Monday, April 17, 2006

Monday with McKenna: Strangling the Golden Goose

In Barbara Ehrenreich's new book, Bait and Switch: The Futile Pursuit of the American Dream, one of the author's correspondents makes this comment about how a corporate culture blackens the human heart: "They think you can be evil all day and then go home and live the American dream."

Later this week, I'll be presenting a review of this book. I have made the same complaint before about those who are infected by the myopia of the corporate mindset that currently prevails in our nation—once in the context of wondering how an axe-swinging CEO must face his own family after a day of ruining the lives of other families.

Today, in Monday with McKenna, my blogging partner Terry McKenna presents a different perspective on this trend of economic murder that is occurring in our Marie Antoinette society—he shows us how strangling the golden goose is truly and inevitably an act of cultural suicide.

I thought I’d follow up last week’s critique of supply side economics with some thoughts about the moneyed classes. For however much we’d like a return to progressive taxes and mandated benefits, our wish will remain just that unless we can demonstrate that it is better for all of us.

But are progressive tax rates, mandatory benefits, and the social safety net better for the rich? One thing's for sure: if we continue on our current course of supply side tax cuts, the middle and working classes will gradually be impoverished. We are killing the golden goose that made us a wealthy nation, and the fallout will eventually kill all of us—including the rich. We'll come back to this point in a bit.

Let me start by mentioning the multiplier effect. It is a simple idea, so simple that I first read about it in a children’s encyclopedia some 45 years ago. It is the missing part of the progressive argument. What the multiplier effect explains is how every single dollar that goes into the economy as spending is spent again and again. As it works its way through the local economy, the result is a multiplier (in some cases as high as 3X) to each spent dollar. Of course, not all dollars are multiplied – thus, if you send $25 to buy a CD from a seller in Great Britain, none of that money is likely to be re-spent in the US. Savings are also multiplied, but the multiples are different (since banks lend savings out, the value is still increased).

What progressives need to explain to the American people is that our vigorous economy has grown because of spending, not investment. And, if the current tax cuts produce a cut in Social Security benefits (as is expected in the next decade) the spending shrinkage will ripple through the American economy like a tsunami. The ripple effect will hit all of us, rich and poor. Of course, the higher taxes needed to sustain Social Security will have an impact, but if the taxes are made more progressive they will be steered to those with disposable incomes, thus the consequences for the economy will be minimized.

Once again, the bottom line: if we continue on our current course of supply side tax cuts, the middle and working classes of all ages will gradually be impoverished. The resulting economic collapse will hurt the rich in three areas: wealth generation, quality of life and public safety.

Wealth Creation

The wealthy live off investments, not wages. But returns come from consumer spending – not primarily businesses (B2B). Let’s look to the top Fortune 500 companies. Among the first 30, 15 are businesses that have large direct to consumer sales. Others, like Hewlett Packard sell to a mix of consumers and to businesses. Likewise with enterprises like Citigroup and Bank of America. Even when we consider non-consumer businesses like Berkshire Hathaway, most own direct retail businesses.

To repeat the mantra, prosperity is the consequence of demand, not supply. Even now, with an enhanced and internationalized flow of capital, demand drives the economic engine. Thus the economic winners have pent up demand (not pent up savings). And sure, you can imagine a world where growth is hemmed in because of the inability to obtain capital, but you don’t see it in the so-called “First World.”

So... if the right gets its wish for a downsized government – starting with Social Security – instead of gaining from reduced taxes, our economy will lose the benefit of the multiplier effect on the billions of dollars formerly spent by retirees and others sustained by government benefits.

Quality of Life

In 20th century Western Europe and North America, our cities morphed from being crowded, polluted and sometimes dangerous, to being hospitable Disneylands for the well-to-do. Thus in present day New York City (and not just in the fashionable districts) you are as likely to see shops selling artisan bread or latte as to run into what once were called “greasy spoons.” Several factors led to this, among them the decline of manufacturing and the move from coal to oil and gas. But for the abundant latte shops and bookstores to survive, the economy needs a thriving middle class shopping for leisure goods. As we impoverish ourselves, let’s not be surprised as Starbucks are replaced by the old style coffee shops, where the patrons sat on bar stools at a counter nursing their coffee (in white china cups) eating a doughnut or wolfing a burger that cockroaches might have been dining on a few minutes before.

Public Safety

As with quality of life, in much of the west, urban uprisings are a thing of the past. Yes, we’ve just seen a large protest over immigration in a number of US cities, and the French just went through a general strike over labor laws; but by and large, riots have been confined to areas where the poor live. This has not always been so. The draft riots in 1863 in New York City touched everyone – except for those wealthy who fled. Riots and strikes were endemic to late 19th and early 20th century America – and to Europe as well. But the post WW2 spread of prosperity gave most of us a stake in the economy – and thus one more reason not to throw that rock at a policeman or through a shop window. As with quality of life, there is no reason to expect the American people to remain civil as they go down.

The Moral

In a recent article for Tom Paine, economist Max Sawicky made a few of the same points being raised here. But what he didn't tell us is how we can make the wealthy and the upper middle classes care. The answer is self-interest—if not one's own, then one's children's. History is very clear on this point: inequity will inevitably out, and there is always a day of painful reckoning for the well-to-do, whenever they stop caring about the health and prosperity of all. So my message for the wealthy would be: Be wary of getting what you wish: this goes for both the privileged idle class and the comfortable-but-working upper middle class. I count myself in the latter, for if I continue to work at my present job, and if the company keeps its pension plan intact; then the combination of pension and my 401k could isolate me from the most ruinous part of the impending collapse. The point is, without a vision for what is to come, even people like me may start believing that the Bush agenda works for them. That would be a perilous delusion indeed.

As the old saw goes, you get what you pay—and vote—for.

—T. McKenna

(thanks to the Daly Joe for providing today's pic)

Happy Eostre, everyone

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