Reverse Flow: Flip-Flopping the U.S. Economy

One feature of economic systems, as in ecosystems, is the flow of resources from one region to another.   For instance in an ecosystem, nutrients flow up the food chain.  If pollutants get into the system, they flow that direction too and concentrate in the top predators.  Rivers flow downhill, winding wherever the ridges and ravines of the landscape guide them, carving out their paths as they go.  In economic systems, money and wealth also flow through winding, complex paths.  Economic systems are human constructions, although the more complex they become the less direct control people have over them, for good or for ill.  People and organizations regularly intervene in the flow of resources in an attempt to redirect their flow.  Sometimes they do this with an eye toward the common good, but other times with an eye to personal gain.

There is an interesting history of redirecting the flow of rivers.  One of the more famous cases is the Chicago River, which used to flow into Lake Michigan.  As the city and its industry grew, the river became more and more polluted, and its toxic flow into Lake Michigan put poisons into the water supply of Chicago.  Eventually, a plan to reverse its flow through industrial canals so that it eventually flowed into the Mississippi Basin helped preserve the waters of Lake Michigan.  Of course, it means the sewage and pollution flowed somewhere else.

The Soviet Union, known for its massive statist vision of industrial progress, long debated and planned for reversing a portion of the flow of Siberian rivers whose waters were "wasted" by emptying into the Arctic Ocean.  Regions with growing industry, agriculture, and population could use the water better for the benefit of the Union.  The internal debates dealt not only with the methods and costs of water transfers, but also on the affect on the climate, especially in the northern regions.  Many argued that the reversal of waters would lead to a shorter growing season and colder winters.  Eventually the plans were dropped, although the mayor of Moscow has revived the idea to reverse a portion of the flow of the Ob river to serve other regions.

China has planned numerous water redirection proposals in order to deal with its growing industrialization and population needs.  Russia fears dams and canals in China will bring desertification to some of its important industrial and agricultural regions.  India and Bangladesh face even greater fear of ecological and economic damage from a plan to divert water from the Tsangpo-Brahmaputra River to the Yellow River.  Some of the most densely populated regions of the world are watered by the Brahmaputra, which flows east along the northern side of the Himalayas in China before turning south, then west through Nagaland and Bangladesh.  China's plan would send much of this water north and east, eventually thousands of miles away into Bohai Bay off the Yellow Sea, not far from Beijing and in the direction of Korea.

The point of talking about river reversals is that in each of these cases, some who had the capacity to redirect the flow of water did so, although not necessarily to the benefit of all who could be affected.  As China and India compete for industrial growth, and as each deals with a history of population growth, water becomes an ever more precious commodity.  The capacity to control the flow of this resource can become a path to survival and prosperity for some, and for impoverishment and death for others.  Even the powerful central administration of the Soviet Union could not amass the social and political power within the nation-state to reverse the flow of water resources according to its vision of a new society.  The Chicago River's transport of sewage benefits many people, but pollutes the Mississippi River basin and potentially many urban and rural water supplies as it crosses Illinois.

Various parties, even those who claim to believe in free markets, are constantly evaluating the flow of resources in the economy and trying to think of ways to redirect the flow.  It is fairly accurate to conclude that those who insist on doctrines of the free market conveniently interpret freedom to be their own freedom while limiting the freedom of others.  They organize, spend, lobby, and manipulate to bend the laws governing economics in their favor and against the interests of those they consider their opponents or adversaries.  Many seek monopolistic structures whereby they can become the de facto market regulators in place of government regulation, or with the assistance of government regulation. 

An examination of the economic policy changes and their results in the forty years since 1980 ends up looking much like reversing the flow of rivers.  Paul Krugman's column, "The Old Enemies," of a week ago spurred me to see this comparison.  Here is an excerpt.

If you really want to know what’s going on, watch the corporations.

How can you do that? Follow the money — donations by corporate political action committees.

Look, for example, at the campaign contributions of commercial banks — traditionally Republican-leaning, but only mildly so. So far this year, according to The Washington Post, 63 percent of spending by banks’ corporate PACs has gone to Republicans, up from 53 percent last year. Securities and investment firms, traditionally Democratic-leaning, are now giving more money to Republicans. And oil and gas companies, always Republican-leaning, have gone all out, bestowing 76 percent of their largess on the G.O.P.

These are extraordinary numbers given the normal tendency of corporate money to flow to the party in power. Corporate America, however, really, truly hates the current administration. Wall Street, for example, is in “a state of bitter, seething, hysterical fury” toward the president, writes John Heilemann of New York magazine. What’s going on?

One answer is taxes — not so much on corporations themselves as on the people who run them. The Obama administration plans to raise tax rates on upper brackets back to Clinton-era levels. Furthermore, health reform will in part be paid for with surtaxes on high-income individuals. All this will amount to a significant financial hit to C.E.O.’s, investment bankers and other masters of the universe.

