Our Misdirected Blame
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General Idea: Economic arguments from both the left and right are misdirected
Most Americans paying any level of attention to our country are in general agreement that the current societal and economic trends in the US, and globally, are not very favorable. Even while job opportunities are by some metrics at an all time high, more people than ever before are living paycheck to paycheck (1), rents are becoming unaffordable, and food is becoming more expensive. How is it that the Washington Post can run a headline that reads “Biden’s Economy Has the Best Growth Record Since Clinton”, while simultaneously worker wages are growing at a rate slower than inflation(2)? These statements say drastically different things about the state of our economy, yet both can be supported by different metrics used; this in itself is a good example of the lack of economic clarity we are facing. I believe the first statement is misleading because it uses metrics irrelevant and very far removed from the quality of people’s lives, and therefore should be deeply scrutinized. The second statement is interesting, useful, and its investigation may actually lead us to some level of understanding of what is happening in today’s world.
In this essay I want to describe and critique how republicans and democrats place their respective blame for our current economic struggles on different policies, institutions, and individuals. These examples and counterexamples will help to explain why I believe most sparring between the left and the right on economic issues is misdirected, unhelpful, and more often than not a distraction from the true fundamental issues that may help us get to the bottom of what has led to our unfavorable situation.
As a rule of thumb, I’ve tried to keep economic perspectives as boilerplate and basic as possible for both democrats and republicans. As a result, I’ve certainly over simplified and narrowed perspectives of both, but exhaustive recaps of the full range of each party’s agendas is not the point I'm trying to get across.
Republicans and Democrats agree on a lot
People across the political spectrum agree on the day to day symptoms of our current economic challenges
We agree that current economic conditions are hurting large portions of the population. Republicans and Democrats both feel that workers are not taking home as much money as they are worth. Everyone is asking the question: why is it getting harder, not easier, to make a living while innovation has accelerated at such a rapid pace?
We are all frustrated with power/wealth disparities. No one likes the feeling of drastic inequality: we feel self conscious and potentially guilty when we see others worse off than us, and we feel resentment when we see people far wealthier economically than ourselves. I believe these feelings are exacerbated on both sides by the feeling of something about society not being fair. This increases guilt of those who benefit from the lack of fairness, and heightens the resentment of those who are poor because they feel not only like they are “losing”, but that they are actively being cheated. I’m not saying they agree on why these disparities exist, but my point is that both republicans and democrats are experiencing and acknowledging the symptoms of our dysfunctional economy in day to day life.
We agree on fundamental characteristics of desired future states of the economy
We all want things to be fair and just. We want people to be paid a fair wage that reflects the value they provide to others. We want people to be able to save their earnings and plan for the future. We want a stable economy that enables us to pursue our passions, and not constantly worry about bills, debt, and economic drawdowns. We agree that political corruption seeping into economic policy decision making is not desired.
The point is, the vast majority of Americans would agree on the symptoms of the economic situation we’re in, and would agree on most essential characteristics of a more preferable state of affairs. Why, then, are both republican and democratic agendas constantly vilifying each other as the causes of the current economic predicament? The reason is because both democratic and republican economic talking points are aimed at addressing immediate symptoms experienced by the vast majority of people, only pitching for different techniques.
For example, republicans would argue to on net lower taxes during an economic struggle, while the democrats would argue to on net increase taxes (in order to fund targeted investment) in response to economic hardship. The fact that these strategies are so at odds, and that neither of these propositions and their associated agendas seem to solve our problems (as we can see from the past 50 years), creates a situation where we can constantly argue over policies, while literally never acknowledging, let alone debating or acting upon, the true underlying causes.
Why are most standard economic perspectives missing the mark?
Republican views and counterpoints:
“High taxes are a main reason why I’m poor”
A standard republican argument is that higher taxes on the citizens is a driver of economic hardship. While it is true that all other things being equal, an increased tax rate will leave you with less take-home income than before, this ignores a much bigger and more influential picture. Over the past 20 years the Average Total Federal Tax rate has fallen slightly from ~23% to ~19% (3); this is a trend in the direction that the Right argues for, yet I think it’s safe to say the correlation between low taxes and middle class wealth have been too strong during this period. So what is the oversight?
