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5 Myths that Are Destroying our Country
A recently produced document by Jacob Hacker and Nate Loewentheil, Prosperity Economics – Building an Economy for All, begins by discussing the five myths of austerity economics. That is an appropriate place to start a discussion of how to build a healthy economy because over the past four decades a widespread belief in those myths among the American people has been destroying our economy and our country. As long as Americans harbor a steadfast belief in those myths we will make no progress and our downward course will continue. Therefore recognizing those myths as the lies they are should be seen as a first step towards our recovery.
The five myths of austerity economics are:
Myth 1: Spending and deficits are our #1 problem
Myth 2: Cutting taxes on the richest is an effective way to spur prosperity
Myth 3: Inequality is not a problem because social mobility is high
Myth 4: Markets are smart, governments are dumb
Myth 5: Those at the top are the ones who create wealth and are alone responsible for their good fortune
Myth 2: Cutting taxes on the richest is an effective way to spur prosperity
Myth 3: Inequality is not a problem because social mobility is high
Myth 4: Markets are smart, governments are dumb
Myth 5: Those at the top are the ones who create wealth and are alone responsible for their good fortune
Actually, careful study of these five myths will reveal that they have a single purpose – the enrichment of the wealthy at the expense of everyone else. And indeed, they have served that very purpose and continue to do so. And they will continue to do so until they are exposed for the lies that they are. Think of the austerity myths and “trickle down” economics as part and parcel of the same idea. Give everything to the wealthy, and don’t do anything for anyone else because the wealthy know best, and they will take care of everything in the best interests of everyone.
It is easy to see how myth # 2 serves that purpose, and no further comment is necessary on that. Myth # 5 justifies myth # 2 by creating the impression that the rich deserve all the breaks they can get, no matter who gets hurt in the process. Myth # 3 justifies the inevitable result – a rapidly growing economic inequality. If inequality is not a problem then we need not do anything to correct it, and anyone who says otherwise is engaging in “class warfare”. Myth # 1 is a little tricky. If “spending”, leading to deficits, is seen as our # 1 problem, then we must decrease spending on social programs such as health care and Social Security. That enables tax cuts for the rich. And yet, anyone with an ounce of common sense will quickly see that massive tax cuts for the rich will itself contribute substantially to deficits. So the proponents of the austerity myth simply ignore that obvious fact or else claim that it isn’t true, by referring back to myth # 2. Myth number 4 is their way of telling us that our government should get out of the way and let them have a free hand to do whatever they want. If their activities lead to the destruction of our planet, don’t worry about it. Markets know what they are doing and must be left alone to produce their magic. Myth # 4 is the equivalent of a mafia king telling us that we don’t need police or courts of law because the mafia knows what is best for us and will shower us with prosperity (after all the evil-doers are sacrificed).
The Powell Manifesto in the context of U.S. history
Many historians see the beginnings of widespread American adherence to the austerity myths in the Powell Manifesto, written on August 23, 1971, by Louis Powell, a corporate lawyer. Less than a year later, Powell was appointed by President Nixon to the U.S. Supreme Court, where he served for 15 years and contributed substantially to the embedding of conservative economic ideas into our national culture and legal system. A few years following the appearance of the Powell Manifesto, the Reagan Revolution began with the election of Ronald Reagan to the U.S. Presidency, and we’ve gone mostly downhill ever since then.
I don’t recommend actually reading the Powell Manifesto. It’s a very dense read, as it is all written in code. An idea of the entire theme and purpose of the document can be gleaned from its last sentence, which notes that “… business and the enterprise system are in deep trouble, and the hour is late”. The body of the document blames this on leftists, Communists, etc.
What is so revealing about the statement that 'business and the enterprise system are in deep trouble" is that the memo was written during what Nobel Prize-winning economist Paul Krugman describes as the "greatest sustained economic boom in U.S. history", in his book, "The Conscience of a Liberal".
The greatest sustained economic boom in U.S. history and its roots in the New Deal
This great economic boom was largely the fruits of President Franklin Roosevelt’s New Deal, which was founded upon an economic philosophy that is directly opposite that of the austerity myths. In the view of FDR and others who brought us the New Deal, we are at our best when all Americans participate in our economy and share in its benefits, rather than passively sit by and wait for prosperity to trickle down to us from the rich, or become virtual slave laborers to those with the money to control our lives.
