First published December 6, 2010
It was the era of “trickle down” economics. Congress and the administration “devised tax credits, refunds and abatements to benefit private corporations, and they enacted four major reductions in income tax rates, skewed to benefit the upper income brackets.”
Inflation was defeated and the stock market roared. But there were signs of trouble.
Families “were working longer hours for the same wages and borrowing more heavily to keep up… the struggling labor movement was decimated; unions lost nearly 30 percent of their membership.”
It reads like recent history, but is in fact a description of the 1920s, when the term trickle down was coined, the decade before the First Great Depression.
Then as now, the Fed failed.
Prior to each failure, money was flowing up in the U.S. to its richest citizens. With the New Deal, FDR and his newly appointed Fed Chairman, a Republican banker from Utah, reversed the flow and the nation began to recover.
They understood that the spending of the rich few cannot sustain a great economy. The sale of thousands of $500 a pair sneakers and $300,000 cars cannot generate the same volume and velocity of money moving through the economy – economic activity – as the sale of millions of less expensive shoes or cars.
That flow of money to the many was the foundation of the remarkable prosperity of post World War II America . It lasted until Ronald Reagan, with the support of a Democratic Congress and the Fed combined to shut it down.
Reagan and Congress revived regressive tax cuts for the wealthy and trickle down economics, allowed the combinations that led to “too-big-to-fail” banks and legalized usurious interest rates on consumer credit.
The Fed crushed inflation with interest rates that devastated the real economy but protected accumulated wealth, and bailed out Wall Street when their bubble of bad loans to the third world burst.
Historically, when the Fed thinks the wealthy will not be unduly burdened and decides to expand the economy or overcome an economic contraction, one of its tools is to “flood the street with money;” that is, to pump a lot of cash into the system where it is loaned, used, circulated and exchanged in the many millions of transactions that add up to a recovery.
With the crash of 2008, the Congress and the Fed did indeed “flood the street.” But the money never got past Wall Street to your street. This was intentional.
As the Fed pumped trillions into the banks and finance companies, it risked massive inflation in the U.S. (remember that inflation destroys accumulated wealth). The remedy to this threat was to simultaneously keep interest rates low. But much of the rest of the world’s major and developing economies have higher interest rates.
The money that flows through the world’s financial system has a property similar to liquid, and like water money seeks its own level. And the level money seeks is the highest interest and rate of return
So the money of America has been flowing in a massive flight of capital into the rest of the world, protecting accumulated wealth while beggaring the future of most Americans.
The Ford Motor Company is about to open its newest and most modern plant – in China, where the government is raising wages and pumping billions into infrastructure; while across America workers are forced to accept wages cuts to keep their jobs and infrastructure begins to resemble the third world.
What to do? Reverse the flow.
Interest rates in the U.S. must rise from their historic lows to attract capital and investment in the U.S. Funds must flow massively into jobs creating, taxpayer creating, revenue creating U.S. infrastructure. The first stimulus was unfocused and insufficient. The president’s proposal for a $50 billion transportation infrastructure initiative is inadequate.
A fair share of the accumulated wealth of America must be made to flow down into many more hands. Income, capital gains and inheritance must be taxed at higher rates. The argument that this will choke investment is a patent fraud. That wealth has been protected from meaningful taxation for decades, but do you see a new washing machine or tractor plant going up nearby?
The out-of-control U.S. military must be disciplined. Wars and by some reports as many as a thousand U.S. military bases in 152 foreign nations are a huge flow of dollars and tax revenue out of the U.S.
Federal taxes on gasoline must be increased. There will be an immediate reduction in the import of foreign oil and the massive out-flow of dollars to buy it. But exempt, subsidize and invest in all mass transit systems (including school bus fleets), and rebate the mostly suburban, auto dependent middle class.
But above all, the Federal Reserve must be brought inside the American democracy and Constitution and made part of the Treasury Department, its accounts audited, so that the elected government of the United States may assume the authority and responsibility for the decisions about money that determine the future well being of every American man, woman and child.
This is what must be done, but will not soon be done. The new Congress will be as bought as the current Congress; because there is one other flow that must be halted – the tidal wave of lobbying and campaign cash that buys and sells U.S. federal elections for America ’s established, accumulated wealth.