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In a New York Times editorial (link) written in 1993 the late economist John Kenneth Galbraith made a point that seems to have been lost on subsequent generations—many in the economic elite benefit from the destitution of others. Even more to the point, activist government could put the unemployed back to work tomorrow, but at a cost to the elite. By tying economic policies long known to work to competing economic interests, Dr. Galbraith explained the current conundrum. Economies in the West aren’t working because a small economic elite benefits from this state of affairs.

With Barack Obama, of his own initiative, slated to begin cutting government expenditures in 2013 (should he be re-elected), a number of his liberal and progressive supporters have taken to granting that the Federal budget ‘crisis,’ to which he purports to be responding, is real. In fact, the ‘debate’ was preceded by forty years of policies designed to systematically de-fund government, reduce labor to a beggar class and to gut any public programs that don’t specifically and directly make the rich richer. To pretend that this is other than a manufactured ‘crisis’ designed to shift more public resources to the already rich is to misread history.

Apparently unbeknownst to many, the working class in America has been living with austerity economics for forty years now. Since the 1970s the proportion of what American labor is paid relative to what it produces has been declining, as have the effective tax rates on corporations and the wealthy. With corporations and the rich who own them receiving a larger proportion of what labor produces and paying less in taxes, there is now little left to pay for necessary social programs such as schools, health care and pensions. But this shortfall is no accident. It is the intended result of four decades of policies specifically designed to enrich the ruling class at the expense of labor, the middle class and the poor.

In modern history the shift of social wealth from labor to the ruling class began in earnest with Democrat Jimmy Carter in the White House in the late-1970s. A series of politically motivated oil embargoes quite predictably led the oil-dependent manufacturing economy to rising prices and lower output—stagflation. Through arcane theory still practiced by the American economic mainstream, the cause—the oil embargoes with attendant rising prices and reduced output, was converted to effect, as if from over-regulation and Keynesian management of the capitalist economy. The proposed solutions derived from these (implausible) economic theories were de-regulation, the destruction of labor’s bargaining power and the return to (long discredited) ‘market’ solutions to policy issues.

Jimmy Carter began by de-regulating the U.S. transportation infrastructure—airlines, interstate trucking and the railroads, handing heavily unionized industries to the vagaries of market ‘competition’ for which they were profoundly unsuited. He also appointed uber-banker Paul Volcker to head the Federal Reserve. Mr. Volcker ‘tamed’ inflation by raising interest rates and rendering a significant proportion of the populace unemployed (this is standard Fed policy). The additional effects were to sink the bond market (bond prices move inversely to yields) and to raise the value of the U.S. dollar, the latter of which further decimated U.S. manufacturing.

With industrial deregulation underway, Keynesian policies to manage the recurrent crises of capitalism ‘discredited,’ the bargaining power of organized labor diminished and Wall Street interests guiding taxes lower and financial regulation out of existence (see Don Regan), the template was set for the decades that followed. Democrat Bill Clinton cut social spending, further deregulated the banks, and would have privatized Social Security if his impeachment hadn’t curtailed this ambition. Democrat Barack Obama rescued the banker class from its own economic murder-suicide, put forward a largely Republican stimulus package and then left labor, the middle class and the poor to rot. Next year, should he be granted the opportunity, he will promote the right-wing canard of budget ‘crises’ by cutting social spending in earnest. (Automatic cuts are already scheduled under his own proposal).

That the radical right has gotten exactly what it wanted for forty years and the economy is a catastrophe are not unrelated (Recall Dr. Galbraith). The economy is only a catastrophe for working people, the middle class and the poor. The ruling class is doing better than it has since the 1930s. Under the guidance of Republican and Democratic administrations, labor’s take in wages and salaries has fallen from 53% of GDP in 1970 to 44% in 2012 (link). The effective tax rate on corporations is currently half of what it was in 1970 (source: BEA). Likewise, tax rates on the wealthy have been dramatically reduced. And these policies have produced exactly the outcomes they were designed to produce.