Krugman describes the economic boom in terms of median family income: Beginning in 1947, when accurate statistics on this issue first became available, with the top marginal tax rate approaching 90%, median family income rose steadily (in 2005 dollars) from $22,499 in 1947 to more than double that, $47,173 by 1980. Then, for the next 25 years, except for some moderate growth during the Clinton years, there was almost no growth in median income at all, which rose only to $56,194 by 2005 (85% of that growth accounted for during the Clinton years). However one wants to interpret those numbers, nobody could possibly conclude that they indicate overall bad financial consequences accruing from high tax rates on the wealthy. To the contrary, as Krugman notes, this period of record high tax rates on the rich coincides with "the greatest sustained economic boom in U.S. history".
So how could Powell complain about the business and enterprise system being in deep trouble during such an economic boom? The answer is simple. His memo was written to the Chamber of Commerce, right wing corporate titans, and other like minded groups and individuals. To them, shared economic benefits were not seen as a good thing. They were after something else. They wanted to go back to the days prior to the New Deal – the days that FDR railed against in setting the stage for the New Deal and the greatest sustained economic boom in U.S. history that followed.
FDR's speech at the 1936 Democratic National Convention came as our country was continuing to struggle out of the worst economic depression in our history. It was directed at those whom he referred to as "Economic Royalists" – the same type of people who today promote trickle down economics and all the austerity myths for their own benefit. Some excerpts from FDR’s great speech:
Out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital … the whole structure of modern life was impressed into this royal service. There was no place among this royalty for our many thousands of small business men and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer…
The privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.
The hours men and women worked, the wages they received, the conditions of their labor – these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age – other people's money – these were tools which the new economic royalty used to dig itself in.
Necessitous men are not free men. Liberty requires opportunity to make a living – a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.
For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor - other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness... These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power…
We seek not merely to make government a mechanical implement, but to give it the vibrant personal character that is the very embodiment of human charity. We are poor indeed if this nation cannot afford to lift from every recess of American life the dread fear of the unemployed that they are not needed in the world. We cannot afford to accumulate a deficit in the books of human fortitude.
The privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.
The hours men and women worked, the wages they received, the conditions of their labor – these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age – other people's money – these were tools which the new economic royalty used to dig itself in.
Necessitous men are not free men. Liberty requires opportunity to make a living – a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.
For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor - other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness... These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power…
We seek not merely to make government a mechanical implement, but to give it the vibrant personal character that is the very embodiment of human charity. We are poor indeed if this nation cannot afford to lift from every recess of American life the dread fear of the unemployed that they are not needed in the world. We cannot afford to accumulate a deficit in the books of human fortitude.
During the New Deal and the greatest sustained economic boom in U.S. history that followed, the American people made great progress towards a shared prosperity. A robust middle class evolved that sustained itself for many decades. But for almost the past four decades we have been regressing in the opposite direction. Wealthy individuals and corporations have united against us and infused their propaganda into our political system and our culture. U.S. Supreme Court decisions have legitimized the use of huge amounts of money to influence our electoral process. The Economic Royalists are back. We fall for their propaganda at our own peril.
A brief look at the economic effects
In their introduction to austerity economics, Hacker and Loewentheil show us three charts that pretty much tell the whole story of the last few decades. Figure A shows us that from 1973 to 2011, the hourly productivity of the American worker rose 80.4%, but in return, median hourly compensation rose only 10.7%. What could cause such a disconnect between production and earnings? Answer: The Economic Royalists have used their massive wealth to buy their own politicians and produce the propaganda needed to get them elected and re-elected. They then direct their puppet politicians to do their bidding, rigging our economic (and political) system for their own private benefit.
Figure B is a graphic illustration of growing economic inequality from 1979 to 2007. While the top 1% of income households have increased their average after-tax annual income by 278%, for an average increase of about a million dollars per household, the poorest fifth of American households have increased their after-tax annual income by only 18%, for an average of about…. well, it’s too small an amount to visualize on the chart with any accuracy.
Figure C is a “Social Health Report Card” for the United States. It shows that among 20 industrialized countries of somewhat comparable wealth to us (Canada, Austria, Belgium, France, Germany, Greece, Ireland, Italy, Netherland, Spain, Switzerland, United Kingdom, Denmark, Sweden, Finland, Norway, Japan, Australia, New Zealand, and us), we rank first in income inequality, relative poverty, health expenditures, and infant mortality, and lowest in life expectancy, health insurance coverage, and environmental performance index. Yet we keep hearing that we are the greatest country on earth – the implication being that it is unpatriotic to criticize our economic or political system.
