For those of us who made our money advising people how to legally cheat on their income and employment taxes, the events in U.S. financial history can all be explained by how the U.S. Treasury collected the money that it did not borrow. For us tax plumbers the changes in net incomes can all be explained by the valves and leaks. The declines and stagnations in the wages earned by "ordinary" Americans that Mr. Greene notes can be tracked against the final end of tariffs. WW 2 and the period of worldwide reconstruction that ended in the late 1950s and early 1960s saw the decline of tariffs as a significant source of revenue to the Treasury; but the U.S. position as literally the last industrial nation left standing allowed American wages and labor demand to be protected from international competition as if late 19th century import taxes were still in place.
As a tax plumber I continue to find bitter amusement in the fact that "free" trade was first advocated by Southern planters because they objected to the head taxes imposed on the last decade of legal importation of slaves. It also makes me smile wryly to know that the income tax was first promoted as a substitute for evil tariffs; better to tax what people earned than to allow them to profit from "inefficient" taxes on imports that raised laborers' share of the national income.
We will know that the labor movement has revived when someone gains national popularity by advocating that (1) Social Security and Medicare coverage be unified at the lower age of 62, (2) employment tax rates be lowered, and (3) that lower rate be applied to all earned income regardless of its characterization.
Thank again to professor plum for allowing me to share this and other rants.
I wonder if you may help me get through this part:
" income tax was first promoted as a substitute for evil tariffs; better to tax what people earned than to allow them to profit from "inefficient" taxes on imports that raised laborers' share of the national income."
"if Congress cannot correctly manage its priorities." The focus on the Fed by the financial media is 99% mis-placed. Congress has 1000x more control over jobs and inflation. Writing about the Fed is nearly akin to the 1971 gold bug article. The Fed doesn't do anti-trust, make covid rules, send stimulus checks, deal with trade, etc, etc, etc. Why no one ever writes about Congress' "mandate" is beyond me. The Fed keeps banks afloat and greased, and controls the short end only. And yet all you hear is about their impact on jobs, stocks, etc. Total nonsense by ALL of you in financial media
Absolutely, Regan. Another friend turned me onto the term POSIWID -- the "proof of a system is what it does." My only reasonable hypothesis is that Congress would prefer to distract us as they rob us blind.
My hypothesis is that the media is distracting us by focusing on the Fed. Want to get rid of inflation? Tax the money causing it,. The Fed doesn't do taxes. Want to create inflation. Cut taxes and/or send stim checks. The Fed doesn't do either. Want to create jobs, kill jobs or nearly anything else... the Fed does not have those tools. But if you read 99.9% of financial media you're 100% convinced they do. Your quote about incompetence instead of conspiracies.... I agree. Financial media is incompetent. It's to the point now that as soon as I see the word "fed" in an article I stop reading because I know they don't know what they're talking about.
Does China have conversations like this, even behind closed doors? Wonder if one point worth mulling is that we do not have the best economic policy, its just that others have worse ones.
As a post-austrian, the "1971" arguments never made much sense since it would seem to follow that ending the gold standard would not have this level of effects immediately. From a historical perspective it makes even less sense as the gold standard of 1971 was less than a shell of the former "cross of gold" era standard and thus ending it would have much less impact than prior "weakening" of the policy.
I would be curious as to the effect on trade abilties by retaining a gold standard as it is my understanding that a gold standard forces trade to "balance" over time. Would NAFTA et al. have had the effects it did were they to be enacted with a gold standard still intact?
I just recently listened to your conversation with Jacob Soll and wondered if either of you had read the works of Friedrich List? His historical accounts of the growth of nations by use of non-free trade policies is extremely illuminating especially on the development of England and America, contrary to the narrative advanced by the Manchester school and their intellectual descendants.
This is the first time I've seen someone have a critical take on the WTF 1971 gentlemen. Usually I see their website used to support arguments. Nice to hear from the other side.
Until people categorize between rentier activity and true wealth creation we will never escape this financialization hell. People are terminally confused about the addition of value versus the appropriation of value. What is happening with housing is completely insane, yet the middle class beg for more of the same.
> please do more QE so there is no point in my kids going to school at all!