When the rich receive a larger share of what labor produces they then have greater capacity to pay for government and social programs and labor has reduced capacity to do so. When taxes on the rich and corporations are cut, the loss in government revenues must either be made up by labor—even with reduced capacity to do so, or government spending must be cut*. One possible solution to the budget ‘crisis’ is to shift the balance of economic power back to labor so that the middle class and poor have the capacity to pay for needed social programs. However, with the Washington (and EU) consensus being that wages must fall and social benefits be cut, this is not going to happen.

*(The relationship between taxes and government expenditures is less direct than is suggested here. With a fiat currency the U.S. government has flexibility in how expenditures are funded. However, money creation is behind much of the wealth re-distribution from labor to capital (via the banks) that has occurred in recent decades. To the extent that inflated financial assets can be monetized, they can be used to buy more ‘real’ assets– what labor produces. This explains why the right (mostly) keeps quiet about the Fed’s ongoing monetary policies that benefit the wealthy while fiscal policies that might directly benefit labor aren’t even being proposed. It also explains why Marx has more relevance for contemporary economics than all of the turgid drivel produced by the academic mainstream in the last fifty years).

Notice please that it is social spending that is on the chopping block because of alleged revenue shortfalls, not the embedded economic interests that live on government spending. Providers to the military receive guaranteed profits through cost-plus contracts. Private prisons, social abominations that they are, profit from increasing incarceration rates and by denying basic services to inmates. For-profit schools survive by misleading desperate and / or gullible people into taking out government loans that they can’t afford to repay (link). For-profit health care earns profits by denying health care. All of these (and more) private beneficiaries of public largesse are slated to grow, not be cut, by the political establishment.

Recall the rationales that were sold along with these policies—government revenues would increase if taxes were cut. Market based policy solutions (health care, education, military) would provide better results for less money because private enterprise is more efficient than government. Shifting social resources from government to private interests would increase social welfare. None of this has happened and yet these remain the only policies being promoted and implemented by the political establishment. Conspicuously, copious evidence that these policies haven’t worked has swayed no one in the political establishment.

The follow-on point is that arguing for ‘better’ policies is a diversion if those making policy decisions serve competing interests. For forty years the rich and connected, the ruling class, have used their representatives in government to take exactly what they wanted. Tax cuts, executive payouts and stock dividends were paid instead of promised pension contributions. Social institutions such as schools have been turned into cash cows for connected capitalists who have no intention of educating our children. Environmental standards have been gutted in return for promised jobs that never materialized. And while the ruling class has taken what it wanted without apology, the chattering class—liberals and progressives, has acted as if it’s at a debate club meeting.

Ironically, bond “king’ Bill Gross of PIMCO makes a (Keynesian) point that many clever economists looking at the issue have not grasped—the West’s bet that financial returns leveraged on the ‘real’ economy—actual goods and services, could rise forever, are coming unwound. With finance capitalism having impoverished the customers needed to keep itself going, available rates of return on investment in the real economy don’t justify making that investment. This is why corporations that have taken an increasing proportion of GDP in recent decades are sitting on piles of cash. In the aggregate, they’ve taken it from their customers who can no longer afford to buy their products. It’s also why the Fed’s QE (quantitative easing) remains a pathetic scam—keeping interest rates low when there is no loan demand (because borrowers have no faith in earning a return in the real economy) only drives financial speculation.

By 1993, when he wrote the New York Times piece, John Kenneth Galbraith was a patrician intellectual. He didn’t use the term, but ‘class struggle’ was clearly a partial, or even whole, inference behind his words. He wasn’t arguing human nature or laws of economics, he was arguing that within the given political economy economic interests not only weren’t always aligned, they were quite often opposed. This really shouldn’t be a revelation. It is fundamental premise of capitalism.

However, left out of actual capitalism are all of the rules and regulations that are supposed to make it work. And it wasn’t the political left that removed them. Just read all of the rational policy pieces from liberal wonks recommending policies, rules and regulations to save capitalism. It was the proponents of capitalism that got rid of the rules. That this is Marx 101 speaks to who controls the ‘public’ discourse. Meanwhile, the ruling class has insisted that we are all in this economy together (capitalist economics). So don’t be surprised when they have Social Security and Medicare in their pockets. This is exactly where the Obama / Romney diversion is headed. But please maintain decorum at the debate club.

Rob Urie is an artist and political economist in New York.