Policymakers and the media are paying too much attention to how quickly the U.S. economy will emerge from the pandemic-induced recession, and not nearly enough to the nation’s deeper structural problem – the increasing imbalance of wealth that could enfeeble the economy for years.

Seventy percent of the US economy depends on consumer spending. But wealthy people, who now own more of the economy than at any time since the 1920s, spend only a small percentage of their incomes. Lower-income people, who were in trouble even before the pandemic, spend whatever they have – which has become very little.

In a very practical sense, the U.S. economy depends on the spending of most Americans who don’t have much to spend. That spells trouble ahead.

It’s not simply a matter of an adequate “stimulus.” The $2,000 checks contained in the American Rescue Plan have already been distributed and extra unemployment benefits will soon expire. Consumer spending will be propped up as employers add to their payrolls. Biden’s spending plans, if enacted, will also help keep consumers afloat for a time.

But the underlying imbalance will remain. Most peoples’ wages will still be too low and too much of the economy’s gains will continue to accumulate at the top, for total consumer demand to be adequate.

Years ago, Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, explained that the Great Depression occurred because the buying power of Americans fell far short of what the economy could produce. He blamed the increasing concentration of wealth at the top. In his words:

“A giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

The wealthy of the 1920s didn’t know what to do with all their money, while most Americans could maintain their standard of living only by going into debt. When that debt bubble burst, the economy sunk.

History is repeating itself. The typical Americans’ wages have hardly increased for decades, adjusted for inflation. Most economic gains have gone to the top, just as Eccles’s “giant suction pump” drew an increasing portion of the nation’s wealth into a few hands before the Great Depression.

The result has been consumer spending financed by borrowing, creating chronic fragility. After the housing and financial bubbles burst in 2008, we avoided another Great Depression only because the government pumped enough money into the system to maintain demand, and the Fed kept interest rates near zero. Then came the pandemic.

The wealth imbalance is now more extreme than it’s been in over a century. There’s so much wealth at the top that the prices of luxury items of all kinds are soaring; so-called “non-fungible tokens,” ranging from art and music to tacos and toilet paper, are selling like 17th-century exotic Dutch tulips; cryptocurrencies have taken off; and stock market values have continued to rise even through the pandemic.

Corporations don’t know what to do with all their cash. Trillions of dollars are sitting idle on their balance sheets. The biggest firms have been feasting off the Fed’s corporate welfare, as the central bank obligingly holds corporate bonds that the firms issued before the recession in order finance stock buybacks.

But most people have few if any assets. Even by 2018, when the economy appeared strong, 40% of Americans had negative net incomes and were borrowing money to pay for basic household needs.

The heart of the imbalance is America’s wealthy and the corporations they own have huge bargaining power – both market power in the form of monopolies, and political power in the form of lobbyists and campaign contributions.

Most workers have little or no bargaining power – neither inside their firms because of the near-disappearance of labor unions, nor in politics because political parties have devolved from giant membership organizations to fundraising machines.

Biden’s “stimulus” programs are fine but temporary. The most important economic reform would be to correct this structural imbalance by reducing monopoly power, strengthening unions, and getting big money out of politics.

Until the structural imbalance is remedied, the American economy will remain perilously fragile. It will also be vulnerable to the next demagogue wielding anger and resentment as substitutes for real reform.

Stephanie Kelton on the economic response to the Covid-19 crisis on both sides of the Atlantic — and why it’s the right time to spend money.

You are one of the most well-known proponents of Modern Monetary Theory. In your book “The Deficit Myth“ you argue that the deficit actually doesn’t matter that much. Could you please explain what this means?
The important thing is how the money is spent. In 2017, the Republicans in the US increased the deficit by cutting the corporate income tax to create greater incentives for businesses to invest. They claimed, we were going to see a boom in hiring and investments. That did not happen. But more importantly, what also did not happen were all of the bad things that for a long time we’ve been taught to associate with increases in the deficit: spiraling interest rates, crowding out of private investment, the increased risk of a debt crisis and all that kind of stuff.

What I argue in the book, is that every deficit is good for someone. That is the important point. On the other side of every fiscal deficit lies a financial surplus in some part of the economy, which is why I titled one of my chapters: “Their red ink is our black ink”. The main question is: Who is profiting from the deficit? The Republican deficits were very good for big corporations and the richest people in society.

The Democrats just added almost two trillion to the deficit with their Covid rescue spending package in March of this year. That deficit was good for a very different constituency. The one percent did not benefit from those deficits. It was the middle class and low income, poor people as well as state and local governments and small businesses.

