Breaking Say's Law

French economist Jean-Baptiste Say (1767-1832) is best known for “Say’s Law”. One simple formulation is “Supply creates its own demand”. What that means is that the amount paid to produce something for labor, raw materials, services, taxes, and profit goes to people who will spend it. Thus, supply and demand will be in balance.

In our present economy, we are breaking Say’s Law. The result is a depressed economy and high unemployment.

Currently, about a quarter of all income goes to the top 1% of our people. They cannot possibly spend all their billions. For example, Sam Walton bequeathed about $72 billion to his children, representing money that he accumulated rather than spending it. According to the Forbes survey, by last year, the childrens’ fortunes had grown to $84 billion, another $12 billion not spent. When the super-rich accumulate more money than they can spend, demand is reduced, representing a drag on the economy.

The rich argue that their wealth is necessary to fund investment to put people to work. The generalization the investment is needed to create jobs is certainly true. However, corporate America is awash in cash, as profits have soared with increased productivity and lower wages. They aren’t investing because there isn’t enough demand for their goods. With the decline in income of working people, that is not surprising. Where M. Say went wrong is in assuming that all the money spent producing things would be spent in turn, creating its own demand. He couldn’t imagine the kind of enormous wealth that today’s super-rich have.

When the recession hit, the federal government initiated a $700 billion stimulus package “to jump-start” a recovery. Unfortunately, that amounted to only about 5% of annual GDP, and was spent over the course of more than one year. It may well be that the money going to the top 1% and not spent was greater than the stimulus package, completely cancelling it out.

The income of the top 1% is roughly $3 trillion per year. If that income were taxed at 67%, it would yield $2 trillion, about three times the size of the stimulus package. It would be more than the entire federal deficit, and still leave the top 1% with an average of over $3 million per year to scrape by on. No one would suffer and we would have enough left over to invest in education, in our decaying infrastructure, and to provide health care to all.

The fundamental problem is the disparity of income in the U.S. It is not only greater than in any other industrialized country, but also greater than in such countries as Tunisia, Egypt, and Libya. If incomes were distributed more evenly, Say’s Law would apply, more would be spent, demand would increase, and people would be put back to work.

Unfortunately, the rich have acquired so much political power that the disparity in incomes is growing. They have managed to get the top income tax bracket reduced from 92% under Eisenhower to 35% today, with proposals to reduce it to 25%. The tax on huge estates has been reduced from about 50% under George Bush to 35% today. Meanwhile, the real incomes of even those lucky enough to have a job have fallen over the last ten years.

Increasing taxes on the very rich so that the middle class could have more would increase spending, increase demand, and create jobs.

But if we continue to break Say’s Law, the unemployment problem may continue to be with us indefinitely.

Give 'em an inch . . .

After 2 1/2 years of futile efforts to compromise, Obama just doesn't get it. The rich and powerful see no need to compromise: they are on a roll! Since Eisenhower's day, when the top income tax bracket was over 90%, they have gotten it down to 35%. In the late '70s, the top 1% got less than 10% of all income. Now they get about 25%. The estate tax, which used to be about 50% is down to 35%. And Obama is trying "to compromise" by offering them even more.

And they do want more, much more! They propose cutting the maximum income tax bracket to 25% (for now), cutting the estate tax and the capital gains tax to zero, and doing awa y with Medicare and Social Security as we know them. As the rich and powerful have grabbed an ever-increasing share of GDP, middle class incomes have been declining so that just surviving is a challenge, to say nothing of coping with major health problems or sending their kids to college. And when the middle class has no money to spend, the economy tanks.

With their money, effective propaganda, and a pliant president, the super-rich continue to increase their share of what others produce. Since Obama won’t do it, the voters will have to wake up to what is happening and put a stop to it.

When George Washington Lay Dying

When George Washington lay dying, he instructed an employee to bleed him. When the doctor arrived, he bled him some more. When that did not help, the doctor removed still more blood so that Washington lost about half of his blood supply in the course of a day. The more that bleeding failed to do any good, the more they bled him. Then he died.

For over a century, the American economy was unstable, afflicted by repeated financial “panics”, ending in the crash in 1929. Under FDR, tight regulations were imposed on the financial system. Establishing what economists call “automatic stabilizers” in the form of Social Security and Medicare followed. For 30 years after the end of WWII, our country enjoyed financial stability and unprecedented growth. The middle class thrived.

Then, deregulation set in and instability returned. There was a “Savings and Loan Crisis” in the 1980s and 1990s. Under President Bush, deregulation proceeded even further, along with a reduction in the top income tax bracket to only 35%, contrasted to over 90% under Eisenhower. Middle class incomes declined. Then came the crash in 2008 and the worst recession since the Great Depression. 

Like Washington’s doctors, politicians are trying to cure the economy by using the same counter-productive remedies that have consistently failed to work before. They are pursuing further deregulation and still lower taxes on the super-rich. They are attacking the automatic stabilizers that keep money flowing to those who will spend it even in a downturn. They have even threatened to violate the Constitution by making it impossible for our country to pay its debts.

Will the next election spell the end of the American middle class? Or, did the last one?