Paul Adolph Volcker is dead at the age of 92. (Most accounts of the man suppress the middle name, though it was often pointed out with bitter glee by builders and others who were undone by his high interest rate policies in the early 1980s.) As I wrote in LBO when he left office in 1987, if capitalism gave out a Hero of Accumulation award, he would have been first on the honors list.
Let’s recall what he did, because all the worshipful obits will almost certainly sanitize the history. Volcker was appointed chair of the Federal Reserve by Jimmy Carter—on the recommendation of David Rockefeller—to get inflation under control. Carter’s old Georgia friend and advisor Bert Lance tried to tell him it was a mistake, and that it would almost certainly cost him re-election. Lance, now remembered as little more than a Good Old Boy, if he’s remembered at all, was right. But Carter ignored him. The charms of a Rockefeller are irresistible.
Inflation is a complicated thing, and this is no place to delve into those complexities. For the purposes of this post I’ll just say a couple of things. Part of the reason for rising inflation in the 1970s was that oil exporters had been jacking up prices—from under $4 a barrel to over $10 in the first oil shock of 1973–1974, and then from under $15 to over $30 in the second shock, 1979–1980. Other commodity-exporting countries were trying to emulate their oil-exporting colleagues. And with those commodity price moves came calls for a new world economic order—one in which the North no longer lorded it over the South, and one in which the South claimed a larger portion of global wealth.
Domestically, labor was restive. There were an average of almost 300 major strikes a year during the 1970s—more in the earlier years of the decade, but they persisted throughout. There was a lot of worry that the working class had developed a serious attitude problem. There’s an appealing theory that reads inflation as a sign of stalemate in the class conflict: workers push wages higher and employers respond by raising prices to protect profits. If the workers were winning, profits would suffer; if employers were, wages would suffer. Neither happened in the 1970s.
The month Volcker took office, August 1979, the consumer price index was up almost 12% from the year before. (See graph below.) But the unemployment rate was 5.8%—not low, but below average for the 1970s. In Congressional testimony a couple of months later, Volcker declared that “The standard of living of the average American has to decline” if inflation was going to be subdued. He worked hard to make that happen.
He made that happen by driving interest rates up to levels previously unknown in US history (and the history at my fingertips goes back to 1857). The federal funds rate—the rate at which banks lend each other money overnight, the most sensitive indicator of Fed policy—went from 10.9% when he took office to 17.6% in April 1980. That drastic tightening of monetary policy sent the economy into a sharp recession. Unemployment rose by almost two points in a matter of months. The downturn was so brutal that Volcker retreated. He—and while Fed policy is set by a committee, the institution is dominated by its chair, and Volcker was a particularly forceful chair—drove fed funds briefly below 10% in the summer of 1980.
But inflation persisted as the economy recovered, so Volcker went back to war. He pushed the fed funds rate to a peak of 19% in January 1981, let it fall a few points into the spring, then pushed it back to 19% in June and July. The economy went into a deep recession, the worst since the 1930s (though we outdid it in 2008–2009). Bankruptcies zoomed, and the unemployment rate broke 8% in November 1981, 9% in March 1982, and 10% in September. Inflation, which had been falling in 1980 but not seriously enough for Volcker, began falling for real in late 1981.
With inflation breaking below 6%, Volcker relented in August 1982—not so much because the US working class was suffering and interest-sensitive industries like housing and manufacturing were in depression, because Mexico was about to “blow,” as he put it. Like many Latin American countries, Mexico had borrowed heavily in the 1970s, the the interest rate spike was ruining them. Fearing that a Mexican default would bring down the banking system, Volcker began pushing down the fed funds rate, and in August 1982 made it clear that the regime of extreme monetary tightness was over. Inflation continued to fall, however, breaking below 3% in 1983.