Deficits do matter. But the question is: deficits for whom and for what. Are we running deficits to address shortfalls in investment, infrastructure and education, R&D – the kinds of things that enhance the economy’s longer term productive potential? Or are we just running deficits to generate windfalls for big corporations and wealthy people.

Many economists across the political spectrum would argue that at some point you must pay back the debts.
If the government runs a deficit, it spends more dollars or euros into the economy than it taxes back out and then it matches up the deficit by turning some of those dollars or euros into interest-bearing currency, which is a government bond. That’s what a US Treasury bond is: just an interest-bearing form of money.

The US government can issue two instruments: they can issue a dollar, or they can issue a Treasury. The dollar doesn’t pay interest, the Treasury does. When the government issues Treasurys, people say the government has borrowed and they say it has taken on debt and that it must pay that debt back. Well, what does that mean for a currency issuing government? What does it mean to pay back debt? It means to turn your yellow paper back into green paper.

It means that you remove the Treasury that you’ve issued; it expires. And upon expiration on maturity, you turn it back into your other monetary instrument. It is just an electronic spreadsheet entry. Paying back the debt means marking down the number in one column and marking up the number in the other column. It’s just changing the composition of the money supply: Fewer bonds, more currency, that’s it.

A group from the German business and political establishment, including former chancellor candidates Peer Steinbrück and Edmund Stoiber, call for “more discipline and a reduction of debt-financing”. The authors warn of rising inflation, massive social upheavals and further political polarisation. Are they wrong?
You can get social upheaval if you create a serious inflation problem. That is certainly correct. However, I’m not hearing proposals from the Europeans to spend anywhere near enough money to put the region at risk of that kind of inflationary spiral where you create real hardship for people. The far more likely cause of social upheaval is going to come from the austerity itself.

That is where you impose misery gratuitously on people. If you tell governments now that the fiscal support that the ECB has been providing through the pandemic is being withdrawn and that they are now expected to get their debt ratios back in line with the Stability and Growth Pact and the Maastricht criteria, everybody knows what will happen. We have been there before. We know from 2010 and from the Greek experience, what happens.

Societies have already been through hell the last 15 month due to the effects of the pandemic. People can only take so much. You cannot come on the back end of the pandemic and tell governments that you must now impose very draconian budget cuts and austerity. It is like a powder keg, it will blow.

The German authors argue that member states should not get cheap money without conditions because this leads to reckless spending and the fast rise of debt, as seen in countries like Greece.
What led to the crisis in Greece was a global financial crisis. Warren Buffett famously said of Greece that when they still had the drachma, they had other problems, but they didn’t have a debt problem. What happened in Greece was unique due to the combination of not having their own currency and having a very significant economic downturn that drove deficits higher.

What Europe needs is a smart, substantial spending programme oriented around dealing with the challenges ahead of us: preparing for the next pandemic and dealing with the immediate crisis facing all of us in the form of climate change. The argument that low interest rates will lead to profligate borrowing and spending is misleading. We have to spend and the Greek government – because of the nature of the monetary system – has to borrow and cover any shortfall in tax revenue. And it is better to do that in a low interest rate environment because then you can keep the fiscal trajectory sustainable.

What would be the consequences if the ECB stopped its emergency bond-buying programme?
At the beginning of the pandemic, when the economic impact was being felt, deficits began to rise and interest rates began to move higher, Christine Lagarde said: Don’t look to the ECB, it’s not our job to manage spreads. Most people, including myself and the financial markets, had the same reaction: are you really going to do this again? Are we going to repeat 2010?

But she walked that back very quickly. She clearly understood that to avoid a repeat of 2010 and allowing yields to blow out, there was no alternative but to step in with pandemic emergency purchasing program and managing spreads. What would happen if they stopped? Markets will move yields higher, particularly in countries like Italy, where the debt ratio is around 160 percent. These countries would run into serious trouble.

Many economists warn of skyrocketing inflation. In Germany, it rose to two per cent in April, the highest level in two years. Is the economy in danger of overheating?
Two per cent is great news because that’s the first time in a very long time that the actual inflation rate coincides with the target rate. Central banks all over the world have been struggling to hit their own two per cent inflation targets. In the US, the Fed has introduced a new framework. If all we got was two per cent inflation, month after month, year after year, we would be missing our target. We would be below target because the Fed has announced that they want two per cent on average and because we’ve been below for so many years, we have to run above two per cent for a number of years to hit the average.

