Deficits for the Rich: Inequality and Instability

Abstract

Deficit spending has long been understood as a stabilizing counter-cyclical force. The thesis presented herein is that over recent decades, the cumulative deficits of government and non-corporate entities have expanded the inequality of wealth and income, which, over the long haul, contributes to slow growth and potential instability. The thesis builds on the Kaleckian-Minsky insight that deficits create gross profits in excess of new investment expenditures (free cash). Since the 1980s, this free cash has been spilled in the stock market through mergers, dividends and stock buybacks—worsening inequality. As the upper classes have a larger range of discretionary spending options, this expanded inequality has made for more spending volatility and speculative endeavors. The authors call for expanded taxes on the rich to claim the deficit-generated free cash. Such taxes would be in the service of more stability and equity.

Keywords:

• deficits
• inequality
• stability

JEL Classification Codes::

• H62
• E11
• E12

Notes

1 Keynes maintained that the classical causal presumption of saving driving investment required an unwarranted assumption that resources of labor and labor were full utilized. In Joan Robinson’s words, such an assumption meant that every “decline in consumption meant an increase in investment to absorb the labor released [but with underutilized resources] It is the rate of investment which governs the rate of saving and not vice versa” (Robinson [1942] 1991, 65–66).

2 Michael Jensen’s term (1986). To my knowledge, Jensen never ascribed this phenomenon to government deficits. His research pertained to corporate mismatches of cash to investment opportunities among particular firms and industries.

3 On CompuStat Data, the mean debt/capital stock ratio rose from 32.5 percent in 1950 to over 84 percent in 2014. The largest top quartile (measured by sales) exhibited the most expanded leverage, particularly after 1980 when the debt/ capital stock ratio expanded from 53 percent in 1980 to over 90 percent in 2014 (Davis 2016, 127–130).

4 As calculated this personal saving is devoid of saving from dividends as the latter is included in free cash.

5 We use standardized variables so as to place disparate series on the same Y-axis.

6 Stock values, Table L.223, Flow of Funds, Federal Reserve; corporate fixed investment as sourced in Figure 2 above.

Additional information

Notes on contributors

Craig Medlen

Craig Medlen is Professor of Economics at Menlo College.

Zelin Chen

Zelin Chen is a Financial Analyst with Guangzhou Finance Holdings Group in Guangzhou.