From the POV of the ruling class, a couple of very good things happened as a result of that regime of extreme tightness. The recession scared the hell out of the working class, leaving millions in terror of job loss. That consciousness was reinforced by Reagan’s firing of the striking air traffic controllers in August 1981; the leader of the striking local was hauled away in chains, a picture that spoke many more than a thousand words. Strikes fell from an average of 300 in the 1970s to 80 in the 1990s—and 23 since. The stock market took off the minute Volcker made it clear that interest rates would fall; investors celebrated the decisive victory of the owners’ contingent in the class war, a party that has continued to this day. That fearful consciousness instilled by Volcker and Reagan persists in the US working class almost forty years later: make no demands or you might find yourself sleeping on the sidewalk.
There was an international dimension to that class war victory as well. Capital successfully turned Mexico’s threatened default into a great opportunity to restructure the global economy to its liking. As a condition for getting fresh loans, and indulgence on the old ones, Latin American and other debtors had to agree to open up their economies to foreign capital and trade and lift domestic regulations and subsidies—the entire package of hypercapitalism that would come to be known as neoliberalism. In less than a decade, calls for a new world economic order, one favoring the South, were replaced by a intensified arrangement of rich countries telling poorer ones what to do, down to the level of what basics like food should cost. As with the domestic reconstruction, Volcker was at the center of it.
RIP Paul Volcker, Hero of Accumulation.
Just added to my radio archive (click on date for link):
November 21, 2019 Ryan Grim, author of We’ve Got People, on the long fight between insurgents and establishment in the Democratic party • Jenny Brown, author of Without Apology, on the history and politics of abortion in the US (check out National Women’s Liberation and Redstockings)
People on the left have been debating Elizabeth Warren’s health plan since it was released a couple of weeks ago—“realistic” or a ruse? I vote ruse, but I don’t want to make that argument myself right now. Instead, I’ll allow a research note from Barclay’s, which found its way into my inbox, do that work.
Here’s the opening paragraph of the report, by Barclay’s analyst Steve Valiquette:
Compared to her previous hardline stance on M4A, the new plan represents a significant change in tone, in our view. Not only does the transition plan push out the legislative agenda for M4A (potentially to year 3), but it also tacitly acknowledges the practical and political resistance of pushing too much change too quickly. In fact, we think Warren’s plan was carefully crafted to appease both progressive and moderate Democrats, and may afford her flexibility to pivot on health care issues throughout the Democratic primaries. All said, her near-term plan seems much closer to more moderate proposals endorsed by Biden and Buttigieg; and as such the ‘pivot’ catalyzed HC [health care] Services stocks on Fri with MCOs [managed care organizations] leading the way (+5% vs S&P 500 up 0.8%).
Health care stocks rallied on the release of Warren’s plan, meaning that Wall Street—which isn’t always right, but does have some skill in decoding political bullshit—sees her plan as political bullshit.
Warren’s defenders say the scheme, to start with a “moderate” Dem plan and wait three years to push for the full program, is politically realistic, given Congressional and other political constraints on ambitious social programs. That argument never made sense to me. If the success of the right over the last few decades has taught us anything it’s that going for maximalist demands gets results. You might have to make some concessions along the way, but you get some wins and also push the political center of gravity in your direction. If you start out already compromised, you won’t get anywhere.
So that whole phase-in approach looked to me like a signal that she wasn’t serious about the M4A part—that it was just for show. Barclay’s offers support for the cynical reading:
However, based on recent history, we note that a US president typically enacts signature legislation during their first two years in office (e.g. ACA under Obama, tax reform under Trump), so the possibility that M4A may slip until year three further decreases the likelihood that this plan comes to fruition, in our view.
The only question is how conscious Warren is of this. Since she’s quite smart, it’s hard to believe she isn’t.
Much of the rest of Valiquette’s note is devoted to analyzing how bullish her opening gambit to allow people to buy into Medicare would be for Humana ($2.6 billion in profits in the most recent year, growing at a 7% annual rate). A Medicare buy-in would allow people over 50 to buy packages similar to Medicare Advantage, the semi-privatized option run by managed care companies that restrict coverage in all the too-familiar ways. (For people under 50, there would be a “modest-cost” public option.)