It seems this will only end through collapse, which is already halfway there. Most young can now expect to rent forever, have no pension and work until they die, with limited healthcare.
So many WTF dates to choose! WTF happened in 1999!!!??? So much incompetence! So much corruption! So many acronyms! Now, perhaps, so little time! 🍿 please!
Hi Michael, not read this yet, so on a probably unrelated note is there a book you would recommend that explains how money/finance has changed over the last 5-6decades?
Where I am coming from is that when I was growing up in the 70s (UK) I remember money supply being a thing in the weekly/monthly news, and now as a lay person my sense is that it is not a topic in the same way for the general public. Also, the language (and probably issues) around money supply seem to have changed....in a direction that has made it less transparent.
Is there something that explains the what why how of this please? Thank you.
Magic, thank you Michael, I have signed up to the blog and the site looks as if it will scratch the itch, wouldn't be surprised if I get the book as well. I hope you have a good week.
This was a very thought provoking article. Thank you.
The comp vs productivity graph was very interesting to me. While I agree with your points about trade agreements, I think there's an additional point to be made about demographics.
In 1964, the first of the Boomers entered the workforce and in 2011 they began to retire. With an overabundance of workers available, the negotiating leverage available to Labor decays. RTI and NAFTA agreements would have been very different with a politically powerful Labor party.
The section from 1961 to 2011 shows the steepest decline in the comp v productivity chart.
For sure, demographics don't paint the entire picture. For example, union membership as a % of workers starts to fade in the late fifties, before the boomers enter the work force.
I'd like to dig into this some more. You mentioned that a substantial change in terms of trade goes back to 1948. Can I assume that you are talking about the Marshall Plan? Is it not possible to extend the regression chart farther back because the data is unavailable?
An alternative/complimentary narrative may be that the decoupling from gold led to explosive growth of credit, which was put to less and less productive use. To generate and maintain growth then required a decrease in the price of money, further credit growth etc. This type of cheap credit goes to those who already have and use it to purchase assets that can then be collateralised to lever further in a not-so-virtuous cycle.
Those unfortunate enough to have to finance their consumption on credit, though, paid for their credit card debts usurious levels of interest.
While it may be too good to be true, maybe the Fed realises that this process has to be reversed?
Make the necessary inflation fighting kabuki theatre, but allow a few years of such ‘fight’ to bring it down slowly enough to inflate away significant portion of the debt, while arresting the asset price increase. This virtuous cycle can continue as long as official unemployment figures don’t explode.
So yes, they monitor unemployment closely and would have to reverse if it gets too bad, but rather than hope for it, they may be dreading the moment, because it would force them to stop this process of gently deflating the credit bubble?
Maybe, just maybe they’re doing the right thing for once?
Thank you for the article. While I was aware of the history, it has triggered a new perspective of historical processes;
To me it suggests that the start of growth of monetary aggregates around the globe pre-dates 1971, and that the disconnection from the gold standard was an inevitable effect of the growing needs for liquidity and money supply, rather than a cause. It's just that like any growth, its magnitude becomes much more apparent with time and became more apparent in recent decades.
To some extent it was like the '20s and '30s when the UK was forced to sever the ties to the gold standard. Just as after WWI, there was a period of reconstruction post WWII as well, where the growth in money supply was for productive use, but eventually productivity declined, while the addiction to increasing liquidity (and the access to it for those nearer to the liquidity spigots) continued.
This suggests that the desire for growth inevitably leads, eventually, to non productive growth of money, at which point trying to anchor it to gold or any real, restricted supply asset likely becomes impossible.
This suggests to me that there is a limited window in such historical cycles when it appears, for a while, that money can be anchored to gold - but this is always a transitory phase.
Sooner or later the money is debased, its use is less productive, and inequality grows.
Without (a highly unlikely) self imposed discipline, this sort of process is doomed to repeat. It is the desire for apparent/nominal growth that drives it, whether real growth is attainable underneath this apparent nominal growth. This also means that within such cycles the inevitable rising inequality eventually leads to some destructive action that then restarts the cycle - whether revolution or war.