We need to take a step back and understand what being poor actually means. It is much more useful to think of wealth as any individual's share of all purchasing power in the economy. A quick thought experiment to make this point.
Scenario A: Person A makes $100 and is taxed at 50%
Scenario B: Person B makes $100 and is taxed at 30%
Who is “poorer”? All other things being constant, the answer is A, but there is more information needed to prove this claim. We need to understand the real value of these dollars, and not stop at the nominal perspective. Now let’s add some additional data:
Scenario A: Person A makes $100k and is taxed at 50% ($100 is 0.00002% of $5T total circulating dollars)
Scenario B: Person B makes $100k and is taxed at 30% ($100 is 0.000005%) of $20T total circulating dollars)
You can see where this is going… Although Person B has a higher nominal take home pay due to a lower tax rate, the actual value of his dollars is lower than person A. One can think of Person A living in 2002 and Person B living in 2022 (4). Person A, while having lower nominal take home pay, has 4 times more purchasing power than Person B. This makes it clear that surface level tax policy debates without discussion of more underlying information are not sufficient to understand the expected impact on wealth of a population. One needs to understand and focus on the concept of purchasing power rather than simply nominal dollar values to understand how wealth is maintained, created, and diminished.
“Politicians are corrupt, and are to blame for economic struggles”
This is a common assertion made by republicans and libertarians alike. While there is a very strong case to make for this argument in today’s world, I again believe this is the result of the nature of today’s corrupt money rather than a fundamental characteristic of political actors. It is true that politicians today are often doing the bidding of large corporations, government contractors, large donors, and banks. Why are politicians under the thumb of these non democratic institutions? I think it’s because of the ability for quasi-government entities (banks, military contractors, oil and gas, etc.) to access money at (essentially) no risk and engage in agreements and contracts with the government. If governments could truly only spend taxpayer money (based on tax brackets that are designed and approved democratically by the people) then these grievances would subside in a big way; but because governments (directed by politicians) are not constrained to the funds “agreed to” by the citizens (because of the nature of the money we are using), they can spend money in ways that don’t reflect the desires of the people.
It is because politicians (and their friends) can access new and debt based money and design the terms of the “loan” (bonds, deficit spending, etc.), and never be held to account for this poor allocation of resources because they can inflate the debt away over time, that politicians are even able to be corrupt. This is an anti democratic system. With commodity money, the incentives to engage in this corruption dissipate.
Below the surface of this argument is the claim that I believe gets closer to the root of the issue; political corruption has been able to expand in modern times because national currencies are not backed by any real commodities that cannot be corrupted by human incentives. Think of bonds in the modern era: this chart below shows how fast the money supply has grown in comparison to the growth of 10 year bonds over the same period. Sources: St Louis Fed, NYU Stern.
What we can see here is that returns on government bonds have not kept up with the increase in money supply, particularly since the ‘08 recession. The implication of this is that the government has been borrowing money, and paying interest that never actually accumulates to the real value of the borrowed money! All lenders/investors/holders of bonds are losing money in this situation, just at a slower rate than the alternatives of holding cash or foreign currency. The fact that US bonds have had a negative real return over the past 50 years is a problem; it means the government borrows money but never actually pays the real value back to the lender. This enables corruption and leads to misallocated resources, and should be a major concern for republicans concerned about political corruption, yet it isn’t even on their radar.
To reiterate the main takeaway; instead of demonizing politicians for being corrupt and fighting over who should replace them, we should focus skepticism on the underlying issues that enable political corruption to be so widespread. In this case, the ability for the money supply to go from $287B in 1959 to $21,503B in 2022 (a 7500% increase!) is an extremely pertinent issue.
“The free market is best way to distribute resources”
This classical liberal and currently republican viewpoint falls short in today’s environment due to a surface-level / symptom-centric trap similar to the “lower taxes'' argument. All things (including money) being held constant, I largely agree with this claim, but in reality all other things are not held constant, and are actually essential to the foundation upon which a free market can thrive. With today’s unsound money standard (think of the money supply increase I described above), a freer market leads to inequality due to the Cantillon effect. More on how this manifests later, as it’s actually also a critique of a democratic talking point.
