I Hope You Don't Mind Greek

Riots in Greece, riots in Spain. Greece of course, was the cradle of civilization over well over 2000 years ago. Spain built the world's first global empire in the 1500s before being muscled out by the Dutch, English, French, and eventually we Americans.

Americans have already gotten a taste of Greek Tragedy, starting with the burst of the housing bubble in 2007. It's complicated: there are a lot of characters in our tragedy. No one thought they were doing anything wrong, they just thought they were honestly trying to get rich, or richer. The key criminal mastermind, Robert Rubin, was U.S. Treasury Secretary under President Bill Clinton. Few remember he engineered the repeal of Glass-Steagall, a banking reform act from the early days of the Great Depression. It was like letting all the felons out of prison at once, on promise of good behavior.

From the Great Depression until about the turn of the millennium it was well understood by economists, politicians, and even the public that government spending could act as a counterbalance to the natural, chaotic cycle of pure free-market economies. Free market capitalism tends to boom then collapse. By increasing spending during recessions the federal government could prevent depressions. It borrowed to do that, which was alright as long as it also damped booms by cutting spending and increasing taxes. Bboom-year surplusses then reduced the national debt to tolerable levels.

The resurgence of the "greed is good" crowd, with its bizarre idea that taxes on the rich should be minimized, was a long time coming. In a normal nation the Internet Stock Bubble that burst just in time for the presidency of George W. Bush would have served as a sufficient warning against the new, faith-based economics. Instead the foolish just switched asset classes. After a brief recession, unregulated lending led to the Housing Bubble.

During the bubble tax revenue skyrocketed, especially for local governments that have real estate taxes as their primary source of income. Politicians like to be generous when they can, it tends to get them reelected. They doled out the real estate tax revenue to local, county, and state employees, and promised generous pensions.

Meanwhile, we had the Bush Tax Cuts, not just on income, but on inheritances and capital gains. While the national economy was in a bubble, that seemed fine to most people. We also increased military spending for the "War on Terror." That led to federal deficits during the bubble greater than we would normally have during a recession.

When the bubble burst unemployment skyrocketed. Construction workers and bankers lost their jobs first. Some stimulus was provided by automatic government mechanisms, like food stamps and unemployment benefits, but it was not enough to break the fall. Local governments, suddenly running big deficits, laid off workers. Pretty soon, by late 2008, just about everyone was either out of work or afraid they would be laid off. Barack Obama was elected President.

Up until 2000 or so the government would have fixed the post-bubble mess by borrowing money and spending it until the economy recovered. The additional debt could be paid back when the economy recovered by adjusting taxes. Federal and local spending would have decreased during the recovery because there would not be so much money needed for food stamps, etc. If a recovery were strong enough, and the tax system had not been gutted by the Bush Tax Cuts (which, you should recall, Democrats in Congress went along with at the time), tax increases might have been minimal. But not this time around.

Now we (and don't just blame the bankers and politicians) are up sh-- creek without a paddle. We, the United States, are still running huge deficits, and have a rather significant national debt. If there is a recovery, and interest rates climb, the interest on the national debt would quickly become the largest item in the national budget. There is still stimulus: the annual federal deficit. But sooner or later bond buyers will wise up, as in Greece in Spain, and refuse to buy. Then there can be no stimulus. Even if the economy is growing at that point we would need to raise taxes to pay off the debt and interest.

Taxing the rich, within reason (say up to 70% on incomes or capital gains or inheritance over $1 billion) does not hurt the economy. Keeping taxes on the rich low is like giving welfare checks to the poor. It demotivates them. They are people who need to make and spend money; that is their identity. If someone needs to make a million dollars after taxes to be happy, if they only pay 10% taxes they will hustle to make $1.1 million and then loaf. Increase their taxes to 50%, and they will hustle to make $2 million, so they would still have a million to spend.

The only way out of the current mud trap requires getting people back to work. That will only happen if taxes on the rich are increased. Rich people do not make their own money. They make money by exploiting their workers. To make more money, to compensate for tax increases, they will need to hire more workers. They say it ain't so, but they are lying because they are, as a class, really quite lazy.

But increasing taxes significantly on the rich won't happen, because both major political parties are controlled by the rich and the nearly rich. What will happen is military spending will be increased, because while that is the stupidest economic policy, it is the most politically defensible. As interest rates rise the government will issue more bonds to fund the interest payments, until the bond buyers rebel.

I think U.S. government bonds are worthless, or nearly so. They pay no interest, and if they did start paying interest the government would not be able to redeem them without essentially closing down.

If, like me, you did not get any or much pie during the feeding frenzy, you should be mad. But you should also prepare for Greek style austerity. Don't expect to slide by on unemployment or disability or even Social Security during the next economic downturn. The Tea Party Republicans have been chewing at the public safety net, and the next time it is heavily weighed it will simply disintegrate into chaos.