This is exactly right: " it suggests that the start of growth of monetary aggregates around the globe pre-dates 1971, and that the disconnection from the gold standard was an inevitable effect of the growing needs for liquidity and money supply, rather than a cause." I'm less bearish than you are on the inevitable need to re-index. Should we allow further breakthroughs in productivity and energy production, we will not need to
Really enjoyed that paper, and why wasn’t I surprised the role of the EU (well a predecessor) and unhealthy obsession with fixed exchange rates...”A central reason that the French wanted to maintain fixed exchange rates was that fixed rates would make the transition to a European economic union, which could compete against the United States, easier. The French believed that Europe needed a common currency. The French regarded a link to gold as helping to facilitate the monetary unification of Europe, and with monetary unification, the French expected greater political unification and enhanced French influence in world affairs. An “écu” (European Currency Unit) could be linked to gold and might replace the ubiquity of the dollar in international transactions. Transition to the écu would be made easier by maintaining fixed exchange rates. The French planned to have the écu defined by its relationship to gold and guaranteed by a European reserve fund. A European currency would then help France counterbalance the U.S. in international economic matters by providing the world an alternative currency that might compete with the dollar.”
I don't think Powell is unwitting. If Powell doesn't do what's expected of him, then he'll be replaced with someone who will. For years Congress has been dysfunctional, so the Fed stepped in to fill the void. I wouldn't want his job, as it seems to be a "no-win" situation. As for the income inequality arguments you make in this piece, I agree that's been the net result of years of policy - trade, tax and Fed policy. But having read the piece in the WSJ today on Rep. Chip Roy, he seems intent on getting serious cuts in federal domestic non-military spending to raise the debt ceiling which will impact the poor. He and the other members of the Freedom Caucus have Speaker McCarthy in a vice, since one member can now call a "no confidence vote" on the Speaker. OTOH Biden knows the Dems still haven't forgiven Obama for making that 10 year budget cap deal to solve a debt ceiling impasse that expired in 2020. So for the first time ever, I'm worried that we might be facing a time when nobody blinks and we have a default. Ironically, default and potential negative impacts on the dollar might get the "go back to the gold standard" people you started this post with finding even more followers. We live in interesting times.
Alia iacta est. I suppose one could argue we crossed the Rubicon with Greenspan and that Bernanke, Yellen and now Powell are the follow up Emperors using your analogy. (sorry posted it below as a separate comment by mistake)
“If you are against an interventionist Fed when they cut rates, then you should be against an interventionist Fed when they hike rates — regardless of the reasons. And the answer is not to hand these decisions to an “independent Fed” if Congress cannot correctly manage its priorities. What is worse is that the Fed will fail because its tools are not fit for purpose, and in the process of failing, it will lose its independence.”
On the topic of interest rate hike/cut being productive or otherwise, and even though I don't have a strong conviction on the matter, I did recall how you view this issue when Gov. Waller spoke last week.
He said that about a decade ago they kept desperately cutting rates so that they could get at least 2% inflation and nothing seemed to be working. I suppose the same logic could explain why even at 5% they're not getting the disinflationary outcome they seek: sticky Core CPI, headline CPI likely down to energy prices and supply chains easing. Thank you for the article.
For those of us who made our money advising people how to legally cheat on their income and employment taxes, the events in U.S. financial history can all be explained by how the U.S. Treasury collected the money that it did not borrow. For us tax plumbers the changes in net incomes can all be explained by the valves and leaks. The declines and stagnations in the wages earned by "ordinary" Americans that Mr. Greene notes can be tracked against the final end of tariffs. WW 2 and the period of worldwide reconstruction that ended in the late 1950s and early 1960s saw the decline of tariffs as a significant source of revenue to the Treasury; but the U.S. position as literally the last industrial nation left standing allowed American wages and labor demand to be protected from international competition as if late 19th century import taxes were still in place.
As a tax plumber I continue to find bitter amusement in the fact that "free" trade was first advocated by Southern planters because they objected to the head taxes imposed on the last decade of legal importation of slaves. It also makes me smile wryly to know that the income tax was first promoted as a substitute for evil tariffs; better to tax what people earned than to allow them to profit from "inefficient" taxes on imports that raised laborers' share of the national income.