Inflation is tricky, because it is a dynamic and complex phenomenon that no economist has a reliable model of, it just doesn’t exist. What we are currently facing globally are the kind of growing pains of growing out of the pandemic years: the dislocations, problems with supply chains, bottlenecks. But those things will shake themselves out. That’s what most economists believe.

Jerome Powell, chairman of the Fed certainly doesn’t think that we’re facing the kind of situation where inflation becomes entrenched and feeds on itself like in a wage price spiral. It’s not the average opinion among professional economists here in the US. It’s Larry Summers and maybe two other people, who think that the US and the world is really staring down the barrel of overheating.

You just mentioned the pandemic. The Eurozone currently is probably only working because we have an emergency situation. It led to all member states agreeing – temporarily – on a common strategy. How could a long-term political solution look like? Do we need debt mutualisation or fiscal transfers between member states? And wouldn’t these kind of measures lead to the re-emergence of the North-South conflict in the Eurozone all over again?
Good question, you definitely need some sort of stable solution. You’re going to have a North-South conflict if you try to operate under the old set of rules as well. This is what you already have: the finger pointing, the blame game, the accusations that one group of countries is a drain on the resources from the other. You are the European Union and you’re an economic and monetary union. The word union is there, but behaviorally you are not always a union.

To some extent that happens here in the US as well. We didn’t used to hear politicians and other people saying that the folks in Mississippi and West Virginia are a drain on the resources from states like New York and California. Now, I’m starting to hear some of that. Wealthy blue states, high tax states, paying more in revenue than they get back in terms of public support at the federal level. But it is not as bad as in the EU because we are a full fiscal union, a full monetary union. And for many years of our existence, we have behaved like that – at least after the civil war. At some point we started to think of ourselves as one nation and have our interests aligned. But that’s becoming more fractured. You saw 6 January: Democracies are fragile things.

It’s clear that the Eurozone needs some kind of reform, but I don’t know that any one thing is going to avoid the kind of tensions that you just raised. I don’t know exactly how to overcome them because so much of it is political and about national identity. Nonetheless, whatever it is, common bond market or fiscal union, you need something that furthers the project.

After passing the 1.9 trillion-dollar Covid rescue package in March, Joe Biden aims to pour further trillions into the economy for investments in infrastructure and combatting the climate crisis among other goals. Would you recommend that strategy for European countries as well?
What President Biden is now proposing is 2.3 trillion dollars for the American Jobs Plan as well as 1.8 trillion dollars for the American Families Plan. In total, he’s seeking over four trillion dollars for infrastructure broadly – human and physical infrastructure. Is that something that Germany and other countries could use as a model for a sort of “building back better” strategy? Sure. Most countries will benefit from investments. Many have underinvested in things like R&D and infrastructure.

In many ways, Europe, however, is heads and shoulders above where we are in the US with respect to paid family leave, childcare, free college and these sorts of things. We are just trying to catch up in a lot of ways with where many European countries already are.

On the climate front, however, what the Biden administration has proposed is actually very modest. It is nowhere near enough of a commitment to get us quickly enough to where we need to be to address climate change. So, we all need to be investing heavily, especially on the climate side.

Something I’ve just learned about Amazon – one of America’s most profitable and fastest-growing corporations, headed by the richest man in the world:

According to the Labor Department’s Occupational Safety and Health Administration, Amazon warehouse workers sustained nearly double the rate of serious injury incidents last year as did workers in non-Amazon warehouses.

In addition, largely because Amazon failed to provide its workers adequate protective equipment during the pandemic, the corporation admits that nearly 20,000 employees were presumed positive for the coronavirus.

Workers who spoke out about these unsafe workplace conditions were fired.

Amazon boasts of paying its workers at least $15 an hour. But that comes to about $30,000 a year, hardly enough for a family to get by on.

The explosive growth of Amazon’s army of poorly-paid and ill-treated hourly workers is emblematic of the long-term decline of America’s middle class and levels of economic inequality America hasn’t seen since the late nineteenth century’s Gilded Age.

This has strained the social fabric of the nation – fueling anger and frustration, a rising tide of drug overdoses and deaths of despair, even tempting some working-class people to embrace Trumpism and white nationalism.

The success of Amazon’s “shock and awe” campaign against workers who dared try to bring a union to their Bessemer, Alabama warehouse exemplifies the immense political power the architects of this growing inequality now wield.

It’s an alarming omen of the future.

In Amazon warehouses like Bessemer, workers are treated like robots. Algorithms relentlessly impose dangerous production quotas. They get two 30-minute breaks each ten-hour day. Every movement is monitored.

