Fight for Democracy, Part 13: The Economics of Pie

I want to talk about the economy but I’m not sure how to do it. The scientist in me wants to put up a bunch of charts and graphs since most people seem to think the economy is measured by numbers. The economist in me (I think a lot of people don’t know I also have a B.A. in economics) wants to talk about the nature of capitalism and the original meanings of Smith and Ricardo. But I don’t think those things will sway anyone. The truth is that ‘the economy’ is a vague subject that’s usually represented by choosing a few numbers to highlight (which numbers depends on what you’re trying to prove). Most people, even economists, don’t know exactly how things work or what will happen - it’s just too complicated a system - so everyone can argue about the topic forever with no objective truth ever emerging. So let’s stay big picture.

First, you need to understand that the government in general, and the President in particular, has relatively little direct control over the economy. Their main tools are monetary policy (which is controlled by the interest rates set by the Federal Reserve, which hasn’t really changed philosophy or practice in the last twenty years), government spending as stimulus (and how that money is spent has more impact on people’s lives than the amount), and structuring the regulations that control our economy.

The Fed (https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm) is largely an independent agency that tries to stabilize our economy by controlling interest rates. During the Recession and recovery they lowered interest rates to help spur borrowing in an attempt to stimulate the economy. Most everyone from both sides agreed it was the right thing to do. The past few years they have been following a long, slow trend of slightly raising interest rates (which are still historically low) in order to prevent the economy from growing too fast. With minor quibbles, most people agree on this approach. It’s really not something that is going to change no matter who you vote for.

Government stimulus, on the other hand, is very much a political issue. Pretty much everyone agrees that during a period of slow economic growth and low interest rates it’s good for the government to spend money to stimulate the economy. This increases the pie (GDP). We did that under Obama (most say not enough, and where the blame lies for the lack of spending is debatable). More curiously, we’re doing that now when we’re not in a recession, which is much less accepted wisdom. And more important is where we spend the money and how we finance it.

The general Democratic approach to government stimulus is to put the money in the hands of everyone, mostly through government spending like a jobs bill or on infrastructure. Does this incur debt? Yes. But so does cutting taxes on the rich and corporations. The difference is where does the money go. Jobs bills, spending on roads and transportation, inject money directly into the economy by creating jobs (wages for middle-class people) and improvement of public resources that benefit everyone (that’s what infrastructure is). It increases the pie by giving larger pieces to the majority of people. Tax cuts for the wealthy tend to increase the stock market (84% of which is owned by the top 10%). It increases the pie by making the larger slices even larger.

Having a larger pie is good, but people don’t judge their wealth (and thus their happiness) by the size of their piece. Rather, we judge ourselves by comparing our share to our neighbors. On that metric, we are at historically high levels of inequality and rising. Wages for the middle class and poor are flat. The ratio of executive pay to workers’ pay is at an all-time high (http://fortune.com/2018/08/16/ceo-salary-pay-workers-gap/). Unemployment numbers are low (following the trend that’s been in place for eight years) but that’s because a record number of able-bodied people are no longer seeking work. Our economy is doing well if you look at the whole pie, but it’s not so good when you look at what’s on your plate.

And that leads me to the third lever for the economy: regulation. Governments use laws and regulations to help control the distribution of wealth. They use it to prevent monopoly control and they use it to provide for fair labor practices, including minimum wages and safety requirements. They use it to prevent harm to the environment (which is a way for companies to offload a cost of business to the public at large). They use it to prevent the wealthy from leverage that wealth to their own benefit. Those regulations and control are being deliberately loosened in the same manner that led to the last recession.

And that brings us back to the difference between Democrats and Republicans. Sure, both are tied too tight to Wall Street; both have too many rich people at their top who are out of touch with everyday America; both are often bought and paid for by the wealthy. But Republicans publically and politically favor the wealthy. They already have reduced their taxes (and incurred huge debt to do so). They have rolled back anti-trust laws and financial regulations. They extoll pay raises for executives and measure their success by their stock portfolios. Democrats passed regulatory laws to rein in Wall Street. They created the Consumer Financial Protection Bureau (https://en.wikipedia.org/wiki/Consumer_Financial_Protection_Bureau). They advocate for workers’ right and an increase in the minimum wage.

Republicans are pursuing an economic agenda which is identical to the one under George W. Bush, which led to the worst meltdown of our economy in a century. The Democrats are pursuing an approach similar to the New Deal, which led to the greatest expansion of middle-class wealth our country has ever seen. Everyone loves pie; Democrats want to give you more.