Book Review: The Great American Deception by Ravi Batra

Al Besler

1998

Published in:

Technocracy Digest, 2nd quarter 1998, No. 328

There has been a quiet depression developing since 1990. There is a booming stock market in the midst of rocketing executive compensation, while real wages continue to slide. The grinding poverty that co- exists with unprecedented opulence in America, today, is creating a climate of distrust and anger.

A brief study of most advanced economies -- G7, Spain, and Australia -- reveals that the quiet depression of the 1990s has been a global phenomenon.

Manufacturing employment peaked in 1979, at a little over 21 million people. Ever since then, the new entrants in the job market have gone, primarily, to service-producing industries. In 1995, manufacturing employment stood at 18 million -- about 15 percent of the total non-farm employment. Before the 1980s, most lay-offs were among blue collar workers. During the '80s, with waves of downsizing, white collar workers were the main victims. From 1990-1995, some three million corporate lay-offs occurred. During this time period, corporate after-tax profits rose 70 percent in the five years, from $229 billion to $390 billion.

During the 1930s, real wages in the U.S. rose by 17 percent. From 1990 to 1995, real family income has dropped six percent.

U.S. Bureau of Labor Statistics show that from 1972 to 1995, for the lowest-paid 75 percent of the workforce, after-tax inflation-adjusted income fell by 25 percent. Real wages have been tumbling for 80 percent of the workforce since 1972.

U.S. Top-Bracket Income Tax Rate:

1960-1963 was 91 percent
1965-1980 was 70 percent
1985 was 50 percent
1988 was 28 percent
1990 was 31 percent
1993-1995 was and is 39.6 percent

The culprit for growth stagnation in the 1980s, was the massive transfer of the tax burden from the rich to the poor. Payroll taxes soared, and the top-bracket income tax rate tumbled. The switch to regressive taxation was accompanied by the lowest post-World War II rate of investment.

There is absolutely no historical backing for the supply-side idea that low income taxes stimulate personal savings. Further, low taxes on the rich do not stimulate investment. The greatest tax impact on investment, savings, and the economy, is the S.S., or Social Security Tax. Drastically raising the S.S. tax has had a dramatic effect on lower income workers. By 1993, the Social Security tax was 37 percent of the total tax receipts. The American tax structure thus became ultra-regressive.

Historically, the corporate income tax has had no visible effect on the investment/GDP ratio. The long history of capital formation shows that the business rate of investment has barely fluctuated since the Second World War ended, 50 years ago. It is then clear that all the tax breaks handed out to corporations since 1950 have been a colossal waste. Multinational business did not return a penny in increased investment as a percent of GDP, even as it extracted billions from the U.S. Treasury in tax breaks. None of these discoveries has stopped conservative economists and politicians from pleading for even more corporate tax breaks. The corporate share of tax revenue exceeded 25 percent in the 1950s. By 1985, after the Reagan tax cuts, it was down by two-thirds. In 1995, it barely exceeded 10 percent.

Conservative economists and politicians argue for big capital gains tax cuts. The stock market has been soaring since August 1982, with huge paper profits for major shareholders who have earned billions of dollars. They would like to hang on to their windfalls as they cash in.

The investment lesson of history is that investment is linked to demand, not to tax breaks for millionaires, corporations, and venture capitalists. Since the rich spend a much smaller proportion of their income for consumption than do the poor, consumer spending and, hence, demand, generally fail to grow as fast as output. Because of rising inequality, demand lags supply. Output, then, has to fall to the level of demand, and growth slows down.

History is full of irony. Republicans constantly rail against deficits; yet their leaders have been most responsible for the country's red ink. In Reagan's first term, alone, the federal debt exceeded the combined debt of all previous 39 presidents. In 1980, the federal debt was less than One Trillion Dollars. By the end of Reagan's second term, in 1988, it stood at $2.6 Trillion. By the start of 1996, it approximated $5 Trillion.

By 1995, the United States had the worst inequality among all advanced economies, including Australia. The lowest 20 percent consumed only 3.6 percent of national income; the top fifth enjoyed nearly half of the income pie.

The top one percent of the population now owns more than 40 percent of assets, compared to owning 21 percent in 1949. The average pay of the chief executives of the Fortune 500 companies jumped from 35 times to 157 times the salary of the average non-supervisory worker. In 1995, less than 40 percent of employees enjoyed corporate pension benefits.

Germany, and other countries in Europe, are quite often described, in a derogatory way, as welfare states which care for the poor, the unemployed, the handicapped, and the retirees, among others. The inference is that the rich are financing a huge pyramid of social welfare that will eventually undermine the economy. This is completely misleading. The corporate tax burden in Germany has been extremely low -- always below 10 percent, and only four percent since 1992. The welfare state is mostly financed by the middle class.

Conventional economics almost totally neglects the impact of wealth disparity on the health of an economy. Despite their extensive theories and vast computer models, economists have lately had a dismal forecasting record. Queer ideas have been always present in economies, but today, with its enormous emphasis on mathematical models, the so-called "dismal science" has queer ideas in abundance. Economics, now totally divorced from common sense, is causing untold suffering that will continue until its obnoxious theories are exposed to the public and put to shame.

Throughout history, intellectuals, as a class, have been the last to adopt new ideas.

What has rising trade between the U.S.A. and Mexico done to Mexican wages? From 1985 to 1988, real wages in Mexico fell six percent. They fell another 25 percent by 1995. The gap between their wages went up sharply. In just two years after the inauguration of NAFTA in January, 1994, the Mexican economy collapsed. The Mexicans went on a buying spree, leading to a huge trade deficit of $30 billion. In December, 1994, the peso collapsed.

COMMENTARY:

In his introduction to his book, the author writes:

"America, What is Wrong? Americans have a nagging feeling, today, that something is wrong with their economy and society. They have been groping for answers since the beginning of the 1990s; but, in the absence of rational explanations, they are very confused. They have repeatedly thrown incumbents out of office, to express their anger and frustration; but the pall of gloom continues to thicken. The new leaders have no better answers than the old.

"....Our economy is very sick today. Its sickness is new; nothing of this kind has been seen in the past. It needs a fresh diagnosis and prescription. Old cures are not working and will not work, no matter how often they are re-named and re-introduced. The purpose of this book is to examine America's economic ills and offer new but effective medicine. We need to overhaul the system, not just tinker with it and indulge in wishful thinking that the economy will heal itself."

Batra cites four vicious self-perpetuating circles as the troubles global economies face today. The first two are taxation: 1. Taxing the poor. 2. Taxing the rich. 3. Lower tariffs. 4. Debt, corruption, interest burden, and growing suffering among the masses in developing economies that came into contact with the multi-national banks.

He writes that he has devised his global economic plan with great care, and is sure we will see nothing but common sense in it; "It is designed to bring prosperity to the world while minimizing pollution."

From our scientific viewpoint, Technocracy points out that nothing is going to change on our Continent, or globally, with this author's plan. You will note what he writes about overhauling the system; he, of course, means the monetary system. He thinks that his economic plan will rectify the social system.

As our Technocrat reviewer points out, when you review history, you can see that no economic plan is going to change anything. Nothing but a plan based on science using Energy Accounting will work.