We will know that the labor movement has revived when someone gains national popularity by advocating that (1) Social Security and Medicare coverage be unified at the lower age of 62, (2) employment tax rates be lowered, and (3) that lower rate be applied to all earned income regardless of its characterization.
Thank again to professor plum for allowing me to share this and other rants.
It's a privilege to get comments like this. You are 100% correct in your interpretation of historical facts -- an unusual observation. Thank you.
What a comment! Thank you for this.
I wonder if you may help me get through this part:
" income tax was first promoted as a substitute for evil tariffs; better to tax what people earned than to allow them to profit from "inefficient" taxes on imports that raised laborers' share of the national income."
Thank you again
Any suggestions from the plumber or Michael for a good book on taxation?
"if Congress cannot correctly manage its priorities." The focus on the Fed by the financial media is 99% mis-placed. Congress has 1000x more control over jobs and inflation. Writing about the Fed is nearly akin to the 1971 gold bug article. The Fed doesn't do anti-trust, make covid rules, send stimulus checks, deal with trade, etc, etc, etc. Why no one ever writes about Congress' "mandate" is beyond me. The Fed keeps banks afloat and greased, and controls the short end only. And yet all you hear is about their impact on jobs, stocks, etc. Total nonsense by ALL of you in financial media
Absolutely, Regan. Another friend turned me onto the term POSIWID -- the "proof of a system is what it does." My only reasonable hypothesis is that Congress would prefer to distract us as they rob us blind.
My hypothesis is that the media is distracting us by focusing on the Fed. Want to get rid of inflation? Tax the money causing it,. The Fed doesn't do taxes. Want to create inflation. Cut taxes and/or send stim checks. The Fed doesn't do either. Want to create jobs, kill jobs or nearly anything else... the Fed does not have those tools. But if you read 99.9% of financial media you're 100% convinced they do. Your quote about incompetence instead of conspiracies.... I agree. Financial media is incompetent. It's to the point now that as soon as I see the word "fed" in an article I stop reading because I know they don't know what they're talking about.
Not sure who is more incompetent...FinanMedia-vs-Congress! It's all kibuki theater...
Does China have conversations like this, even behind closed doors? Wonder if one point worth mulling is that we do not have the best economic policy, its just that others have worse ones.
Great article! Now make FIG rain...
As a post-austrian, the "1971" arguments never made much sense since it would seem to follow that ending the gold standard would not have this level of effects immediately. From a historical perspective it makes even less sense as the gold standard of 1971 was less than a shell of the former "cross of gold" era standard and thus ending it would have much less impact than prior "weakening" of the policy.
I would be curious as to the effect on trade abilties by retaining a gold standard as it is my understanding that a gold standard forces trade to "balance" over time. Would NAFTA et al. have had the effects it did were they to be enacted with a gold standard still intact?
I just recently listened to your conversation with Jacob Soll and wondered if either of you had read the works of Friedrich List? His historical accounts of the growth of nations by use of non-free trade policies is extremely illuminating especially on the development of England and America, contrary to the narrative advanced by the Manchester school and their intellectual descendants.
I can't speak for Jacob, but I would argue List refined his views on Alexander Hamilton's "Report on the Subject of Manufacturers" from 1791
This is the first time I've seen someone have a critical take on the WTF 1971 gentlemen. Usually I see their website used to support arguments. Nice to hear from the other side.
Follow Matt Stoller for anti-monopoly related news and information. Monopolies and Citizens United decision are huge problems IMHO.
I think very highly of Matt's work and often recommend his book Goliath. I did an interview with him a few years ago https://www.realvision.com/shows/mike-green-in-conversation/videos/matt-stoller-us-monopolies-and-the-accumulation-of-concentrated-power-QEjR?tab=details
Until people categorize between rentier activity and true wealth creation we will never escape this financialization hell. People are terminally confused about the addition of value versus the appropriation of value. What is happening with housing is completely insane, yet the middle class beg for more of the same.
> please do more QE so there is no point in my kids going to school at all!
It seems this will only end through collapse, which is already halfway there. Most young can now expect to rent forever, have no pension and work until they die, with limited healthcare.
So many WTF dates to choose! WTF happened in 1999!!!??? So much incompetence! So much corruption! So many acronyms! Now, perhaps, so little time! 🍿 please!