Enrollees in Medicare Advantage plans rate their care lower than traditional Medicare, especially if they have chronic illnesses. Traditional Medicare allows you to “choose your doctor” and Medicare Advantage doesn’t. Since the inability to choose your doctor is one of the major raps against “socialized medicine”—nonsense, given all the restrictions that come with private plans—Warren is embracing one of least appealing parts of Medicare as the leading edge of her plan, the one that’s supposed to build support for the transition to full M4A.
But her scheme would be great news for Humana. The company left the Obamacare exchanges in 2017, and if there were a scheme to allow people to buy into Medicare, most of the migrants would presumably come from those exchanges. Barclay’s estimates a Warren-style buy-in would boost Humana’s earnings per share (EPS) by 50 cents. That’s not a massive windfall, given current EPS of just under $19. But it is a step in the wrong direction, since companies like Humana need to be put out of business, as a serious M4A plan would.
Supporting evidence: the performance of Humana stock over the last month.
Just added to my radio archive (click on date for link):
October 24, 2019 Gabriel Winant, author of this article, on the professional–managerial class and its decomposition (the 1977 Ehrenreich papers are here and here; their 2013 follow-up is here) • Alan Beattie, author of this paper, on the US-led global order and its decomposition
It’s become near-consensus on the social democratic left that you can fund a decent welfare state by taxing the rich and shrinking the military. Sad to say that isn’t true. Those are good things in themselves, and you could pay for some excellent things with that agenda, but it would still be well short of actual social democracy.
I’m defining social democracy as a large and robust welfare state that socializes a lot of consumption through taxation and spending, compressing the income distribution, reducing poverty sharply, capping the political power of the rich, insulating people from the risks of sickness and unemployment, and educating people at low cost, all structured to reduce racial, gender, and other inequalities. It’s not the end of capitalism, but it’s a lot bigger than Medicare for All and free college, as badly we need both those things tomorrow.
We’re sure not spending much on human uplift now. As the first graph below shows, the US spends less and taxes even less than other rich countries. In 2017 (the vintage of most of these stats), US government at all levels (aka general government in fiscal jargon) took in 34% of GDP in taxes and spent 38%. Australia spent somewhat less and taxed somewhat more, but otherwise the US figures are the lowest of the bunch.
The three countries who are labeled “Scand” in these graphs—Denmark, Norway, and Sweden—spend an average of 50% of GDP and take in 53%. None is very far from those averages, which are 12 and 19 points above US levels respectively. The US lags the averages of the entire OECD, the Paris-based think tank of, by, and for the richer countries (and the source of all these stats), by 4 points on spending and 8 points on revenue.
Some on the left suggest that we could also borrow more, but we’re already doing a lot of that, and to little good effect. Our budget deficit, over 4% of GDP, is the largest of any of the countries shown. It’s nine times the OECD average. The Scandinavians run a surplus, though Norway’s oil gusher distorts that average. Sweden and Denmark run surpluses over 1% of GDP. Australia and Canada run small deficits; Germany, a small surplus. If you listen to some of our more fervent populists and MMTers, to whom deficits are essential for economic health, you’d think these countries would be in a deep slump, but they’re not. And all have lower poverty rates and less inequality than the US.
If you take out interest payments to get what’s known as the primary balance, the US had the largest deficit of any country but France. But you can’t take out interest payments—they can be big. They’re 3.4% of GDP for the US, three times the cost of Bernie Sanders’s free college scheme. That’s just a bit less than Italy, which has a far larger debt relative to its economy. (See top left graph of “spending shares,” a few paragraphs down.) Taking money from the mass of taxpayers and handing it over to mostly rich bondholders is a perverse use of state power.