This is a perfect example of why we are confused: with sound money, a free market is the best way to distribute resources effectively and is also the fairest way, and will likely over time lead to relative equality (assuming a democratic-ish political system alongside). Conversely, with unsound money, a freer market leads to misallocation of resources, and inequality - the exact opposite. Democrats notice the inequality challenge of the market and think policy is the solution, and republicans think policy is the problem, and the market is the solution - both are missing the point.
For this republican argument to be viable, a sound money basis, or at a minimum a free market money, is a prerequisite. If we look at this argument from a God’s eye perspective, doesn’t it feel like republicans are leaving out the most important part of the economy from their revered free market? Money itself. Republicans get up in arms when political policies subsidize or tax specific goods and services, yet don’t blink when we massively and inorganically discount the price of money to certain parts of the economy (setting interest rates). This is a far bigger barrier to a free market being effective than the Democrats’ hated political tax policy and redistribution efforts. Again, to summarize, a free market is likely the best way to allocate resources, but a sound money is a prerequisite to this state of affairs, so should be focused on prior to arguing over fiscal policy.
Democratic views and counterpoints
“Rich, greedy, corporations are the reason for our weakening middle and lower classes”
The argument here is that corporate profit is stripping the middle and lower classes of their wealth due to intentional exploitation, and that if companies operated more altruistically then the middle and lower classes would be better off. This perspective is erroneous for two main reasons in my view. 1. I believe it is naive and privileged to take for granted and not appreciate the massive range of goods and services that corporations have provided to us in the US (and globally). And 2. Corporations, because they are managed by people, respond to incentives; it is utopian and not useful to think that individuals (let alone a group of individuals acting as a corporation) can ignore self interest and sacrifice their interests for the benefit of others they don’t know.
More on my first challenge to this perspective. The free market and corporations acting in it generate the vast majority of wealth and prosperity in the economy by providing goods and services to the citizens. Just take an inventory of all of the objects, products, and activities you engage with on a recurring basis and think of how this good or service was provided to you. Everything from groceries to cars to restaurants to ubers to flights to phones to clothes are all provided to you by companies existing in, acting in, and responding to a market mechanism. All of these things are provided to you because the individuals managing corporations are rewarded financially for providing people products and services they prefer. I think many people (but well-off democrats fall victim to this the most) have become so accustomed to having effectively all of our wants and needs met, that we have forgotten it is these same corporations that are being demonized are the same entities that have been meeting our needs so completely that we have lost sight of how they’ve been being met. Democrats blast the wealth of Jeff Bezos, yet are the largest customer base for Amazon’s services (5). Democrats demonize Elon for his wealth, yet cheer on NASA when using SpaceX technology, are the largest customers of Tesla, and support accelerating EV adoption wholeheartedly. I know these examples are generalizations, but the point is that we can’t just look at inequality and say corporate greed is to blame. We need to appreciate the prosperity corporations have provided to us, and understand the true reason why the scales are indeed tilted toward large corporations.
The combination of the US Government being the largest customer for huge corporations, and the fact that the Federal government can pay these contractors with (effectively) new dollars is a much more realistic explanation for the disproportionate wealth large corporations generate than greed is (5, 6, 7, 8). The fact that the government is a massive customer of these corporations is a simple thing to understand the importance of, but the manner in which these contracts can be paid for is where things get really interesting. Federal governments are the least capital constrained (I won’t say fully unconstrained..) customers of large corporations. This means that they will effectively always be the highest bidder for these corporations’ services; this means that the government is not just an exceptionally large customer of corporations, but that they are the most influential because they have the greatest ability to express consumer demand (because of their unmatched deep pockets) and therefore indirectly push the funds of these corporations towards investments that otherwise would go towards addressing the direct demands of the people. This influence has trickle down effects that greatly affects the suite of goods and services eventually provided to the market.