Hi Michael, not read this yet, so on a probably unrelated note is there a book you would recommend that explains how money/finance has changed over the last 5-6decades?
Where I am coming from is that when I was growing up in the 70s (UK) I remember money supply being a thing in the weekly/monthly news, and now as a lay person my sense is that it is not a topic in the same way for the general public. Also, the language (and probably issues) around money supply seem to have changed....in a direction that has made it less transparent.
Is there something that explains the what why how of this please? Thank you.
I'd encourage you to read the first 2/3rd of Richard Duncan's book "The Money Revolution" or check out his blog https://richardduncaneconomics.com/
Magic, thank you Michael, I have signed up to the blog and the site looks as if it will scratch the itch, wouldn't be surprised if I get the book as well. I hope you have a good week.
The following academic article about global trade/employment immediately came to mind: https://www.anderson.ucla.edu/faculty/edward.leamer/pdf_files/mar07_leamer.pdf
It is from 2007, but it is thoughtful and has relevance to what you are thinking... I think.
Interesting take on this narrative. Thanks for sharing.
This was a very thought provoking article. Thank you.
The comp vs productivity graph was very interesting to me. While I agree with your points about trade agreements, I think there's an additional point to be made about demographics.
In 1964, the first of the Boomers entered the workforce and in 2011 they began to retire. With an overabundance of workers available, the negotiating leverage available to Labor decays. RTI and NAFTA agreements would have been very different with a politically powerful Labor party.
The section from 1961 to 2011 shows the steepest decline in the comp v productivity chart.
For sure, demographics don't paint the entire picture. For example, union membership as a % of workers starts to fade in the late fifties, before the boomers enter the work force.
I'd like to dig into this some more. You mentioned that a substantial change in terms of trade goes back to 1948. Can I assume that you are talking about the Marshall Plan? Is it not possible to extend the regression chart farther back because the data is unavailable?
An alternative/complimentary narrative may be that the decoupling from gold led to explosive growth of credit, which was put to less and less productive use. To generate and maintain growth then required a decrease in the price of money, further credit growth etc. This type of cheap credit goes to those who already have and use it to purchase assets that can then be collateralised to lever further in a not-so-virtuous cycle.
Those unfortunate enough to have to finance their consumption on credit, though, paid for their credit card debts usurious levels of interest.
While it may be too good to be true, maybe the Fed realises that this process has to be reversed?
Make the necessary inflation fighting kabuki theatre, but allow a few years of such ‘fight’ to bring it down slowly enough to inflate away significant portion of the debt, while arresting the asset price increase. This virtuous cycle can continue as long as official unemployment figures don’t explode.
So yes, they monitor unemployment closely and would have to reverse if it gets too bad, but rather than hope for it, they may be dreading the moment, because it would force them to stop this process of gently deflating the credit bubble?
Maybe, just maybe they’re doing the right thing for once?
Unfortunately, no. The increase in household credit began with the innovations of unsecured credit lines (credit cards) and a growing cohort of Boomers (debt is issued by young). The decoupling from gold was simply a political reaction to "allies" attempting to sabotage the US/UK. A good read is here https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=3545&context=faculty_scholarship#:~:text=Beginning%20in%201965%2C%20de%20Gaulle,influenced%20by%20the%20United%20States.
Thank you for the article. While I was aware of the history, it has triggered a new perspective of historical processes;
To me it suggests that the start of growth of monetary aggregates around the globe pre-dates 1971, and that the disconnection from the gold standard was an inevitable effect of the growing needs for liquidity and money supply, rather than a cause. It's just that like any growth, its magnitude becomes much more apparent with time and became more apparent in recent decades.
To some extent it was like the '20s and '30s when the UK was forced to sever the ties to the gold standard. Just as after WWI, there was a period of reconstruction post WWII as well, where the growth in money supply was for productive use, but eventually productivity declined, while the addiction to increasing liquidity (and the access to it for those nearer to the liquidity spigots) continued.
This suggests that the desire for growth inevitably leads, eventually, to non productive growth of money, at which point trying to anchor it to gold or any real, restricted supply asset likely becomes impossible.
