Is money round, to go around; or flat, to pile up?
Both. We need capital (piled up) for investment in industry and infrastructure. And we need income (going around) for consumers to keep the economy humming along. Henry Ford famously sold more cars by paying his workers better.
Economic policy should therefore get the balance right. It once did. But recent policy has been abysmal. Former Sen. Byron Dorgan, D-North Dakota, said in his book Take This Job and Ship It that the goal of American corporations today is to manufacture in China, sell in America, and park the profits in the Cayman Islands. Former state Sen. Fred Risser, D-Wisconsin, said: “Give money to low-income people and it stays in the local economy. Give money to the rich and it goes to the Cayman Islands.”
The Caymans are a tax haven — no income tax, no capital gains tax, no corporation tax. Profits generated in America may be stashed in the Caymans tax-free. A law firm there is the “registered office” for 20,000 corporations operating in America. They are therefore not legally “American.” The Caymans are a self-governing British colony.
The British are not to blame for this tax dodging. The money is placed offshore by Americans. Around $2 TRILLION of America’s corporate money is sitting in these tax havens, untaxed.
This money sitting offshore is bad news for two reasons. Since it is untaxed, Uncle Sam’s revenues fall, whereupon national debt rises. Secondly, as money goes around, it effectively “grows.” One dollar of new income spent boosts America’s economy, not by $1, but by up to $1.80. This is called the “multiplier effect.” But money offshore creates no such boost. It is stashed under the mattress. This fact shows up in various official numbers. We focus on one.
The Federal Reserve measures the rate at which money circulates around the economy as it is spent, re-spent, etc. This is the “velocity of circulation of money.” As we see in this chart from the Fed, this plunged from 1929 until a recovery after WWII. It rose steadily until 1975, a period of great economic expansion.
But inflation may creep in if it gets much higher, as it did around 1975. We see a reversal in 1981, thanks to Democrat Paul Volcker, who ran the Fed from 1979. Velocity rose briefly during the housing bubble, then fell after the 2008 crash to around 4.0 in 2015. This is the lowest in history. Why?
Today’s miserable velocity of circulation of money stems from Reaganomics, the destructive economic policies advocated by President Ronald Reagan. President George Bush Senior called them “voodoo economics.” America’s money circulates far too slowly because far too much of it has been transferred upward to the super-wealthy and stashed under the mattress. It does not generate extra wealth that “trickles down” like a “rising tide” that “lifts all boats.” Its inaction shows up in the velocity numbers.
The 2008 crash obviously crimped consumer spending. So the Fed flooded the economy with money to stimulate spending. And President Barack Obama’s stimulus package pulled the economy out of the 2008 crash. But these actions could not make the ravages of voodoo economics magically vanish. As a direct result, corporate profits are the highest, and wages are the lowest, in history. This is bad news for spending and economic growth.
Money is like manure. It works best when spread around. Nowadays it piles up uselessly. And our manure expert, President Donald Trump, has piled it up even higher purely to make super-rich Republican Party donors even richer … at the expense of the lower classes, many of whom vote Republican.
If you do not know whether to laugh or cry — cry, very hard. It is your country the GOP and its clueless voters are wrecking.