Deficits accumulate into debt over time. As the graph below shows, while the US debt burden is above the OECD average, it trails debt champs Italy and Japan. Australian and Scandinavian debt levels are low. Surprisingly, though, the effective interest rate (computed as the interest/GDP ratio divided by the debt/GDP ratio) paid by the US—the cornerstone of global capitalism whose government debt it the world’s benchmark—is twice the OECD average, and higher than Italy, a country not known for fiscal righteousness. But when you remember that junk bonds helped put Donald Trump where he is today, it begins to make sense. We’re not the sterling credit we used to be.
What do governments spend their money on? The graphs below give some idea. (For some inexplicable reason, much of the data for Canada is missing.) As already noted, the US spends a lot on interest paid to bondholders—well over twice the OECD average. The Scandinavian governments are net earners of interest, not payers, though that’s again largely because of Norway’s oil income and the vast investment portfolio it’s endowed.
The US spends well over twice the OECD average on the military, even more compared to the Scandinavians—3.2% of GDP by the OECD’s accounting. According to the US national income accounts, the Pentagon eats up 3.9% of GDP, the difference from the OECD no doubt reflecting different classification schemes. (The OECD uses the internationally standardized System of National Accounts; the US marches to its own statistical drummer.) But that military spending number—which has hardly budged during the Trump years, his braggadocio to the contrary—is just over half what it was during the Reagan years and less than a third what it was at the peak of the Vietnam war. Still, it’s grotesquely high. Taking that near-4% down to the Japanese level of 1% would free up 3% of GDP for nobler pursuits. That’s significant but it’s not social democracy.
Not graphed here: spending on “public order,” cops, courts, prisons, and firefighting. Unsurprisingly, the US spends a lot on those, a fifth above average and 75% more than the Scandinavians, but the differences are less than 1% of GDP. There’s every reason to slash the regime of “public order” deeply, but it wouldn’t free massive amounts of resources—though of course it would free a lot of people and soften the depraved brutality of American carceral state.
And cutting interest interest payments and radically shrinking the military and “criminal justice” system, which are minima for a better society, still wouldn’t change the public sector’s share of GDP, only redeploy it. Increasing that share would be essential to a serious social democratic program.
Surprisingly, the US spends a lot on health—more than any other country in the graph. More on all this in the near future, but it’s a reminder that public spending on health in the US is already enormous, and comes nowhere near covering everyone. Grafted on top of that public finance system—mainly Medicare and Medicaid—is an enormously wasteful private system that isn’t captured in these stats. That could be euthanized, its cash flows repurposed into a universal public system.
The fourth graph is where American exceptionalism really comes in—the share of GDP spent on “social protection,” that is, classic welfare state programs. In the OECD’s words, these include “sickness and disability; old age (i.e. pensions); survivors; family and children; unemployment; housing; social exclusion n.e.c. [not elsewhere classified]; [and] R&D social protection.” The US spends under 8% of GDP on these things, less than half the OECD average and a third what the Scandinavians spend. Over 60% of the US total goes to Social Security, compared to just over 40% for public pensions in Scandinavia. Despite that, pensions there are nearly twice as generous, measured as a share of GDP, than ours.
Unfortunately, the OECD breaks out social spending in detail for only a subset of member countries, all in Europe. But some rough comparisons are possible, using the US national income accounts. (See graph below.) Scandinavians spend over 12% of GDP on social protection other than pensions, more than four times the US’s 3%. They spend 5% on sickness and disability allowances; the US, little more than 0. They spend over 3% on family and children, things like child allowances and day care; we spend 0.1%, mostly on things like TANF. (The official description of TANF emphasizes not humane poverty reduction, but the promotion of marriage.) They spend 1.4% of GDP on the unemployed, both benefits and retraining schemes; we spend 0.1%. The US numbers are probably a little low, because the national income accounts table these are drawn from (table 3.12, here) may not include some indirect spending on these items, but not profoundly so. There are important things the US state just doesn’t do (publicly funded child care) or does only meanly (TANF).