What is the importance of these contracts being paid for with “new dollars” rather than with dollars already in circulation? Being the recipient of “new dollars'' creates advantages that are unavoidable and entirely unrelated to the intentions of the company; this is the Cantillon effect. This effect can be observed in any economy in which the money supply increases; but it only has an unfair and disproportionately large impact when the money supply is increasing quickly, and can be increased arbitrarily by only certain people/groups. Three quick comparisons to drive this home:
In a gold standard world, money supply increases slowly, and the beneficiaries of this new money are the individuals and entities that expended resources to extract this value (primarily gold miners and their investors). It’s important to note that the new money in this scenario is spread out quite quickly; miners will benefit from the Cantillon effect only from their leftover (low) margin, and their cost of “money creation” (in this case the cost of mining) is paid to other businesses that provided them with equipment, labor, and other services. This is a meritocratic way to increase money supply that doesn’t have significant negative economic consequences because a) inflation is slow, and b) distribution of new money is decentralized and meritocratic.
Let’s now imagine a system with a similarly meritocratic distribution of new money, but with a high(er) rate of inflation. We can think of this as the world on a silver standard. In this scenario, there will be a large portion of the economy centered on silver extraction because a) holding silver will depreciate in value quickly, and b) it is relatively easy to find silver as it is not as scarce as the gold scenario. This leads to a technically fair system of new money distribution, but is not ideal because it redirects capital investment towards silver extraction rather than towards real goods and services (because the revenue generated in the real economy will lose value due to inflation). This is worse than the gold standard because of the higher level of inflation, but still has the equalizer of new money distribution being meritocratic.
Now for the worst combination of the two characteristics we’ve been thinking about: higher inflation, and non-meritocratic distribution of new money. These are the characteristics of our system today. You can reference the table earlier in this piece to understand the level of inflation. To understand who is getting these new dollars, we don’t need to look far; the money is “created” by the Fed, and provided to banks, and then to corporations. This differs from the silver standard scenario because not anyone can generate new units of money through mining a commodity, only the Fed can do this. So the beneficiaries are the banks and large corporations who directly and indirectly get these funds first. In my view, the nature of this structure will always lead to disproportionate wealth concentrating in the pockets of the entities and individuals receiving and investing these new dollars.
In summary, I believe blaming corporate greed for inequality is a misdirected, surface level, and symptom-centric perspective. It isn’t greed that’s the core problem leading to wealth inequality, it’s the fact that we have two very concerning characteristics at the center of our money: 1) we have consistently high inflation, and that 2) this new money being distributed in an arbitrary and non-meritocratic way, and lining the pockets of corporations in the process.
“We need to have higher taxes to redistribute wealth to address today’s wealth divide”
This argument again is aimed at immediate symptoms, and fails to address the underlying driver of inequality that I described in the previous section. Here’s an analogy that I hope will help make this point. Imagine a seesaw that we want to keep perfectly balanced. Imagine this seesaw has a malfunction that causes the fulcrum to move slightly to the left at a changing rate. I view a redistribution policy stance as equivalent to constantly trying to move the right amount of weight from the right side of the seesaw to the left in order to keep it balanced, rather than trying to address the malfunction of the moving fulcrum. (To be crystal clear.. the moving fulcrum is analogous to our soft money system that has high inflation and arbitrary distribution).
If we had no possible way to try and stop the fulcrum from moving, then I would be much more open to a redistributive tax policy. But I believe we can stop the fulcrum from moving, and perhaps even recenter it to the middle of the seesaw. I’ll keep this one short because I feel like I’m belaboring the importance of sound money.
“UBI has worked well in all implementations we have seen play out - let’s do that”
UBI is a unique and interesting idea. It has a vague and wide range of accepted definitions, it hasn’t been tested at scale, but it undoubtedly has revealed some level of success in smaller scale pilots. I’ll start by laying out a few of the benefits and positives UBI could provide to an economy, and then describe why I think it shouldn’t be counted on to provide a large-scale solution to our current economic challenges.
