[EkonoKlast] Our Good +300 Years Old Economic System Is Broken But Don’t Blame It On COVID-19. Something Far More Consequential Is Going On

Gabriel-Andrei ŢECHERĂ[EkonoKlast], In English

I was pondering for sometime on this subject when, a few days ago, an (economically speaking) unorthodox post published by Mr. Andrei Caramitru – Romanian tech investor and entrepreneur, caught my attention. In a concise manner, he argues that the only way out of the unbearable global level of indebtedness that we are experiencing today, is to increase wages faster than the GDP and to increase wealth taxation, while keeping the interest rates low. It worked in the ’50s and the ’60s, it should work now. A powerful mix of economic policies, albeit extremely difficult to implement because they amount to economic heresy nowadays. Conventional economic wisdom tells us that these three policies are bad, bad and bad, right?

But are they, though?

I think not.

The idea that labor productivity growth provides the basis for the growth of wages has become almost a farce in our times. In the U.S. for example, labor productivity almost doubled since the ’70s whereas the hourly compensation increased by less than 20%. Paradoxically, this is perfectly consistent with the economic theory. Since productivity has been increasing almost exclusively due to automation, digitalization and robotization there is no reason for the salaries to increase. And they didn’t. And by the same fractured logic we should not increase salaries, ever. Why should we?

On the other hand, a zero wealth tax defies both historic evidence and logic. Conventional economic wisdom argues that a high level of taxation is slowing down the economic activity, discourages innovation and encourages tax evasion. History tells us a different story though. In the high taxation environment of the ’50s and the ’60s the economy grew faster than in the last two decades and the rate of innovation was higher than today. The current economic environment did not come with any significant innovation in the last twenty, maybe even thirty years, with the exception of the smartphone. Nothing comparable to the integrated circuit, the laser, the computer and many other great inventions of the ’50s and the ’60s. On the other hand it is true that high income taxes encourage tax evasion, but it is not necessarily true when it comes to the taxation of wealth. Wealth is less volatile and much harder to conceal than income, making taxation much easier and effective.

Finally, keeping leverage at sustainable levels is Economics 101. But does “sustainable” mean anything any longer in a market that has been flooded with cheap money for the last 12 years? Apparently not. And I am not referring to governments, they could not care less about debt sustainability, debt is always better than tax hikes. I am talking about companies for which financial demise is always a possible outcome and which, despite that, are still binging on debt. On the other hand cheap money are here to stay because even a moderate increase in interest rates would transform the market in a bloodbath. It will simply not happen any time soon. Better get used to it.

So why was the economy not booming after the great recession of 2008? Why is it that cheap and readily available capital and labor, high productivity and low taxes, combined, are not fueling economic growth in our days? Why don’t they work anymore?

To put it bluntly, because our +300 years old economic model is flat-out broken. It is beyond repair and we need to replace it with a newer model, one in which a combination of increased wages, higher taxation and low interest rates is no longer an economic heresy.