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Green Lantern Corps Quarterly 2/47.

One last word (I hope) on my economic views, and where they come from, and why I'm so dogged on the point, and then I'll try to stop.

I grew up in the belief that capitalism—the arrangement that divides society into two (slightly overlapping) groups, the very small group of the owners of capital, who control the economy for the purpose of profit, that is of increasing their capital stock, and the very large group of the rest of us, who are controlled by it, and must surrender to the demands of capital to survive—is a problem: unleashing astonishingly creative and transformative forces, as Marx and Engels put it in the 1848 Manifesto,

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground – what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor? 

but doling out the rewards of this extraordinary progress in unequal fashion, keeping most of the "surplus product" for the owners, and giving everybody else just enough to keep them more or less quiet and docile, and creating disparities between them that have and them that have not that could only grow, and grow, and grow inexorably worse. 

Not only was it intrinsically unjust, but Marx and Engels thought it was ultimately unsustainable, because it couldn't possibly keep going until the bourgeoisie owned everything as much as the feudal aristocrats had done: the workers wouldn't be able to tolerate it and would revolt. That seemed very far away to me in my youth, even inconceivable, as the proliferation of unexpected luxuries, cheap clothes, cheap color TVs, frozen foods and interesting drugs, all kinds of entertainment, kept us busy, and most of us did seem to have more than enough to survive, and I was allowed to pursue my unpolitical interests, which were wide and engrossing. Besides, government in liberal democracy, scorned by Marx as "the managing committee of the bourgeoisie", seemed capable of doing a lot of things to slow the process down, if not actually reverse it.

Time spent in other countries practicing some kind of social democracy, and reading, confirmed this: governments could after all rouse themselves (under pressure from labor unions and sometimes intellectuals making their way into power positions) to do things for the masses, using steeply progressive taxation to provide people with healthcare and education and daycare and pensions a retired person could live on; benefits that provided individuals with a space within which they could feel less alienated and more capable of shaping their own lives. It wasn't the revolution, but it was worthwhile. While you're waiting for the revolution, my Communist friend said, you can vote for the party that has ideas for making things better for working people and poor people right now, which does make a difference. 

So I was always a Democrat, like my not-Marxist parents before me. Frequently disappointed, but never thinking there might be a better alternative, and often really pleased, sometimes contracyclically, because unlike most people I judge the presidential candidate by the party rather than the other way around. That's is why I'm not surprised by how great Biden is proving to be: it's not exactly him (though he has wonderful political qualities), it's the party that nominated him, which was clearly ready, at least outside West Virginia. 

Anyhow, I got more interested in politics in the wake of the Afghanistan and Iraq Wars and the scandalous Bush tax cuts on top of the Reagan ones, and the existence of the Internet of course, and eventually started writing about it, as you know, but didn't develop any economic thinking one way or another, until 2014, really, in the wake of the Occupy movement making us all more aware of economic inequality and the injustice in which all the gains produced by workers seem to accrue to the 1%, when the English-language version of a book by the French economist Thomas Piketty arrived under the title Capital in the Twenty-First Century and revived the socialist ardor of my youth.

Because it turned out that Marx was right! And Piketty had the receipts to prove it! Hardly anybody was putting it that way (not so much Piketty himself, who is decidedly not a Communist, though he understands the value of Marx's analysis, and not at all Dr. Krugman, though he received the book with enthusiasm), but Piketty showed, through the survey of tax receipts over an immensely long timespan, how inequality in income and wealth has steadily increased throughout the history of capitalism, at an often increasing velocity, and in principle unstoppable, because as long as r, the rate of return on investment, is greater than g, the rate of economic growth, capital itself automatically favors the former, the capitalists' individual gain, over the latter, the gain of society as a whole. So that Marx's "immiseration" thesis, the idea that the relatively poor will get poorer and the relatively rich won't, and the really rich will get richer until they own everything there is, seems to be borne out by the empirical data, unless—

Unless there is some kind of revolution—preferably not a bloody overthrow of the capitalists but an economists' revolution of the kind a liberal democracy could mount without really hurting anybody, using taxation as a weapon: if the richest are sufficiently taxed to make r < g, to bring the rate of return on capital below the growth rate, inequality will start to diminish just as inexorably as it has grown. And the proof of that is that it has happened before, around the world, in the years after the Great Depression and World War II, as shattered economies rebuilt, on the basis of steeply progressive taxes on high incomes and corporations, and created the institutions of the modern welfare state. 

A happy situation, best remembered in the French name for it, "les Trente Glorieuses", the Thirty Years of Glory. But it was ended very prematurely for the United States, which hadn't really built those welfare state institutions at all, and ended around most of the rest of the world as well, by what you could call the neoliberal revolution represented by the Thatcher and Reagan administrations, dominated by economists like Milton Friedman who held that taxes weren't good for the economy, which may be true by certain calculations, and sparked the subsequent spectacular rise in the fortunes of the wealthiest, and stagnation for everybody else, that we've seen in most of the years since then.