This suggests to me that there is a limited window in such historical cycles when it appears, for a while, that money can be anchored to gold - but this is always a transitory phase.
Sooner or later the money is debased, its use is less productive, and inequality grows.
Without (a highly unlikely) self imposed discipline, this sort of process is doomed to repeat. It is the desire for apparent/nominal growth that drives it, whether real growth is attainable underneath this apparent nominal growth. This also means that within such cycles the inevitable rising inequality eventually leads to some destructive action that then restarts the cycle - whether revolution or war.
This is exactly right: " it suggests that the start of growth of monetary aggregates around the globe pre-dates 1971, and that the disconnection from the gold standard was an inevitable effect of the growing needs for liquidity and money supply, rather than a cause." I'm less bearish than you are on the inevitable need to re-index. Should we allow further breakthroughs in productivity and energy production, we will not need to
Really enjoyed that paper, and why wasn’t I surprised the role of the EU (well a predecessor) and unhealthy obsession with fixed exchange rates...”A central reason that the French wanted to maintain fixed exchange rates was that fixed rates would make the transition to a European economic union, which could compete against the United States, easier. The French believed that Europe needed a common currency. The French regarded a link to gold as helping to facilitate the monetary unification of Europe, and with monetary unification, the French expected greater political unification and enhanced French influence in world affairs. An “écu” (European Currency Unit) could be linked to gold and might replace the ubiquity of the dollar in international transactions. Transition to the écu would be made easier by maintaining fixed exchange rates. The French planned to have the écu defined by its relationship to gold and guaranteed by a European reserve fund. A European currency would then help France counterbalance the U.S. in international economic matters by providing the world an alternative currency that might compete with the dollar.”
Keep your friends close and your Francaise closer
Something happened around 1971 https://books.google.com/ngrams/graph?content=Adjusted+for+inflation&year_start=1800&year_end=2019&corpus=en-2019&smoothing=3
I wish. That inflection was 1967
I wish. That inflection was 1967
Still, kinda funny that people didn't need to constantly use the phrase "adjusted for inflation" back when our coins has actual silver.
I don't think Powell is unwitting. If Powell doesn't do what's expected of him, then he'll be replaced with someone who will. For years Congress has been dysfunctional, so the Fed stepped in to fill the void. I wouldn't want his job, as it seems to be a "no-win" situation. As for the income inequality arguments you make in this piece, I agree that's been the net result of years of policy - trade, tax and Fed policy. But having read the piece in the WSJ today on Rep. Chip Roy, he seems intent on getting serious cuts in federal domestic non-military spending to raise the debt ceiling which will impact the poor. He and the other members of the Freedom Caucus have Speaker McCarthy in a vice, since one member can now call a "no confidence vote" on the Speaker. OTOH Biden knows the Dems still haven't forgiven Obama for making that 10 year budget cap deal to solve a debt ceiling impasse that expired in 2020. So for the first time ever, I'm worried that we might be facing a time when nobody blinks and we have a default. Ironically, default and potential negative impacts on the dollar might get the "go back to the gold standard" people you started this post with finding even more followers. We live in interesting times.
For years the Senate had been dysfunctional, so Julius Caesar stepped in to fill the void.
Alia iacta est. I suppose one could argue we crossed the Rubicon with Greenspan and that Bernanke, Yellen and now Powell are the follow up Emperors using your analogy. (sorry posted it below as a separate comment by mistake)
@profplum99 nails it as usual:
“If you are against an interventionist Fed when they cut rates, then you should be against an interventionist Fed when they hike rates — regardless of the reasons. And the answer is not to hand these decisions to an “independent Fed” if Congress cannot correctly manage its priorities. What is worse is that the Fed will fail because its tools are not fit for purpose, and in the process of failing, it will lose its independence.”
Well said!
On the topic of interest rate hike/cut being productive or otherwise, and even though I don't have a strong conviction on the matter, I did recall how you view this issue when Gov. Waller spoke last week.
He said that about a decade ago they kept desperately cutting rates so that they could get at least 2% inflation and nothing seemed to be working. I suppose the same logic could explain why even at 5% they're not getting the disinflationary outcome they seek: sticky Core CPI, headline CPI likely down to energy prices and supply chains easing. Thank you for the article.