I have heard you say on many occasions that “entitlements are the drivers of the national debt.” In this narrative I will present the outline that reveals why that belief is false. But I will also explain what a more complete picture reveals, and what can be done to bring about the kinds of change that will do least harm to individuals as well as to the economy while correcting the imbalances that are the true drivers of budget deficits.

First, budget deficits result when tax revenues are too low, or outlays are too high, or perhaps some combination of both. Third grade arithmetic confirms that statement.

Second, there is a distinct difference between “proximate” and “underlying” causes. A proximate factor often is more a consequence than a cause in a linkage that is observable by its nearness to the issue at hand. An underlying cause is at least one step removed from it effects, while it nevertheless triggers the proximate linkages. Such is the case with budget deficits.

Underlying Causes

The U.S. economy is functioning at a level that cannot produce enough jobs, at high enough incomes, that will sustain individuals and households so that many more can become employed, while paying the prescribed taxes that could boost the budget revenue inflows. That is the broader underlying cause of deficits. It has several components.

Chief among the reasons for our underperforming economy is the fact that too little new money flows into circulation (M1), while too much new money is directed into investments (M2 – M1). Increases in M1 produce growth via more products and services, more jobs, more incomes, more tax revenues, and more prosperity. It is summarized in this simple identity: M1 times V1 = GDP, where V1 is the annual turnover rate of each new dollar, currently 6 times. M2 – M1 produces higher stock, bond, and real estate values, the great bulk of which flows passively as personal wealth to those at the high end of both the income and wealth curves. The turnorver rate of M2 – M1 is negative, which argues forcefully that increases to it reduce GDP, jobs, tax revenues, and general prosperity. This errant outflow is controlled mainly by large bank lenders and large corporate borrowers, all part of the wealthy elite.

Both income and wealth inequality are measurable via Gini coefficients. Both coefficients show greater and greater inequalities from about 1967 to the present. This statement can be reduced to the simpler observation “the rich have been getting richer, while the poor have been getting poorer.” We now live in a plutocracy where wealth and power are dominated and controlled by the wealthy.

How bad are these inequalities? Wealth inequality is the best measure of economic activity. It is a fundamental cause of low economic growth, low incomes, and low tax revenues. Most taxes are regressive (benefitting the wealthy); inheritance laws favor those who have “chosen their parents wisely” (also the wealthy); the concept known as the “diminishing marginal utility of money” also favors the wealthy. This latter observation is a bit too complex to explain here, but it is nevertheless a standard economic concept that is well-understood by the nation’s 21,500 economists.

Given all the preceding factors, we find that of the $95 trillion in wealth held by residents, 98 percent of it stays in the control of the wealthy, while slightly less than 2 percent flows to churches, schools, and charities. And approximately 98 percent of all new wealth flows passively to the holders of present wealth via capital gains in those stocks, bonds, and real estate. Thus 96 percent (98% times 98% = 96%) of all wealth is inherited, directly or indirectly. Those numbers also argue that only 4% of all new wealth flows to the bottom 90 percent of residents.  

Meanwhile, the bottom 90 percent find that they cannot improve their lot in life apart from the 4 percent of new wealth that is up for grabs. But that 4 percent is but $361 billion that is spread disproportionately among the 292 million or so residents in the bottom 90 percent.

On the social side of these divisions we find high rates of poverty and all that poverty portends: High crime rates, high incarceration rates, high suicide rates, high illiteracy rates, high teen pregnancy rates, high drug usage rates, low self esteem, low life expectancies, and low social mobility rates.

The Fix

It should be clear that by merely reducing entitlements will only make the conditions of poverty worse for those who must survive in that condition. Moreover, further increases in both income and wealth inequalities must lead ultimately to economic stagnation, to widespread squalor, to social unrest, and perhaps to an outright revolution. Those outcomes can only put the U.S. on the road to becoming a third world nation.

Job Training and Retraining. The U.S. needs a major job training and retraining program that is supported jointly by industry and the government. It needs to be inclusive of all able-bodied residents who live in or near poverty. The prospect of incomes that are substantially higher than all the entitlements combined is essential.

The Economy. Conversely, by directing new money into circulation, rather than into savings, economic growth will increase via the multiplier noted earlier, and all the prosperity that it portends. No economist would dare dispute this fundamental law of macroeconomics. Moreover, when all taxes are considered, most U.S. residents already pay a total tax of about 35 percent (local, state, and federal income; sales tax, gasoline tax, misc. hidden taxes, and the most sinister regressive tax of them all—inflation).

The Tax Code. We need to tap at least $1 trillion per year from the wealth growth pool. Since this pool increases at about 7.2 percent per year, no wealthy person—indeed no person—could possibly feel any negative effects from it. It would all occur above the $95 trillion level. That could be achieved via a tax on high volume security trades and on the inheritance tax. The first category is primarily passive wealth on inheritances, while the second is free wealth directly from inheritances. Neither is earned.

Total Benefits. A growing economy that employs more people with higher incomes and with a slowing of the income and wealth inequality issues would have many salutary effects. Among them are: a reduction in poverty, higher tax revenues, lower budget deficits, and more prosperity for all. It is always better to grow the economy to achieve all these ends than it is to assert that more tax cuts will stimulate economic growth. They will not.

In conclusion, cause and effect relationships within complex economic structures are difficult to sort out, all assertions by anyone to the contrary notwithstanding. Still, most of my (former) students in micro and macroeconomics grasped these fundamental concepts without too much mental aguish. Each topic has also been a part of nearly all text books in the subject areas for many years. There is nothing radical or new about any of them. Disbelieve them if you will, but you will stand in opposition to nearly the entire community of economists, a formidable bunch of eggheads. Notable within this group are 370 economists who recently signed an open letter about our dangerous current path that seeks to accelerate inequalities and all the rest of our major economic issues by solidifying our errant ways into new laws. Among these intellectuals are Paul Krugman, Oliver Hart, Angus Deaton. I wholeheartedly put my name, credentials, and reputation in the same boat with them.