There is no doubt that if we were able to magically reset the economic landscape, it would be preferable to have purchasing power equally distributed rather than concentrated in certain groups of people. The benefits of this are plentiful: the number of people able to express their talents and creativity in the economy is higher, the market will reflect the demands of all people in a more representative manner than in unequal distributions, and no portion of the population would be exclusively concerned with very near terms challenges and survival. These are all positive things. Let’s see how these positive effects have been realized in small scale pilots.
This WaPo article describes a lot of positive results of UBI-like programs that have been rolled out in various ways. When individuals received $500-$1000 per month over the course of a year, likelihood of employment increased, ability to pay for a $400 emergency health expense improved, and studies showed that mental health of recipients improved. There are also many compelling (for good reason) anecdotes that are referenced throughout the piece. I believe this could be a very successful policy for local governments to investigate and implement. If a town or county’s constituents believe that such a policy would benefit the society, then it should be implemented, just like all important policies in a democracy. But the same goes for the opposite. In the case of Stockton, CA, Michael Tubbs, the incumbent mayor of Stockon who implemented this successful pilot program, lost a reelection to a competitor who did not want to continue such a policy. This, in my view, is exactly how local elections are supposed to work. It is not politicians’ role to implement policies that their constituents do not support.
There are also some more tactical reasons why I believe implementing a UBI type policy at scale will face insurmountable challenges. I’ll touch on some general challenges, and specific critiques of the article here.
Can UBI be implemented at a Federal level? Hypothetically and technically, I think the answer is yes, but it would be very challenging to run a successful program both logistically and fiscally (balanced budget). Quoting WaPo, “Providing $1,000 a month to every American regardless of income — which some scholars argue would make the policy more palatable than one targeted to people in poverty — would cost $3.1 trillion a year, nearly half the federal government’s entire budget in 2021.” Let’s assume a much more conservative and realistic $300B a year in UBI payments. In order to be implemented, $300B in revenue must be raised through taxes. If we can truly raise revenue this much through democratic processes, then I don’t have a fundamental problem with it, but what we've learned over the past 15 years is that if constituents don’t vote for candidates who support tax increases to pay for programs, we pay for spending through borrowing and debt. Specifically, we issue bonds that banks with accounts at the Fed purchase with money given to them by the Fed. This new money, even if nominally “printed” to allocate amongst all people, is what causes inflation, the Cantillon effect, and the wealth disparity cycle I described above.
In the WaPo article, they quote MLK saying (my italics) that government aid programs all have a “common failing: they are indirect. Each seeks to solve poverty by first solving something else (UBI is actually far from simply “direct” if you think through all implications). I am now convinced that the simplest approach will prove to be the most effective (I agree) - the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.” I believe the last two statements contradict themselves. Simple is great, but I think it’s misleading to present UBI as a simple solution. In my view, the simple solution is to have money that doesn’t require constant human manipulation and altruism to function. It is much more complicated to have imperfect humans try to constantly optimize a system for the betterment of all, rather than let more natural human self interest be the equalizer.
I believe UBI is not a preferred Federal policy because of two difficult challenges it faces: one is logistical, the other economic. First for the logistical challenge. Let’s take the most simple example for UBI, say, $1000/month for all US citizens. I think the US would generally be able to give the vast majority of people these funds on a monthly basis, but there are the associated challenges of security, fraud, bank involvement, and in a scenario a step or two removed, this reveals too tight a tie between individuals bank accounts and the government in my view. We gained some experience providing everyone with funds during COVID. Around 140 million people were eligible for some level of direct stimulus through the three rounds of payments in 2020 and 2021. It is estimated that there are still almost 10 million eligible recipients who have not received any of their stimulus (GAO). One, this isn’t a great conversion rate for such a policy, and two, the people who haven’t received these payments are the same people who these payments (and UBI) are allegedly aimed at helping. These groups include those who haven’t filed taxes before, the unbanked, those with limited access to the internet, the homeless/addressless, and those with some level of immigration status. If we can’t get direct payments to the people who the policy was designed for, this makes me question how the US could implement something more permanent without drastically “upgrading” their visibility and access to all peoples financial information. I won’t linger on this, but this leads to a slippery slope and the CBDC Fedcoin discussion which would accelerate a shift of power from citizens to the CBDC program managers. This leads me to the economic challenge.
