Capitalism’s Quagmire

Capitalism has never before faced the demons of the past like it does today.

Karl Marx (1818-1883) may be proven right. He believed that periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system. His dark prediction may be happening right before our eyes, but it is the economic historians who look back and fully recognize the drama with the benefit of time. Meanwhile, capitalism is stuck in a quagmire caused by inept policies within the capitalistic system.

The problem, specifically in America, is a bastardization of capitalistic democracy on two levels.

First, elite capitalists have exploited the system in their favour, starting with President Reagan’s Supply-side economics spoof, which is primarily responsible for the nation’s indebtedness. In fact, it was on Reagan’s watch that the U.S. became the world’s largest debtor nation because of tax breaks for the rich, carving out a big hole in federal tax receipts, but what’s even worse, much worse, is the wealthy elite’s fancy for stashing funds offshore, hiding more than enough uncollectible taxes to turn around the national debt problem.

According to a recent extensive study (July 2012) conducted by James Henry, former chief economist of McKinsey & Company, the wealthy elite have up to $32 trillion stashed away in offshore tax havens. This is twice the size of the U.S. economy, and remarkably, the study excluded ownership of tangibles like RE, yachts, fancy cars, and entire islands (metaphorically speaking, those hidden assets comprise the largest economy in the world… a tax free economy… a pure libertarian nation-state.)  No wonder U.S. federal tax receipts are so low; most of the taxable income is vacationing offshore! This is the crime of the century!

Why doesn’t the U.S. declare a War on Tax Havens against the offshore banking institutions and demand payment of a 10% Wealth Tax on all U.S. citizen offshore accounts? Send in the U.S. Marines and IRS agents and take over the offshore banks. This is not dissimilar to the U.S. declaring war on Iraq because of WMDs (Weapons of Mass Destruction.) After all, aren’t tax cheats equivalent to FWMDs (Financial Weapons of Mass Destruction.)? Their failure to declare and pay taxes is as destructive to the financial integrity of the country as terrorists are to the nation. Furthermore, this will easily, and painlessly, pay off an enormous chunk of the federal debt, putting the country back on its feet.

Is Mitt Romney the first-ever presidential candidate with money stashed away in Luxemburg, and the Bermuda Islands, and the Cayman Islands? These are the prototypical tax-dodge-scheme investment havens. Otherwise, and assuming his excuse is he wants to diversify out of the U.S. dollar, why not place his money in France, England, Norway, or Germany?  Why in Luxemburg (a known tax haven) instead of a strong currency country like Norway (not a tax haven)?

Is it possible the United States of America will elect a tax-evader as president? You’ve gotta wonder how history will judge this!

Secondly, the middle class in America has been obliterated, and it is not possible to operate a functioning democratic capitalist economy without a middle class. Here’s how this happened: The vastly popular corporate doctrine of neoliberalism searches the world for the lowest bidder, the cheapest labor, and the lowest bar of regulations required to produce the most profits. Thus, all good paying jobs are shipped offshore to low paying countries, sacrificing America’s middle class on a pendulum of profits. This is the mantra of global capitalism!

Why not offshore CEO jobs as well as middle class jobs?

Surely there must be some very capable CEO candidates in India or China or Thailand who will work for much less than tens of millions per year.

There’s been a lot of talk in recent years about the “hollowing out” of the American middle class. Here’s the proof: A new study by the National Employment Law Project (NELP) confirms the troubling trend. NELP broke down jobs into low/ middle/and high-wage groups based on median incomes. Looking at the period from early 2008 through the first quarter of 2012, the study found:

“High-wage” occupations accounted for 19% of the jobs lost during the Great Recession and 20% of the jobs gained during the recovery.

“Mid-wage” occupations suffered 60% of job losses during the recession but only 22% of the growth during the recovery.

“Low-wage” occupations accounted for 21% of the losses and a whopping 58% of the growth.

In other words, NELP found what many Americans already know: The market for middle class jobs has shrunk and most of the jobs that have been created during the recession are in low-income fields like retail and food service; i.e., McJobs.