There are other forms of spending that aren’t captured here. Public employment is 20% of the Swedish total and 15% in the US. Public investment is almost half again as high. Those differences mean government offices aren’t understaffed and dingy, and things in general don’t feel like they’re falling apart.
How do the Scandinavian states—and others that are more generous social spenders than the US—finance that spending? Not, as we’ve seen, by borrowing. Countries with more generous welfare states than ours borrow far less. Instead, they tax.
Here are some of the principal revenue sources. On some things, like social security and personal and corporate income taxes, the US isn’t an outlier. On others we are. Property taxes, a core financing mechanism for US localities, take up 5% of GDP, over twice the OECD average and over three times the Scandinavian. At 5% of GDP, our taxes on goods and services—mostly value-added taxes (VATs) in other countries, not sales taxes, which are classed separately—are less than a third the Scandinavian share of GDP (16%), and not much larger compared to the OECD average (14%). The difference between the US and the Scandinavians is over 10% of GDP.
Yes VATs are regressive. They’re taxes on consumption that hit the poor harder than the rich because the further down the income scale you go, the larger a portion of your income you consume. But their regressivity is more than compensated for in the Scandinavian countries by spending, which not only takes from the rich and gives to the poor, but takes from the masses and gives it back in the form of good public services. It’s a way of socializing consumption to some degree, of taking things out of competitive markets. It makes for a less stressful life than the US, where the normal state is to be just a few paychecks from insolvency. Or worse.
The relationship between the share of the VAT take and spending on social production is impressively close; for the twelve countries shown, admittedly not a huge sample, the correlation coefficient between the two is 0.69. As Lawrence Summers once put it: “Republicans don’t like value-added taxes because they are a money machine and Democrats don’t like them because they are regressive. We will get a VAT when Democrats realize that it is a money machine and Republicans realize that it is regressive.”
Here are a few statistical reminders of what all this social democracy can get you. Scandinavians live, on average, over three years longer than Americans—and Swedes, the longest-lived of the three, outlive Americans by almost four. (Danes have consistently lagged their neighbors, by about two years.) As the graph below shows, since at least 1960 (when the World Bank data begins), Scandinavian life expectancy has always exceeded American. The gap was just over three years six decades ago; that narrowed to just over a year in the mid-1980s, and then began widening—gradually at first, and accelerating after 2000 or so. US life expectancy fell between 2014 and 2017, which is almost unheard of among countries not at war or in social collapse; it fell again in 2018, though it’s not graphed here. Scandinavia’s has continued to rise.
Part of that widening gap, and the recent US decline, can be explained by the insane expense and inaccessibility of the health care system, but it also reflects poverty, inequality, and the stresses that come with both.
These are illustrated in the graph below. (See captions for definitions.) The US has the most unequal income distribution of any rich country for which the Luxembourg Income Study has data, though it still has a way to go to catch up to South Africa, Russia, and several Latin American countries. Much the same can be said for poverty; the US has the highest rate of any rich country other than Israel, though it’s also beaten by a similar set of poorer countries. Getting those numbers down would require some really ambitious social spending.
can you do it by taxing the rich?
Can you fund a Scandinavian-style welfare state by taxing the rich alone? No.
In 2012, the economists Peter Diamond and Emmanuel Saez published a widely cited paper arguing that the optimal top tax rate for soaking the rich is 73%—optimal in the sense of pulling in the most revenue. Any higher, and avoidance will undo any increase. Who knows? But let’s accept it for now. Working with those numbers, Washington Post wonk Jeff Stein figured that could pull in $320 billion a year at most. Stein also figures a 1% tax on the wealth of the top 1%, pretty much Elizabeth Warren’s plan, would pull in $200 billion a year. Bernie Sanders’s freshly released wealth tax plan would raise $435 billion a year, according to its designers, Saez and his Berkeley colleague Gabriel Zucman, who also designed Warren’s more modest levy. (A popular version of their analysis is here; a more technical one, here.)
