America’s Deteriorating Economic Performance

America’s Deteriorating Economic Performance

Paul Craig Roberts

The US military/security complex and its numerous supporters in the House and Senate can’t get enough of war.  The one they have going in Ukraine has denuded NATO members and the US of weapons and ammunition, thus creating a massive resupply market for US armaments manufacturers.  This is great profit news for the merchants of death, but it is a foolish policy to be warring with Russia when we are out of bullets.

Not content with our precarious position, Washington if fomenting war with China.  NATO is no longer limited to the North Atlantic Treaty Organization.  It has been expanded to the South Asian Treaty Organization.

Michael Hudson, my sometime coauthor, tells us about it in “The Looming War Against China” .  It is going to be a costly war for everyone, especially for the US as US manufacturing has been relocated in China. 

One of the good things that jumps out of Hudson’s article is that Washington’s wars on Russia and China have destroyed globalism.  Hudson notes that the world has divided into blocs:  America and its empire vs. the rest of the world.  Hudson emphasizes the cost and loss of efficiency of this breakup, but in my view the silver lining is that globalism is Washington’s mechanism for hegemony and keeping other countries under its thumb.  With the dollar as global money, Washington had no problem financing its huge trade and budget deficits. The breakup of globalism that Washington has caused is very much against Washington’s interest and permits the rise of a multi-polar world. 

Hudson’s analysis cannot be obtained from the Council on Foreign Relations or any think tank, or from the State Department, Pentagon, National Security Council, or from any university.  I recommend Hudson’s analysis.  It will enhance your perception as events unfold, the meaning of which the media is incapable of explaining.

I have one cautionary note.  Hudson makes a mistake that he often makes.  In this case it is a purely gratuitous mistake as it has no relation to the points he makes.  As I have corrected him many times, this time I will do so publicly.  

Hudson associates the cause of American de-industrialization and the rise of the financialized economy with “Ronald Reagan’s tax cuts for the wealthy.”  That is the way I read his sentence: “The United States has suffered an equally devastating shift of wealth and income to the Finance, Insurance and Real Estate (FIRE) sectors in the wake of Ronald Reagan’s tax cuts for the wealthy, anti-government deregulation, Bill Clinton’s ‘Third Way’ takeover by Wall Street.” I categorically reject that supply-side economics had anything to do with promoting predatory financialization and de-industrialization.

The purpose of the Reagan reduction in marginal income tax rates was to employ a supply-side approach to the problem of stagflation–the worsening trade-offs between inflation and employment, not to cut taxes for the rich.  Demand-side approaches had failed.  A few of us had a supply-side solution, and President Reagan and Congress agreed to give it a chance.  It certainly worked.  The Phillips Curve and worsening tradeoffs between employment and inflation disappeared.

The purpose of the reduction in marginal tax rates was to increase the earnings of labor and investment by reducing their tax cost.  It worked.  In place of the neoliberals’ prediction of a rise in inflation in response to tax rate reduction, inflation collapsed.

Hudson himself favors reducing the cost of labor and capital by subsidizing health care, education, and public transportation.  This would provide the same living standard at lower wage rates, thus making US labor more competitive.  Following his logic, if he is consistent he favors lower rates of tax on  income as they also produce the same real income with lower wage rates. Indeed, they produce higher real incomes because of the incentive effects.

Hudson implicitly agrees with my explanation of supply-side economics as he agrees with me that the current inflation, which is being mistakenly fought, is a supply-side inflation from the reduced production caused by the Covid lockdowns and US sanctions, not a demand-side inflation caused by consumers.

Hudson also knows that financialization of the economy has been on track for a long time and that the laws that gave financialization its boost were enacted years after Reagan.  I opposed them, as did former Chairman and CEO of the Chase Manhattan Bank George Champion.  The Riegle-Neal Interstate Banking and Branching Efficiency Act passed in 1994. This law permitted the large banks to collect deposits outside their home states. The repeal of Glass-Steagall was in 1999. The repeal destroyed the separation of commercial and investment banking.  Reagan’s last year as President was 1988.  He left the White House on January 20, 1989.

Puzzled by Hudson’s repeated mischaracterization of supply-side economics as “tax cuts for the rich,” I have concluded that the answer lies in his leftwing background.  Hudson is a man of the left, which in his day meant a man of the working class.  High taxes on the rich were seen by progressives of his time as reducing the power of the rich.  The left assumed that this would be beneficial to the working class, but high taxes on capital income also reduce investment and, thereby, the productivity of labor and wages. 

In our time, the left has turned against the working class.  The working class are the “Trump deplorables.” In the Woke ideology of today’s left, the white working class is seen as exploiters of people of color and others.  The leftwing that Hudson was a part of no longer exists.

Hudson is correct that the reduction in tax rates, which was equal across the brackets, most benefitted the rich in dollar amount, but this is because the rich pay more in dollar amount.  For today’s leftwing, equal rate reduction is not equity.  Equity would be taxing the rich so heavily that their income after tax would equal the national average.  In other words, a supply-side policy to lower the tax cost of labor and capital is not a possible policy choice in today’s Woke intellectual climate.

The emphasis on equity (equal outcomes) constrains economic policy and locks in the deterioration in American living standards that we are experiencing.  

Hudson’s analysis leaves me convinced that the combination of de-dollarization with offshored US industry (import dependence) means a decline in the dollar’s exchange value and higher inflation that will further lower US living standards.

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