This leads to the festering problem of an American nation-state that is short of revenues and deep in debt, resulting in ever-more erratic financial markets. Marx was one of the first economists to take note that, before the Industrial Revolution in the late eighteenth century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subjects; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy.

All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point with Marx: That these business cycles originate somewhere deep within the free-market economy.

Nevertheless, as far as almost all modern economists are concerned today, Marx can go sit on a chair in the corner and puff away on one of his daily cigars. They believe that the government can successfully stabilize depressions and the cycles by interfering in the natural economic cycle; however, interference may be precisely the tipping point that Marx alluded to.

Following a couple of years of massive, unprecedented central bank interference, today’s economic outlook is not necessarily brisk, “The pallid, uncertain character of the US economy’s ‘recovery’ so far in this cycle differs from anything we’ve seen in at least 50 years,” Contrary Investor, September 2012, “… the anomaly in the current economic cycle is the character of the recovery seen in the all-important US service sector.  Point blank, it’s the weakest service sector recovery in a half century.” The question is: Why is the recovery so halting in nature?

Capitalism is faced with its most serious challenge of all time because of the tenuous over-leveraged financial status of Western nation-states, and this is what makes the challenge of up-righting the economy so different and difficult this time around! The very countries that have consistently withstood the rigors of hard times and rebounded in typical cyclical fashion with renewed growth following recession/depression are now the most vulnerable to deflationary/debt implosion, and the list of candidates is not a big secret, including economic powerhouses Great Britain, France, Italy, and the United States, not to mention Spain and Portugal.

Over the past 200 years in the U.S. there have been six serious economic contractions, starting in 1807-14 and most recently in 2008-? None of the previous five challenged the integrity of capitalism like the present because, unlike any time in the past, today the financial health of nation-states is a serious impediment to economic recovery because of too much debt, based upon a decades-long credit cycle, both government and consumer, which impedes economic growth. In the examples to follow government debt serves as a “proxy” for all debt:

The Depression of 1807-14– caused by the Embargo Act of 1807 directed at Great Britain as an act of economic coercion by the U.S. to avoid war, ironically led to the War of 1812. At the time, federal debt as a percentage of Gross Domestic Product was 10%-to-15%, a low number and not influential for the subsequent economic recovery.

The Panic of 1837 (1837-44) was a financial crisis based upon speculative fever and runaway inflation; over one-half of the nation’s banks went under, but federal debt to GDP was well contained at zero; in fact the federal government was debt-free in 1837. Again, debt was not an impediment to the economic recovery post 1844.

The Long Depression (1873-79)- the Panic of 1873 kicked off this worldwide depression.  Almost 20,000 businesses went bankrupt, ten states went bankrupt and unemployment hit 14%. A stock market bubble and a railroad building bubble with accompanying corporate fraud; e.g., Credit Mobilier, preceded the Panic. U.S. federal debt-to-GDP peaked at 35%, a manageable level that did not impede an economic recovery.

The Panic of 1893 (1893-98)- At the time, the worst depression ever for the U.S. set off by the Panic of 1793; massive railroad overbuilding/speculation/bubble, shaky financing deals, huge runs on banks, run on gold supply, 15.000 companies and 500 banks failed. Unemployment hit 17-19%. U.S. federal debt-to-GDP was 10-15%, a modest level that did not hinder future economic recovery.

The Great Depression (1929-41) An extremely severe worldwide event set off by the stock market crash of October 29th, 1929, aka: Black Tuesday caused by loose credit of the 1920s leading to over-indebtedness. International trade plunged 50% (Smoot-Hawley Tariff Act), unemployment at 25%.  A severe drought, aka: The Dust Bowl ravaged agricultural heartland, a deflationary spiral set in. Al Capone opened a free soup kitchen in Chicago in 1931 with signage reading, “Free Soup, Coffee and Doughnuts for the Unemployed,” US federal govt. debt-to GDP hit 40%, which was not an impediment to financing World War II (temporarily spiking debt-to-GDP up to 120%) and subsequent economic recovery.