I view the economic challenges involved with UBI implementation as a direct exacerbation of the redistribution seesaw challenge I described in the “high taxes are the answer” section above. With this additional multiple hundred billion dollar distribution of funds, the seesaw gets even harder to balance. These are the additional questions that would need to have very logical, robust, and democratically supported answers for the externalities of an expansive UBI to be successful. How can we make these payments without increasing the deficit or inflating the money supply? How will we handle a large portion of the population not agreeing with this policy? How can we be sure that the managers of such a policy act in the interests of the people rather than themselves? (Fed and Treasury officials are not elected) . My point is, the implementation of such a policy is just like adding an additional input to an increasingly complicated economic calculation that we are constantly trying to solve. Another analogy that I relate this to is continuously building increasingly complicated workarounds to avoid fixing a poorly designed code or algorithm. I think we should either look to fix our existing code, or slowly shift to a more structurally sound code over time.
So far I’ve tried to question and poke holes in traditional democratic and republican economic policy arguments. I’ve laid out the case that we have inadvertently gotten stuck in a self reinforcing cycle of economic argument that will never end until the foundation breaks (and the crisis is massive), or we completely reorient our understanding of the root cause of our challenges. The good news is we do agree on the symptoms of our challenges, and we also agree on many fundamental characteristics of our desired future, as I described early on. So, what are the true fundamental issues leading to these challenges, and how can we be acting on this?
The real problems we are facing
I believe our current challenges are the result of the convergence of three concepts. 1) Humans are self interested and not all-knowing, 2) some money-like meme is required to facilitate our globalized economy, and 3) our current money is easily debased. If one of these statements was false, we wouldn’t be in the scary economic situation we find ourselves in today. I’ll briefly describe why each of these causes challenges, and then suggest near and long term solutions to address this unfortunate confluence of issues.
Humans are self interested and not all-knowing. When confronted with options, we and humans will always choose the options most preferred to us. Even when an action seems to be altruistic from a third party perspective, that action was taken by the actor because it was valued more highly than any alternatives; this is always the case. This selfish nature of humans is not bad or dangerous in itself, but can lead to poor consequences when paired with challenge 3. Humans are not all-knowing. This is pretty obvious, but can be overlooked, and when it’s overlooked we lose the humility that grounds us and encourages us to focus on cooperation and collaboration rather than demanding things of others. If we delude ourselves into thinking that we are altruistic and all-knowing, this will justify political and economic strategies that cannot play out in reality as they do in theory because of these inaccurate assumptions.
Some money-like meme is required to facilitate our globalized economy. This is also true on local, state, and national levels, and increases in importance as society expands. Here (pg 9) I describe in detail how the “money” emerged as the consensus strategy to engage in commerce; money outcompeted barter in the never ending battle between memes. It outcompeted barter because it expanded the number of trades available to people, and because it more effectively maintained value over time. Another way to think about money is as information. Money has the ability to express wealth, preferences, demand, desire, impact, success, failure, change, growth, distribution - so many things. You can think of all prices, transactions, salaries, bankruptcies, and more as data available to everyone that expresses the importance and value of ideas, objects, experiences, and anything else a human can provide to another. This is incredibly useful. Imagine what would happen tomorrow if the value of the dollar went to zero, and we had no shared ability to understand what others had to offer or wanted to do or buy. I think most everyone would agree that we need some medium of exchange to facilitate the commerce that enables our economy today.
Finally, our current money is easily debased. This speaks to the nature of Fiat currency, and results in the charts on page 4: $1.00 in 1959 is worth the same as $0.013 today. This can only happen when a currency is being debased or inflated away. This debasement is possible because our money is not “backed by'' a real world commodity. Technically, the fact that a money can be debased doesn’t mean that it will be. The reason it always will be is because of challenge 1; humans are self interested.
In summary, we require money to provide us with information, we currently have easily debased money, and we cannot overcome our innate self interest that inevitably will lead to us debasing the money. What can we do about it?
In my view, the only one of these challenges that is feasibly attackable is the third: the debase-ability of our money.