Marshall’s magical money machine (The man behind the curtain)
According to Marshall, the accounting identity wherein the gross national income is equal to the sum of its parts, can, if not properly handled by government, lead to a practical non-identity wherein the national income does not equal the sum of its parts.
The fact is, if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, and, given the size of the private sector’s debt problem, a full-blown debt-deflation process will emerge.
In the strange looking glass world occupied by Marshall and his friends at New Deal 2.0, this identity, which has to be true as a matter of simple accounting, is, simultaneously, untrue as a matter of political economy. Confused by this, Marshall, who is on the opposite side of the looking glass, where reality undergoes an inversion of sorts, attributes the inequality to the lack of government deficit spending. It never occurs to him to investigate the source of inequality between the ideal form of the national income and its real form – he simply proposes to plug the gaping hole with dancing electrons.
In fact, he doesn’t want us to investigate this gaping hole in the ideal and practical forms of the national income either. Quoting Galbraith, Wray and Mosler, he tells us,
“Debt issued between private parties cancels out, but that between the government and the private sector remains, with the private sector’s net financial wealth consisting of the government’s net debt.”
He also informs us that this private sector “has to ‘finance’ all spending either through earning income, drawing down savings or liquidating assets.”
We found this point perplexing, since it is obvious that the entire source of government borrowing has to be from the private sector in these forms. Given this, it would appear as if government deficits presuppose income, savings and assets in excess of demand for new credit in the private sector. Taken as a whole, the private sector demand for credit cannot run up against the limits of income, savings and assets, if government is to run deficits.
Since the source of the problem cannot be the lack of income, savings and assets in the private sector taken as a whole, we can learn nothing of its cause by simply looking at the sector as a whole. We have to decompose private sector income, savings and assets. Fortunately, we do not have to go about doing research on the figures, since Professor G. William Domhoff, at the University of California, Santa Cruz, was kind enough to collect the information for anyone who cares to examine them at a web page titled, “Wealth, Income, & Power.”
According to Professor Domhoff,
In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater share: 42.7%
In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.
Here are some dramatic facts that sum up how the wealth distribution became even more concentrated between 1983 and 2004, in good part due to the tax cuts for the wealthy and the defeat of labor unions: Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the new financial wealth generated in the United States during the ’80s, ’90s, and early 2000s (Wolff, 2007).
The income distribution also can be used as a power indicator. As Table 6 shows, it is not as concentrated as the wealth distribution, but the top 1% of income earners did receive 17% of all income in the year 2003 and 21.3% in 2006. That’s up from 12.8% for the top 1% in 1982, which is quite a jump, and it parallels what is happening with the wealth distribution. This is further support for the inference that the power of the corporate community and the upper class have been increasing in recent decades.
The rising concentration of income can be seen in a special New York Times analysis of an Internal Revenue Service report on income in 2004. Although overall income had grown by 27% since 1979, 33% of the gains went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents for each dollar they made in 1979. The next 20% – those between the 60th and 80th rungs of the income ladder — made $1.02 for each dollar they earned in 1979. Furthermore, the Times author concludes that only the top 5% made significant gains ($1.53 for each 1979 dollar). Most amazing of all, the top 0.1% — that’s one-tenth of one percent — had more combined pre-tax income than the poorest 120 million people (Johnston, 2006).
And the rate of increase is even higher for the very richest of the rich: the top 400 income earners in the United States. According to an analysis by David Cay Johnston — recently retired from reporting on tax issues at the New York Times — the average income of the top 400 tripled during the Clinton Administration and doubled during the first seven years of the Bush Administration. So by 2007, the top 400 averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier (Johnston, 2010). (For another recent revealing study by Johnston, check out “Is Our Tax System Helping Us Create Wealth?“).
Marshall can, if he wants, take exception to these figures provided by Professor Domhuff, but then we would ask him to produce his own. If the wealthiest one percent of the population accounts for 35 percent of all privately held wealth, 38 percent of all privately held stock, 60 percent of all financial securities, 62 percent of all business equity, and 21 percent of all income – with the next wealthiest 19 percent taking the lion’s share of what is left over – is it just possible that his magical money machine, capable of spending without any significant limits to pull us out of this financial crisis, is not Washington, but the very wealthiest one percent of the population?
Indeed, when we investigate who owns the national debt, we find a surprising fact: despite all the hype about our indebtedness to China, Japan, Saudi Arabia and the usual suspects, private individuals own 57 percent of US treasury securities ($3.6 trillion) and 56 percent of all federal securities ($6.9 trillion). Yes, those are trillions, of which, we can deduce, no less than $2.2 trillion and $4.2 trillion of the above figures are the property of the wealthiest one percent of the population.
It does not escape our notice that even as tax rates have fallen, and the wealthy have profited by this fall the most, the resulting uninterrupted fiscal deficits from these tax cuts are funded entirely from borrowing back the monies Washington bestowed on the wealthy in the first place through tax cuts! Washington is, in effect, paying interest on its own tax revenues!!!