It’s slowly dawning on economists that something is badly wrong with our economy. Of course, the economists who think this aren’t the neoliberal toadies at George Mason or the Booth School of the University of Chicago, but it’s nice that Paul Krugman and Larry Summers are talking about secular stagnation, and progressive politicians like Tom Harkin and Elizabeth Warren are talking about actual solutions, like increasing Social Security. There is even talk of guaranteeing a minimum income to everyone, suggested last week in the New York Times Magazine by Annie Lowrey. Of course, the Very Serious People who run things in our pretend democracy can’t imagine such things, and even the friendlies can’t quite bring themselves to discuss the possibility of redistributing wealth through taxation.
Krugman says the problem is secular stagnation. The word “secular” in this context means lasting a long time. It implies that a situation is the result of strong external forces which are very difficult to reverse. When we talk about the US economy, we are indeed talking about strong external forces that are very difficult to reverse, namely the entrenched power of the neoliberal consensus on economics that dominates all discourse on the subject, whether among the elites or average people. Capitalism won the Cold War, and unbridled capitalism has no competition in the minds of most people, including the New Democrats and every Republican, and their supporters in the general public. The term secular stagnation has the potential to open a few minds.
Krugman quotes a speech by Larry Summers to the International Monetary Fund to explain the term. Summers said that the Great Crash was years ago, and the US economy hasn’t recovered. In the years prior to the Great Crash we had a huge housing bubble, and a massive increase in debt, and yet the economy wasn’t that great then either.
Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
Krugman adds additional evidence, and discusses some alternative explanations. He concludes that we are bound by the rules of depression economics for the foreseeable future, no matter how offensive that is to the sensibilities of the Very Serious People. Then he writes that maybe increasing Social Security would be a good idea, first in his blog and then in a column. The arguments are different. In the blog, he points out that in a depressed economy, the solution is a negative interest rate, created through higher inflation. In the column, he points to the desperate future facing millions of retirees who haven’t saved enough and who are going to be dependent on Social Security for their quality of life.
The negative interest rate argument is the standard response to the problem of depressed demand among liberal economists like Krugman and Jared Bernstein, though, as a commenter frmrirprsn noted, both prefer fiscal solutions to monetary solutions. The problem with negative interest rates is that they damage retirees and small savers. If retirees have to eat their nest egg to survive, eventually they will run out of money. That is bound to happen to those who have saved relatively small amounts, which is most of us. For small savers, if interest rates stay low as part of the monetary solution, there is no point in saving, or at least, they will have to save much more to accumulate money after inflation. That defeats the purpose of inflation, which is to increase demand and consumption.
A massive increase in Social Security would solve both problems. For retirees, the increase would make it possible to preserve their principal. For small savers, there is much less pressure to accumulate for retirement, and the increase in Social Security can replace income that otherwise would be generated by interest on savings. In both cases, people are able to continue their consumption and perhaps even increase it.
Higher inflation helps debtors by making it cheaper to repay their debt, assuming that their income keeps up with inflation. Bernstein admits that the short term impact is to decrease real wages, because of the enormous unemployment we suffer. I suspect the answer is that it helps at least some of the debt problem, but not all. For many debtors, it looks like bankruptcy is the solution. An amended Bankruptcy Code that increased exemptions and lowered the cost would be a big part of the debt solution.
So how would we finance this change? Of course, one way is just to print the money. Given that we are printing money for the sole benefit of banks and their shareholders, I don’t see why that isn’t fair. A lot of people argue we should just lift the cap on Social Security taxes, but I’m not sure that’s a great idea. FICA taxes and interest on the Social Security Trust Fund pay our current benefits, and increasing the taxes on people who make more than the current ceiling will hurt a lot of people. The FICA tax of 12.4% is a big bite out of people whose incomes are in the $150K range, especially those who live in high cost, high tax cities. Anyway, that doesn’t suit my sense of justice. They didn’t cause the Great Crash, any more than you did.
Raising the cap doesn’t solve the other problem, which is the gross inequality of wealth distribution. I’m not talking about the millionaire next door, the several million of us who have a couple of million dollars in financial assets. I’m talking about people so rich they have special bunkers to store their cash and collectibles in Switzerland, Luxembourg or Shanghai. These people have so much money they are free to use it to hurt the rest of us, and for many, like the creepy Walton heirs and the thuggish Koch brothers, that is their idea of sport.
In the spirit of using taxation to solve social problems, we should finance the increase in Social Security by massively increasing taxes on the filthy rich. I suggest a donut hole in the FICA tax. The cap does what current law does, and then we have a gap. People with over $750K, indexed for inflation, in annual income pay the FICA tax on the excess. Also, we add the FICA tax to the income of Corporate Persons and Endowments, Trusts and other forms of hiding wealth. I’m thinking maybe at the $10 million level of net income.
Let’s start dealing with these problems at the source.