Half of the old economic world, in the U.S., EU and Japan, believes you can spend your way out of economic disaster. The other half of the old economic world believes you can grow your way out of economic disaster by cutting taxes. China, the new economic world, doesn't care and just plays the hand they are dealt. As it is, it's a very good hand. The oil states don't care because they are just pumping enough money out of the ground no matter what they spend.
The ascendancy of capital formation, tax cuts for the wealthy, as economic cure all has created a global economic trend towards low taxes and government austerity. Tax cuts for the wealthy and austerity for everyone else didn't work to stimulate the global economy, no surprise there. In 1980, when this tax "solution" was undertaken, there was already more idle wealth in the world than could be made use of. Now there is more idle wealth in the world than can be employed by ten global economies. We don't need to form any more capital. There is nothing for it to do.
You'd suppose the failure of tax cutting to stimulate economies was a disappointment for the ideologues behind it. But cleverly, they found what they thought must have been the problem, over regulation. Surely financial deregulation would free all that capital to be invested without fear of some Ayn Rand regulation nightmare of bureaucratic seizure of assets. Unfortunately for the Laissez Faire capitalists, this didn't work to grow the global economy either. It did nothing to channel money into economies but instead exaggerated volatility.
Deregulation simply increased the flows of wealth into the global casino of speculation and into the government coffers through lending. Odd that much of the money freed by tax cuts would end up in the government coffers after all, at a nominal profit of course. One wonders if this won't end up being as much of a loss through eventual defaults as it would have been paying taxes in the first place.
After all the tax cutting and resulting economic disaster, the world's governments began to run deficits, not exclusively to cater to the concept of nanny state, but equally to avoid the real decline in their economies that cutting benefits to their publics would cause. On top of that, following Keynes, governments, worldwide, sought to stimulate economies to make up for tax revenues lost to tax cuts. They borrowed and inflated and to little avail in economies because deficit hawks urged restraint.
Through this economic policy and taxation Schizophrenia, billionaires got richer, governments and peoples got poorer and deeper in debt. It might seem as if it was by design. I'd just say, I've never met anyone that was that smart and that ruthless at the same time. Maybe I've just not met the man in charge. Bernie Madoff was not that smart, only ruthless. He, like our global finance system, adapted to conditions as they presented themselves. He had no plan other than the next paycheck. After all, a Ponzi scheme is not a plan, it will always fail.
Madoff gamed the low interest rates arising from government policy of monetary easing necessitated by tax cuts. He promised higher returns and security where banks and stocks could not. He created a Ponzi scheme not too dissimilar too what global finance undertakes internationally right now. Global finance is loaning, secured by nation/state assets, on assets that will eventually run out and leave the countries loaned to in default and the banks failing because of defaults. They, like Madoff, do not have a plan.
Global finance now preys on government's obligations to meet the needs of peoples. They loan and government pays, never quite reaching the horizon in which the returns on Keynesian investments in national economies pays off. This has become a global socioeconomic hamster treadmill in which no one benefits except the brokers. Eventually the global economic decline this predicts will affect bankers too. They just refuse to see it coming, like Madoff.
To break this death spiral will take reevaluation of our assumptions about Keynes and Friedman:
1) Keynes accomplishes nothing to promote growth if wages don't go up due to full employment. Sure, government spending can staunch economic calamity. But to actually grow the economy you need more money in the hands of the public than before. And a growing economy is what is needed to replace tax revenues lost to cuts for the rich. Essentially, you have to court inflation enough to find a balance between wage growth and capital formation. The reason WWII got us out of the Great Depression is because enough of the work force was drafted so that no one was left behind in the civilian work force. Real wages doubled during WWII. Anything short of that scale of effort, 96-100% employment, will not grow an economy and retire deficits.
2) Friedman suggested that you can grow an economy without wage growth if you reduce the cost of goods through higher capital investment. The flaw in that argument is that you can't force capital to invest. Even if you could the point of diminishing returns in making things more cheaply is rapidly reached in terms of predictable results. So Friedman is an intellectual curiosity more than a plan for global economic success. Having pursued his formulas, globally for thirty years now, we know this to be a proven conclusion. Why then do we keep trying to make it work?
3) Out of Friedman grows the tax cut as stimulus fakery. The flaw is this: from the thirty thousand foot view, the benefits provided through taxation and by government spending are not handouts. Government benefits and entitlements are more appropriately viewed as part of the total compensation of the work force. They are undertaken by government because business is unwilling to take responsibility for them. In essence, business has socialized the costs of these benefits to their work force. Without them, the economy will be affected, will shrink not grow. Tax cuts for the rich were never anything other than a pay cut for the work force. It follows that raising taxes on the wealthy would be a raise in pay for the work force, exactly the outcome of properly applied Keynes.
4) The middle class and the wealthy are at odds over who gets the money and how much. If this loggerhead is not broken, everyone, including the wealthy that require the middle class to power markets, will be continuously weakened and impoverished. We really all are in this together, because the John Galt "elsewhere" does not exist to run to. We need to break this cycle of back and forth between the rich and poor by understanding that economies depend on this fight being a perennial draw.
Government has been in this borrow to stimulate mode since way before Greece rattled the global economy with potential default. Our own government and Fed has been borrowing and printing money in order to fight deflation for eight of the last ten years. Global finance has been providing the fuel for the same effort in countries, like Greece, that can't create their own money. Tax cuts for the wealthy caused a contraction in the global economy and governments have been scrambling to make up for it since 1980. Time to just recognize what is going on and find an open and sensible way to fix it, or it will drag us all down, the middle class, the wannabe rich, and the rich alike.