Combine those two and you get a revenue increase of $520–755 billion, or 2.4–3.5% of GDP. Scandinavian revenues are 19 percentage points higher as a share of GDP than the US. (Recall that we not only need to spend more, we also need to borrow less if we’re to reduce the tribute paid to creditors.) So these taxes, which are probably what lots of contemporary American leftists have in mind, come only an eighth to a fifth of the way towards closing the gap with the Scandinavians (and it must be said the Scandinavian welfare states aren’t as generous as they were before neoliberalism set in, but they’re still big).
I’m taking these revenue estimates as they are. It seems likely that, were taxes raised sharply in this fashion, a good bit of the targeted money would disappear, and not just because of clever lawyers and accountants and the lure of offshore locations. CEOs, bankers, and star athletes wouldn’t be paid so highly if the money were going to be taxed away, as the experience of the 1950s and 1960s shows. Superstar incomes have flourished because they’ve been so lightly taxed. Stocks, where the very rich earn a lot of their money—a large share of the income of the very rich is from capital gains—would not be so richly valued under a government so clearly hostile to wealth. The ranks and riches of tech bros and hedgies would be radically shrunk.
A few stats about the Forbes 400 will underscore these points. When the magazine first issued it annual list of the USA’s richest in 1982, No. 400 was “worth” $75 million (which would equal $195 million in 2018 dollars), and the whole lot of them together tipped the scales at $94 billion, or not quite 3% of GDP. Last year, the minimum price of admission was $2.1 billion—eleven times the current value of 1982’s minimum—and the whole gang claimed $2.9 trillion, or 14% of GDP. It’s no accident, as the vulgar Marxists used to say, that the list made its debut in September 1982, one month after the great bull market in stocks began—one that, aside from a few stumbles, like the 1987 crash and the 2008 financial crisis, continues to this day. It’s been a riot of accumulation.
A major reason why so much money as accumulated at the top is that policy has been coddling the rich for decades, with assistance from a popular culture that has celebrated them. We want to throw all that into reverse. To reduce the power of the rich requires taking their money away—as Sanders said in introducing the wealth tax, “I don’t think that billionaires should exist.” Stocks and other financial assets would deflate profoundly.
That means you can’t plan for those hoards of money to be a constant source of recurring revenue, a point that Saez and Zucman do not address in those two papers, but which they do address in their forthcoming book, The Triumph of Injustice. As they say—in a short passage quite deep into it—“In the long run, a radical wealth tax erodes top fortunes so much that it reduces the taxes paid by the ultra-rich….” Although that’s a comment about the wealth tax, it could be adapted to high rates on top incomes. The point is less revenue-raising, though you can do some of that, but giving extreme wealth a very radical haircut. Plutocrats will whine about “confiscatory taxation,” and they will be right. And with a reduction in their riches would come a reduction in their political power. Right now that seems like a pleasant dream, but we should be clear on the politics involved.
Which takes us back to the need for broader taxation to fund a civilized welfare state. In the book, Saez and Zucman reject a VAT for the US as too regressive, and propose a tax on all forms of income. The numbers they float are well short of a full welfare state—it’s little more than Medicare for All and free college (both of which, let me say again, we need badly). But regardless of the style of tax and its level, we’d have to raise more revenue, and not just from the rich.
Some might find it impolitic of me to say all this, but you have to be honest with people, otherwise they’ll turn on you for selling a bill of goods. There’s no doubt that adding 3% of GDP to social spending would be a good start — it would improve people’s lives and change their expectations. Elites hate giving the masses anything, lest it increase the appetite for more—and, as Sam Gindin argues, the lowering of expectations has been one of neoliberalism’s great successes.
We could frame the programs financed by taxing the rich as an overture or downpayment and hope that stimulates the appetitite for more. But if we want a seriously better society of the sort outlined in the Green New Deal, then it’s going to take a lot more — and it won’t “pay for itself.” As Ralph Waldo Emerson said, ‘‘nothing is got for nothing.”