By John Mauldin
Yes, the system is rigged, just not in the way that 99% of the people think it is and not by those they think are doing the rigging. Greed is not the reason for the rigging, nor are any of the other usual “follow the money” reasons. We cannot make a convenient demon out of Wall Street or the big banks and investment banking houses. The real culprits are far less sinister and are actually sincere in their motives, so you won’t see an Oliver Stone movie about the conspiracy to defraud the middle class and strip them of their hard-earned retirement savings. No, the “bad guys” in the story are just Nobel laureates, tenured professors, and other honorable members of the economic academic establishment, what Ken Rogoff calls the “policy community.” The Occupy Wall Street crowd had a right to be angry, but they should have been demonstrating in front of the economics schools at Harvard, MIT, Princeton, Yale, etc. You know, the schools that many of those Occupy Wall Street protesters themselves attend.
The economy has been rigged through a process that may have seemed innocent enough at any given point but that quickly put us on a slippery slope as ideological forces captured the ramparts of academic economic science. A brief history will bring us up to date.
The Creature from Jekyll Island
In 1913, the Federal Reserve was created by the major banks as a way to protect them from crashes. (The disastrous Bankers’ Panic of 1907 was still fresh in their minds). And there is no doubt that the Fed was designed so that the big banks retained as much control as they could convince a skeptical Congress to grant them, while giving in on a few minor points. But sometime in the ’90s power shifted. The servant became the master; and while it is certainly true that Wall Street and large banks and investors currently benefit from the policies of the Federal Reserve, they really are not in control anymore.
In the 1930s and into the early ’40s, an intense debate ensued among economists about how to best measure the national income and gross productivity. The questions were magnified by the Great Depression. I have written about this debate at length in reviewing a 140-page book called GDP: A Brief but Affectionate History, by Diane Coyle. The book can be read in a pleasant Sunday afternoon, and I highly recommend it. I am going to quote a paragraph and summarize the rest below. Writes Ms. Coyle:
There is no such entity out there as GDP in the real world, waiting to be measured by economists. It is an abstract idea…. I also ask whether GDP alone is still a good enough measure of economic performance — and conclude not. It is a measure designed for the twentieth-century economy of physical mass production, not for the modern economy of rapid innovation and intangible, increasingly digital, services.
So how did this nonsensical measure we call GDP come about? Fact is, you actually do have to try to measure an economy if you are going to be a government and especially a wartime government. Without such a measure, how do you know how much you can actually tax and produce for the war effort, let alone for welfare and other services?
The argument boiled down to debates between followers of John Maynard Keynes and more conservative economists, either the disciples of Friedrich Hayek and Ludwig von Mises or followers of the classical school of economics. Conservative voices argued that the government’s taxing and spending simply took money from the citizens/taxpayers and put it to work somewhere else, so that it was not really contributing to the true productive economy. (The argument was far more nuanced and detailed than that, but I boiled it down to its simple central idea.) Those on the other side argued that you had to know about the effects of taxes, depreciation, and the myriad forms of government spending in order to understand the economic capacity of the country.
(For the rest of Mauldin’s article, click the link.)