The Long-term Mismanagement of the US Economy Has Taken Its Toll
Paul Craig Roberts
The last time the US economy received a helping hand from policymakers was the Reagan tax rate reductions. The high tax rates on inflated nominal incomes by the “guns and butter” Vietnam war policy reduced the after tax earnings of labor and new capital investment, and the economy was experiencing the “malaise” of stagflation. The Reagan tax rate reduction, which I drafted and saw through to passage, indexed the tax system for inflation, so that inflation, if properly measured, could not push purely nominal incomes into higher brackets. This was the last achievement of American economic policy. Everything that followed contributed to the decline of the once powerful US economy and the dismantling of its ladders of upward mobility that had brought growing prosperity to Americans.
The supply-side policy also corrected the outdated theory of the cost of capital. The theory predated the income tax and was never adjusted for it. The theory attributes the cost of capital to the interest rate. The higher the interest rate, the higher the cost of capital. Thus, according to the theory, government budget deficits drove up interest rates and crowded out investment, while high rates of saving lowered the interest rate and the cost of capital.
I brought taxation into the theory. What I was able to show together with Treasury economists Aldona Robbins, Gary Robbins, and David Brazil, with review and input from others acknowledged in the publication–“The Relative Impact of Taxation and Interest Rates on the Cost of Capital,” published in Technology and Economic Policy, edited by Ralph Landau and Dale Jorgensen, (Ballinger, 1986)–is that taxation as part of the service price of capital is a higher cost than interest rates. This result has never been challenged to my knowledge, but it has not, to my knowledge, been incorporated into the body of economic knowledge.
Here is the statement of our finding:
“The chapter calculates the relative impact of interest rates, taxes, and technology on the cost of capital. The results show that the cost of capital is highly inelastic with respect to changes in the interest rate. Taxation, however, substantially affects the cost of capital, raising it by 43 percent for the economy as a whole. Increases in the cost of capital due to tax changes raise the rate of return required from real productive assets, which translates into fewer viable investment opportunities.
“The results of this chapter dispute the policy prescription implied by the view that federal deficits cause high interest rates, which in turn, crowd out investment. The view that higher taxes would reduce crowding out and raise the investment rate is inconsistent with our findings that taxation has significant adverse effects on the rate of capital formation.”
Since President Reagan’s revival of the US economy, many greed-driven economic responses have appeared in response to changing foreign policy events. When the Soviet Union collapsed in 1991 as a result of Soviet Politburo house arrest of Soviet President Michael Gorbachev, China and India, witnessing the collapse of communism and socialism as an economic system, opened to foreign investment. This made vast amounts of labor available to US capital at throwaway wages.
American executives who did not quickly capitalize on low labor costs in Asia by moving their prodution for US markets offshore were informed by Wall Street to get there quickly or Wall Street would finance takeovers of the corporations and move their manufacturing to China.
With the offshoring of US manufacturing jobs to Asia (and Mexico) went blue collar middle class incomes and the tax bases of US cities and states.
The growth of US consumer incomes stopped in its tracks, and the values of municipal bonds in the abandoned cities and states declined. Social support budgets rose as the tax base declined.
In 2013 I described the economic deterioration of the US economy in my book, The Failure of Laissez-faire Capitalism https://www.amazon.com/Failure-Laissez-Capitalism-Economic-Dissolution-ebook/dp/B00BLPJNWE/ref=sxts_entity_rec_bsx_s_def_r00_t_aufl?content-id=amzn1.sym.78f2affb-7cb9-4034-a202-130468a5a689:amzn1.sym.78f2affb-7cb9-4034-a202-130468a5a689&crid=2ESYYZOCOPNI&cv_ct_cx=Paul+Craig+Roberts&keywords=Paul+Craig+Roberts&pd_rd_i=B00BLPJNWE&pd_rd_r=923ab1d1-18d9-427f-a664-ab042ed2fba9&pd_rd_w=2ei3E&pd_rd_wg=WEw9Z&pf_rd_p=78f2affb-7cb9-4034-a202-130468a5a689&pf_rd_r=EFMP11TJM4011BXT21H2&qid=1785694044&s=books&sprefix=paul+craig+roberts,stripbooks,209&sr=1-1-ef9bfdb7-b507-43a0-b887-27e2a8414df0
So we have a picture of 21st century America whose corporations produce the goods that they sell to Americans with Chinese labor, thus depriving Americans of the incomes associated with the production of the goods and services that they consume. There goes a big chunk of American national income.
Then came the Federal Reserve’s multi-year zero interest rate financial institution bailout policy that, together with the “Covid pandemic” hoax, gave us todays inflation that has deprived Americans with mortgages the ability to pay the mortgage and required insurance. Today Florida, once the favorite retirement state, now has the highest home foreclosure rate.
In the 21st century the stock market has been kept up by a few tech stocks and now by artificial intelligence stocks that do not seem to be making the profits to justify their price. In other words, where were the investment opportunities even with negative real interest rates?
Then come the data centers, vast complexes invading many communities requiring vast amounts of electric power before any effort was made to increase the electric grid’s ability to provide the power. As electricity prices rise as data centers bid it away from homes, Trump’s war for Israel against Iran threatens to send the price of energy through the roof.
Add to this picture the depletion of resources documented by ecological economists, a depletion greatly increased by the Democrats’ multi-year policy of open borders. America, already suffering depleted human infrastructure resources such as water, air, and fertile land in addition to depleted material resources, stupidly opened its borders to 30 million immigrant-invaders whose presence will accelerate the rate at which the US arrives at resource exhaustion. Already Washington is having to steal Venezuela’s oil and has its grasping hand on Greenland’s resources, a territory of NATO member Denmark. Having grossly mismanaged America’s resources, will Washington now enter a time of warfare for the resources of others?
Donald Trump is at risk of going down in history as the President who destroyed the remnants of America. Trump’s devotion to Israel rather than to America, has revealed him as Netanyahu’s puppet willing to shut down the weak and declining Western world in an energy crisis for the sake of striking Iran in behalf of Greater Israel. As Americans are incapable of producing a leader that represents Americans, the door has been opened to the ideological agenda of the Democrat left-wing that is rapidly emerging in Democrat primaries.
The United States does not have an economics profession. It has, as my Cal Berkeley professor Henry Rosovsky explained to me later as Dean of Arts and Sciences at Harvard University when he was unable to get me appointed professor of economics at Harvard, economists who debate properties of models based on assumptions non-reflective of reality and quote one another into prominence.
In other words, economics like foreign policy, educational policy, medical policy and all other policy is conducted within false narratives. Reality remains unaddressed.
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