Monday, January 12, 2009

The Great Financial Chain of Being

William Shakespeare lived in an ordered universe. The moral philosophers of his day conceived of that universe as a Great Chain of Being. God was at the top of the chain; the angels occupied a position immediately below Him; and humanity occupied the link below them. They were followed by animals, plants and inanimate objects. In turn, each of these rungs was itself further subdivided. The King sat on top of the human organization chart, followed by the nobility, followed by various permutations of the common man. This precise organization of the universe guaranteed stability -- unless Lucifer decided to challenge God's authority, or a member of the nobility tried to usurp the power of the King. And, if that occurred, God eventually reached down and set things right. Thus, in Macbeth and Hamlet and Julius Ceasar, pretenders to the throne eventually met their just and richly deserved comeuppance. The Great Chain exemplified what the philosophers called "natural law."

Classical economics has constructed something similar. The very wealthy, or the captains of industry, occupy God's rung on the ladder, followed by the CEO's, shareholders, etc. Mere "consumers" are the equivalent of inanimate objects. That organizational chart has been accepted for most of human history -- with the exception of Franklin Roosevelt's New Deal -- as theologically sound. Indeed, Roosevelt's harshest critics accused him of tampering with natural law -- and they eagerly awaited the day when God would set things right. Forty years ago, God appeared in the form of a bespectaled little man. His name was Milton Friedman; and it was he who re-established The Great Financial Chain of Being.

But, as became clear in Roosevelt's day, the Great Chain is actually the Great Vacuum Cleaner. Rather than allow the wealth of the mighty to trickle down to society's least powerful -- and, apparently, least important -- creatures, this kind of economic organization actually sucks the meager wealth of those at the bottom to the top, because it is maintained by a tax system which is tilted decidedly in favour of the wealthy. Over time, those at the bottom are deprived of purchasing power. They can only purchase goods and services by going deeply into debt; and, eventually, they can no longer support the debt they have accumulated. When the broad foundation which supports the Great Chain begins to crumble, the whole edifice -- like the Twin Towers -- comes tumbling down. What Roosevelt did was to inject money into the foundation of the edifice. His various employment initiatives put money into the hands of those at the bottom and kept the system afloat.

Thus, in a financial crisis, the government must put money into the hands of those who have lost their jobs by giving them jobs which need to be done -- whether it's the Tennessee Valley Authority electrifying the country by building hydro-electric dams, or a Green Economy Initiative to create renewable energy sources.

Those who have been at the helm of the economy for the last thirty years, however, keep insisting that the way to put money into people's hands is to give everyone across-the-board tax cuts. The Americans gave away $150 billion in tax cuts last year and nothing happened. Mitch McConnell, the Republican leader in the Senate, wants another $350 billion in tax cuts. And the word is that Jim Flaherty -- who two months ago foresaw a $100 million surplus, then last month predicted a $30 billion deficit and last week warned Canadians to steel themselves for rising unemployment -- is considering similar tax cuts in the upcoming budget. These folks maintain that the way to stabilize the building is to strengthen the roof. And they scratch their heads when, like the Leaning Tower of Pisa, it continues to sink.

Paul Krugman, this year's Nobel laureate in Economics, has advised President-elect Obama to ditch the tax cuts. "My advice to the Obama team," he writes in today's New York Times, "is to scrap the business tax cuts, and, more important, to deal with the threat of doing too little by doing more." That is advice which Canada's opposition leaders should also take to heart. It is too much to expect those who got us here to heed that advice. "By and large the free market medicine men," Thomas Frank wrote in last week's Wall Street Journal, "seem determined to learn nothing from this awful year. Instead, they repeat their incantations and retreat deeper into their dogma, generating endless schemes in which government is to blame, all sin originates with the Community Reinvestment Act, and the bailouts for which their own flock is desperately bleating can do nothing but harm."

The American Revolution, the French Revolution and World War I doomed the Great Chain of Being. But the Great Financial Chain of Being is alive and well.


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