Now, don’t cry for these people: they’ll still be doing extremely well, and by and large they’ll be paying little more as a percentage of their income than they did in the 1990s. Yet the fact that the tax increases they’re facing are reasonable doesn’t stop them from being very, very angry.

Nor are taxes the whole story.

Many Obama supporters have been disappointed by what they see as the administration’s mildness on regulatory issues — its embrace of limited financial reform that doesn’t break up the biggest banks, its support for offshore drilling, and so on. Yet corporate interests are balking at even modest changes from the permissiveness of the Bush era.

From the outside, this rage against regulation seems bizarre. I mean, what did they expect? The financial industry, in particular, ran wild under deregulation, eventually bringing on a crisis that has left 15 million Americans unemployed, and required large-scale taxpayer-financed bailouts to avoid an even worse outcome. Did Wall Street expect to emerge from all that without facing some new restrictions? Apparently it did.

His comments made me look back again to refresh my memory of the tax rates of the federal income tax.  In preparation for war and in time of war, during the late 1930s through the 1950s, marginal tax rates for those earning high incomes stayed around 90%.  Those earning and amassing great wealth were expected to pay most of it back into the system to support military families, war efforts, road building, crime prevention, agricultural infrastructure, small business support, unemployment, assistance to the poor--including children, widows, and others.  It was only fair that a system which prospered because of the hard work of the masses would structure a downward flow of resources from those who were benefiting most from the economy toward those on whose backs those benefits had grown, and to those who were most vulnerable to the harsh effects of economic processes.

It would be remiss not to remind readers that the lower tiers of everyone's income are taxed the same.  As a person's income rises, the higher tiers of that income become taxed at higher rates.  For most of the twentieth century, the federal tax rates had many tiers.  As one's income rose, one paid a lower tax rate on the lower amounts, then progressively higher rates on the additional amounts.  It made for complicated math, but it made good sense for trying to strengthen the entire economy.  There are still several "tax brackets," but the percentage differences are much smaller than they used to be.

In the prosperous 1960s, the top marginal tax rate declined to the 70% range, where it remained until 1981.  Having moved beyond World War II and the Korean War, having repurposed industry away from the build-up of conventional war materiel, the U.S. revised the taxation system to allow those at the top of the economy to retain three times as much as they previously had of their marginally high incomes.

Starting in the 1980s, the top tax rates dropped drastically.  The reasoning was that so many tax loopholes and exemptions existed, the people in the highest brackets were mostly avoiding paying those rates.  If loopholes and exemptions could be eliminated, then maybe they would end up paying their fair share with lower tax rates.  Ever since that time, people whose income is higher than 80% of the nation have paid a significantly lower portion of their income in taxes.  Yet they have grown to pay a larger share of the total federal tax bill because their incomes have increased four times faster than the lower income portion of the population.

Thus the last part of the twentieth century witnessed changes in the flow of resources within the U.S. economy.  Ross Perot's famous "giant sucking sound" was redirecting the flow of wage income away from U.S. workers and toward overseas workers, not merely in the Americas, but also in China and other Pacific economies, and even a few African economies.  On the taxation front, the wealthiest U.S. taxpayers now had to pay only half of the percentage of their marginally higher incomes than had previously been the case.  A major policy for redistribution of wealth was fully underway, with the help of government policies on trade, taxation, and labor.  But these were not the only massive wealth transfers happening.  Another regulatory change also redirected the flow of resources.

Usury caps had for centuries helped to prevent overconcentration of wealth among a few.  Keeping interest rates at relatively low levels slows the transfer of wealth from the lower-income groups toward the wealthy lords of finance.  As interest rates rise, debtors find it harder to get out of debt.  The history of sharecropping, company towns with company stores, tenant farming, and other such systems illustrates again and again that the power of lenders has to be held in check for the benefits of the economy to accrue in a fair and just manner.  Usury laws imposing interest rate caps are one of the best methods to do this.  But around 1980, a series of changes in law eliminated the regulation on interest charged by banks, credit card financiers, and other financial institutions.  The massive growth of consumer credit, the housing bubble, and many more destructive trends have led to huge transfers of wealth from average workers toward a financial elite through bonuses, short-term gains, and eventually through bailouts of the banking, finance, and insurance industries.

On one side, changes in tax policies reduced the flow of resources toward shared benefits and the common good.  In the middle, the flow of resources to U.S. workers stopped growing or declined, as wages flowed overseas.  On the other side, the income of low- and middle-income people began to flow into profits for the financial industry through a system designed to keep people perpetually in debt through high interest rates, exorbitant fees, and deceptive policies.  Like reversing the flow of a river, the resources stop going where they used to.  Instead, they go elsewhere to benefit a few and harm others.  This is not an argument for never meddling.  It is an argument for making decisions with the good of all people in mind.  That is what the biblical teachings on economic life tell us:  put in place economic structures that will prevent permanent indebtedness, harsh economic class divisions, and rewards for manipulating money markets.