I want to emphasize the degree to which it was taxes, not deficits (shortfalls made up with borrowed money), that brought on the prosperity in the US at least—that plus the massive debt from World War II, serving as what I've called a kind of national mortgage and refinanced by an artificial clamp on interest rates in the six years following the war. There were seven years of surplus between 1948 and 1960, and deficits rarely above around 1% of GDP, Afterwards there were no surpluses other than those at the end of Clinton's second term (1999-2001) and well over 3% of GDP in all but one year of 1983 through 1994 and 2004-05. Total income taxes on the rich, in contrast, rose above 25% for the first time after the 1929 crash and remained higher, and almost always very high, close to 50%, from 1938 to 1968, after which they mostly declined.

Piketty, Saez, & Zucman via Slate, which notes that the number of people affected by those 90% marginal rates were far fewer than the 1%, only a couple of thousand at most: "Effective tax rates on 1 percenters may not have fallen by half, as some on the left might be tempted to imagine. But they are down by about 6 percentage points1 at a time when the wealthy earn a vastly larger share of the national income. That drop represents a lot of money. Moreover, as Greenberg admits, tax rates on top 0.1 percent have fallen by about one-fifth since their 1950s heights. That rather severely undercuts the idea that taxes on the wealthy haven’t fallen 'much'". 

Annual federal deficit as expressed by the difference between spending (red line) and receipts (blue line) in 2010 dollars, via.

There's a reason, too, why taxes would contribute relatively more to overall growth fueled by government spending and deficits would contribute relatively less: because the loan paper the government sells to finance a deficit is largely sold to wealthy institutions and individuals who gain extra wealth from the interest payments, especially in periods of relatively high interest rates. Deficits tend to increase r, the rate of return on capital; taxes obviously diminish it.

There was a real, small but extremely successful, revolution against inequality in the first decades after World War II, in other words, the idyll of my childhood as it happens, before the neoliberal reaction set in, and the work of Piketty and his colleagues showed empirical evidence that it could be repeated, and I began to envisage the possibility of real economic change, if only the peoples of the world's democracies could mobilize politically to turn taxation around to the function of reducing the disproportion (as, polls show, most people would love to do). This was the most exciting thing I had learned about economics since I was 14.

And this is what gets me cranky when I see some economic theorists claiming that we all have the relationship between government spending and taxation wrong because "Governments create money by spending and extinguish it by taxation" (James K. Galbraith, 2019) (Jeepers, who would want to extinguish money?), or that "taxes for revenue are obsolete" (Rohan Grey and Nathan Tankus, 2018), or that or that there's no relation between government spending and taxation at all (Stephanie Kelton, 2020):

Galbraith's formulation is probably true in some elegant paradoxical way that yields some fascinating equations if you're an economist but that doesn't contradict the fact that taxation does, indeed, pay for spending, in the same way paying my credit card bill at the end of the month (and extinguishing a bit of the bank balance) pays for (most of) my spending: it extinguishes the taxpayers' money at exactly the same rate as the Treasury deducts money from its tax revenue accounts and cuts checks correspondingly for the various agencies, and the formula doesn't change that. If Congress decides you need to "extinguish" less, they must either let you borrow more or you must stop spending to the same extent. The relation between spending and the sum of tax + borrowing is kept constant in Treasury's books, and the amount of money that is in the books in the first place roughly determines the amount of money that can be spent.

Kelton's formulation is misleading at best, and dishonest at worst, in its suggestion that both taxation and borrowing are irrelevant to what the government spends, because the government has Green Lantern powers that were denied to absolute monarchs like Charles I and Louis XIV. It suggests that government can provide universal happiness without any sacrifice on anybody's part, including the preposterously wealthy. "Oh, but we want to tax the rich," says Kelton, but why should we expect President Kelton to do it? She believes she can take care of everybody without bothering them. How does she convince Congress to raise taxes if she doesn't believe she needs the money?

I look at my Piketty, and see that there is always a sacrifice involved in using government to perform socially beneficial work (as opposed to prosecuting wars and otherwise enhancing the king's glory, which you can always try to finance just by taxing the poor, as was the norm in the rest of human history), whether through taxation from the rich to benefit the public, or penalizing government itself through bond issues on behalf of the public to benefit the rich. Bond issues alongside progressive taxation aren't too bad, and not bad at all during periods of super-low interest rates, but taxing the rich is what we need, as a society, to create healthy long-term growth of the kind we had in the Trente Glorieuses. It really upsets me to see people who call themselves "leftists" suggesting there's no reason to think about it.