The Great Recession (2008-?)- A major global deep recession, caused by ultra super easy credit (the end of the multi-decade credit-creation cycle?), global speculative bubbles in real estate and in stocks and in commodities, and risky financial schemes; persistent high unemployment; US federal govt. debt-to-GDP skyrockets to 100% and even higher in several key legacy European nation-states as consumer debt also hits all-time records.

In the wake of The Great Recession there is a heightened interest in leverage and debt dynamics. According to: J. W. Mason and Arjun Jayadev, Fisher Dynamics in Household Debt: The Case of the United States, 1929-2011, Abstract, February 23, 2012:

While growing out of debt would be ideal, it would require a large increase in net exports, government spending and/or private investment, none of which seems plausible for the US at present. So lower nominal interest rates and/or higher inflation is probably essential… some form of systematic debt forgiveness may be the logical, and eventually unavoidable, solution to the problem….

If the Western World continues to slog ahead with reflation-leading-to-a-new-bubble-leading-to-a-bust-leading-to-reflation-leading-to-a-new-bubble and on-and-on, at some point in time, like in musical chairs, the last chair will be removed and the economy implodes. This is happening in real time right now in Spain.

Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain, By Landon Thomas, Jr., New York Times, September. 3, 2012: In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s debt-laden financial system. More disturbing for Spain is that the flight from the country is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. They are pulling up stakes and moving to other European countries.

Is America headed in the same direction as Spain? And what can be done about it?   These are fair questions:

The Federal Reserve Bank openly acknowledges the gravity of the problem by pouring massive amounts of liquidity into the American economy. According to Bloomberg, “Fed Moves Toward Open-Ended Bond Purchases to Satisfy Bernanke”, by Joshua Zumbrun and Simon Kennedy, September 2, 2012: “There has been more talk among members of the FOMC of an open-ended program,”  according to Dean Maki, chief U.S. economist at Barclays Plc. This is unprecedented central bank behaviour!

Furthermore, in Europe, on September 6th, Mario Draghi, head of the European Central Bank, announced a new unlimited Central Bank bond-buying program, similar to actions taken by the U.S. Federal Reserve Bank. This is unprecedented central bank behaviour!

The central banks are pulling out all the stops!

What’s at stake is a very serious economic challenge because the central banks are the lenders of last resort. The implications herein only serve to emphasize how seriously damaged are the financial affaires of some of the world’s leading developed countries, like Spain, Great Britain, and in the United States, where indiscriminate Republican-sponsored Supply-side economic policy over the past three decades has slammed the federal government up against a wall. Here’s the proof: Otherwise, federal government tax receipts as a percentage of GDP would not be at 50-year lows.

Meanwhile, the leading economies of the world hold their collective breath, hoping for renewal of growth sufficient to bail out the system. However, at what point in time does reflation-after-reflation-after-reflation by central banks result in pushing on a wet noodle? This is the crux of the matter… but wait a moment… isn’t it possible for America to ameliorate the problem, possibly saving-the-day, by raising taxes on the very people who have been the primary beneficiaries of the system?  Clinton did it!

President Bill Clinton grew GDP at a 3.9% annualized rate (a better performance than either Reagan, 3.5% or Bush, 1.7%.) He corralled national debt problems by taking the top marginal tax rate up to nearly 40% in direct opposition to the Reagan/Bush Supply-side theory, which, plain and simple, is lowering taxes on the rich. Remarkably, he turned the Reagan/Bush Supply-side legacies of annual budget deficits into a budget surplus. The ‘Come Back Kid’ proved the economy performs well when governmental policies are reasonably well balanced…. but what about that $32 trillion in offshore tax havens?

As of today, the Romney/Ryan Supply-side economic plan would be a continuation of Reagan/Bush Supply-side policies, although on steroids, and it is certain to set the stage for more of the same merry-go-round financial market disasters, ultimately proving Karl Marx right.

And furthermore, how much longer can, or will, the U.S. government and the U.S. middle class continue subsidizing the wealthy elite before Karl Marx’s class warfare scenario settles the score?

Robert Hunziker (MA, economic history, DePaul University) is a freelance writer and environmental journalist whose articles have been translated into foreign languages and appeared in over 50 journals, magazines, and sites worldwide. He can be contacted at: Read other articles by Robert.