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The "Gusher Up" Theory Of Economics
By Jeff Berg
13 November, 2009
Countercurrents.org
During the Reagan era the government put in place policies that guaranteed that the wealth that naturally accumulates at the top end of the income ladder stayed there. In order to accomplish this bit of social engineering the top taxation bracket was significantly reduced. The policies of this time succeeded to the extent that the wealthy did in fact get much wealthier.
Where they failed was in the second part of the "trickle down" theories that justified this policy to the public. The theory such as it was stated that if the rich were allowed to get richer this would allow the society at large to become wealthier as a whole. This extra wealth would then "trickle down" thereby resulting in everyone become wealthier than they had been previously and would have been otherwise. To no great surprise to the critics of this policy what happened instead is exactly what the critics projected. I.e. The gap between the rich and everyone else increased dramatically.
Simultaneously the Reaganites embarked on a massive increase in military spending which resulted in two major economic effects. First it massively accelerated America's debt and deficits. Second it acted as a further transfer of wealth from the middle class to the wealthiest classes. An aspect of military spending that is seldom publicly discussed but has been fully understood for centuries if not millennia.
Today we have a new variant on this economic theory that I would like to call the "Gusher Up" theory. In this economic model the government sprays massive amounts of money directly upwards into the pockets of the investor class. This is justified by declaring that a state of emergency exists and to do anything else would result in a complete collapse of the entire financial system. It is further justified by claiming that the end result of this massive geyser of money will be - in the long run - to make everyone wealthier. (As many of you know Keynes had a different view of this long run) This time around no one is saying out loud that this wealth will then "trickle down". No doubt afraid that the terminology might create negative associations for what is already a hard sell. It is nonetheless relentlessly implied.
Once again the critics of this policy have a different take. They are projecting that the net result of this policy will instead be a monumental transfer of money to the richest classes while leaving the entire country burdened with an unprecedented level of debt. The effects of massive debt on a county's economy and its citizens standard of living being at least as well understood as the effects of massive military spending on the pockets of the rich.
This debate could not be said to be raging in the mainstream media as the only critics of the current policies of the U.S. Federal Reserve given major media attention come from the deranged end of the "laissez-faire" libertarian fringe. Folks who would have had all governments do nothing after the collapse of Bear Sterns and Lehman. These "invisible handers" insist that the market like mother knows best. It is now clear in retrospect that what would have happened instead is a cascading failure of all derivative bets that would have taken down the entire economy. A situation that would have led to most of us being unable to access our funds from our banks and a subsequent run on the banks. The resulting panic, pandemonium and street level unrest would have led to an international credit seizure that would have stopped the global economy in its tracks. The net effect may well have put 1929 in the shade. This would have been to no one's advantage.
Those making an informed and balanced critique of these policies are as usual shunted off to the margins. Though they did have a few moments in the sun when it turned out that their projections about the housing bubble were exactly right. Dean Baker comes to mind.
Another critic whose projections have been exceptionally accurate for the last four years is Mike Whitney. In his latest article he refers to a recent study that shows that the critics of the "Gusher Up" theory are proving to be as prescient as those that predicted the effects of the earlier "Trickle down" variant.
"The Fed's meddlesome interventions (now in-excess of $11.4 trillion) represent the largest transfer of wealth in history.
Berkeley economics professor Emmanuel Saez, recently released a report which just confirms that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression. The report shows that
1--Income inequality is worse than it has been since at least 1917
2--"The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
3--"In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth." ~ http://www.informationclearinghouse.info/article23947.htm
Along with these facts are the current facts about the productive economy in the U.S. today. The true jobless rate is at 17.5% and shows every sign of increasing. The number of people "upside down" on their mortgages and being tossed out of their home continues to grow at an alarming rate. Worse yet there is another round of resetting beginning in the Adjustable Rate Mortgage market which will only exacerbate this already drastic situation. Simultaneously commercial real estate is giving off every sign that it too is a bubble ready to burst. This is the picture for the working and non-working stiff for the next few years at least. To call this a depression for the non-investor class is no exaggeration.
Meanwhile the asset and equities bubbles are being reflated with the Fed's money. It's as if the Fed has decided that the only way markets will be allowed to go is up. No matter how much public money this takes. What Whitney and people like Marc Faber, Peter Schiff and Jim Rogers rightly call "lunacy".
When we finally get around to tabulating the numbers for the period of 2008 to 2010; the gap between those few at the top and what is now being referred to as the "bottom 90%" will have become the widest chasm ever seen in the U.S. What this will mean for the social fabric of the country is not hard to guess. The only upside that I can glean is that this time, surely, the U.S. will not turn to a massive increase in military spending to pump-prime its economy. If only because they have no foreign creditors to bankroll the effort.
Who knows maybe this will leave the energy, transportation and housing retrofit sectors as the only places large enough to turn to in order to kick-start the U.S. and global economy. If this turns out to be the case, and the U.S. meets its domestic challenges and international obligations in these areas, then there is a good chance that all else will be pretty much forgotten if not forgiven. "The War on Terror" like the "Domino Theory" fading into well deserved obscurity. Horrific episodes that ultimately meant little to those not directly affected and not permanently fatal to the human project. Meaning there is at least something to be hoped for if not to be counted on.
Ton confrere,
Jeff Berg
Jeff is a founding member of Post Carbon Toronto. His writing focuses on Energy & Emissions and their micro and macro implications ecologically, economically and socially. He can be reached at [email protected]
