)
The effect of concentration might be analyzed by dividing households into two subgroups, one for the wealthy (say top 10%) and one the rest. Showing each subgroup’s surplus or deficit in relation to the rest of the private sector and the foreign and government sectors would show how much of a problem inequality really is.
I know of no easy way to do that, but conceptually, it would debunk the idea that income inequality is an envy, special pleading, or made-up class warfare issue. It would also show that taxes can do more than just prevent inflation, they can be used to limit the leak of money out of the productive parts of the economy.
Economic proof: In most sciences, new discoveries gain acceptance when others are able to replicate and validate them. Advocates of MMT and MS have a hard time convincing other economists, partly because it is hard for the others to replicate and validate the basic formulae by using widely accepted economic data.
Many economists use the data reported by the Federal Reserve Board each quarter in its “Flow of Funds Accounts.” Unfortunately, one cannot just use the data directly to see that the flows among the three sectors of the economy do balance to zero. The Levy Economics Institute of Bard College uses the data to show the balancing, but their analysis is complicated because many factors are involved.
It seems likely, however, that a relatively few factors account for much of the difference between what the Levy Institute says are private sector savings and the savings reported in the Flow of Funds Accounts. If that is so, a list of the largest factors (in descending order of importance) along with a simple explanation of how to apply them would help many economists become more confident of the balance idea by doing their own back-of-an-envelope analyses.