Counteracting the austerity myths
Hacker and Loweentheil go into much detail to counteract the austerity myths. I’ll just say a few words about them here:
Myth 1 – Spending and deficits are our # 1 problem
Deficits are justified when they fund investments with large payoffs, like getting Americans back to work. This is precisely the case today. Historical experience reinforces this message. In 1937, a premature turn toward fiscal austerity worsened the Great Depression. Conversely, after World War II the United States had a huge national debt, yet instead of paying it down immediately the nation made large investments in infrastructure, education, and economic security, which paid off in long-term growth that gradually brought the debt down.
Myth 2 – Cutting taxes on the richest is an effective way to spur prosperity
Just prior to the Stock Market Crash of 1929 that led to the Great Depression, top marginal tax rates were very low, at 25%. As noted above, the greatest sustained economic boom in U.S. history took place in the midst of the highest top marginal tax rates on the wealthy in the history of our country – over 90% from 1950 to 1963. That should be enough by itself to shut up all the yapping about the benefits of reducing tax rates on the wealthy. But if not, consider where the George W. Bush tax cuts for the wealthy have gotten us. In the face of the economic disaster that followed several years of massive tax cuts for the rich, how gullible do you have to be to continue to believe that tax cuts for the rich are good for our economy? And finally, take a look at these two charts, which show respectively: 1) the relationship of income inequality to the two worst economic catastrophes of our history – the Great Depression of the 1930s and our current recession. It is titled “Re-creating the Gap that Gave us the Great Depression”; and 2) how top marginal tax rates for the wealthy have varied over time.
The first chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90%. The most important thing to note about this chart is that just preceding the great stock market crash of 1929, which plunged us into the Great Depression, and again preceding the great recession of 2008 (in which we are still mired), the inequality ratio hit peak levels, whereas it was at its lowest levels during the long economic boom that Paul Krugman speaks about. The second chart shows that income inequality plotted over time is inversely proportional to top marginal tax rates.
Myth 3 – Inequality is not a problem because social mobility is high
Figure F in “Prosperity Economics” shows that among nations, social mobility declines in proportion to economic inequality. The United States demonstrates very low mobility and very high inequality compared to similarly wealthy nations. End of story.
Myth 4 – Markets are smart, government are dumb
While noting that “markets have enormous virtues”, Hacker and Loewentheil go into great detail in describing the many problems that can plague markets unregulated by a democratic government that is responsive to the needs of its citizens. They conclude:
Absent thoughtful regulation and public investments, markets will not align private and social returns or produce optimal outcomes. Austerity economics ignores this reality. Markets bereft of sensible ground rules and public investments are markets distorted by the underprovision of public goods, marked by destructive bubbles and busts, and weakened by the ability of market actors to impose costs on the rest of society.
Myth 5 – Those at the top are the ones who create wealth and are alone responsible for their great fortune
Again, this flies in the face of the fact that the greatest sustained economic boom in the history of our country occurred concurrently with the greatest levels of economic equality. We don’t need to shower the wealthy with gifts in order to have a strong economy. To the contrary, history shows just the opposite of that. Economic prosperity occurs when everyone contributes and shares in the benefits of their labors.
Furthermore, the recent wave of high-level financial fraud that led to our recent economic crisis has shown that, far from creating wealth, many of the wealthiest financial titans in our country have merely found ways to transfer wealth from the American taxpayers to themselves.
Growth for whom
The authors conclude their discussion of the five myths of austerity economics with this common sense paragraph:
Moreover, the crucial question is, “growth for whom?” The United States has done relatively well in terms of aggregate growth in the last generation, but growth for the middle class and the less-well-off has been more anemic than in almost any other richnation. This is in great measure a result of austerity economics – of the policies propagated around and through these five myths.
And the solution is:
To tackle our immediate and long-term economic challenges, we must reject austerity economics and embrace a reality-based economic agenda. The plan we propose here embodies that approach, an approach we call “prosperity economics.” Prosperity economics recognizes that we must make investments in productivity to build our economy, that individually and collectively we need basic securities to move confidently into the future, and that a strong democracy undergirds a strong economy.
And that is what the rest of their report is about.
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