Amazon delivery drivers report being instructed to turn off their safety apps so they can meet their quotas.

Others report having to urinate into bottles because of delivery timing pressures.

Even though public support for unions is as high as it’s been in 50 years – 60 million American workers would join a union today if they could – Bessemer workers were outgunned by a behemoth whose market capitalization exceeds Australia’s GDP.

The National Labor Relations Act makes it illegal for employers to fire workers for trying to organize a union. But the penalties employees for violating the Act are so laughably small (rehiring the worker and providing back pay) that employers like Amazon routinely do it anyway.

Amazon may be the future of the American economy, but if that future is to have room for the kind of prosperous working families that fifty years ago defined American capitalism, unions are critical.

In March, the House of Representatives passed legislation designed to level the field. It’s called the Protect the Right to Organize Act (PRO Act). The Senate version has 47 Democratic co-sponsors. It needs three more to give the PRO Act a fighting chance of getting to Joe Biden’s desk.

The PRO Act would end many of the practices Amazon used to defeat the union effort in Bessemer. Real penalties would be imposed on companies and corporate officers who retaliate against union advocates or otherwise violate the National Labor Relations Act.

The PRO Act would make it easier for workers to form a union, with the aim of protecting them from unfair working conditions.

The PRO Act alone won’t end economic inequality or return prosperity and opportunity to America’s working families. But passage of the PRO Act would help.

It would also send a clear signal that ours is truly a government “of the people” – such as the million people who work for Amazon today, not the one multi-billionaire at the top, and of the vast majority of Americans who are working harder than ever today and getting nowhere, in America’s Second Gilded Age.

How do we prevent America from becoming an aristocracy, while also funding the programs that Americans desperately need? One way is to get rid of a tax loophole you’ve probably never heard of. It’s known as the “stepped-up basis” rule.

Here’s how the stepped-up-basis loophole now works. Take a man named Jeff. At his death, Jeff owns $30 million-worth of stocks he originally bought for a total of $10 million. Under existing law, neither Jeff nor his heirs would owe federal tax on the $20 million of gains because they’re automatically “stepped up” to their value when he dies — $30 million.

Under Biden’s proposal, Jeff’s $20 million of gains would be taxed. And don’t worry: Biden’s proposal doesn’t touch tax-favored retirement accounts, such as 401-Ks, and it only applies to the very richest Americans.

As it is now, the stepped-up basis loophole enables the super-rich, like Jeff, to avoid paying more than $40 billion in taxes each year. It has allowed them to skip taxes on the increased values of mansions and artworks as well as shares of stock.

In fact, it’s one of the chief means by which dynastic wealth has grown and been passed from generation to generation, enabling subsequent generations to live off that growing wealth and never pay a dime of taxes on it.

Unless the stepped-up basis loophole is closed, we will soon have a large class of hugely rich people who have never worked a day in their lives.

Over the next decades, rich baby boomers will pass on an estimated $58 trillion of wealth to their millennial children — the largest intergenerational transfer of wealth in history.

Closing this giant tax loophole for the super-rich is how Biden intends to fund part of his American Families Plan, which would provide every child with 2 years of pre-school and every student with 2 years of free community college, as well as provide paid family and medical leave to every worker.

Close this stepped-up basis loophole, and we help finance the programs the vast majority of Americans desperately need and deserve. We also end the explosion of dynastic wealth. It should be a no-brainer.

Even if everyone agreed that printing another trillion dollars to finance a basic income for the poor would boost neither inflation nor interest rates, the rich and powerful would still oppose it. After all, their most important interest is not to conserve economic potential, but to preserve the power of the few to compel the many.

Back in the 1830s, Thomas Peel decided to migrate from England to Swan River in Western Australia. A man of means, Peel took along, besides his family, “300 persons of the working class, men, women, and children,” as well as “means of subsistence and production to the amount of £50,000.” But soon after arrival, Peel’s plans were in ruins.

The cause was not disease, disaster, or bad soil. Peel’s labor force abandoned him, got themselves plots of land in the surrounding wilderness, and went into “business” for themselves. Although Peel had brought labor, money, and physical capital with him, the workers’ access to alternatives meant that he could not bring capitalism.

Karl Marx recounted Peel’s story in Capital, Volume I to make the point that “capital is not a thing, but a social relation between persons.” The parable remains useful today in illuminating not only the difference between money and capital, but also why austerity, despite its illogicality, keeps coming back.

For now, austerity is out of fashion. With governments spending like there’s no tomorrow – or, rather, to ensure that there is a tomorrow – fiscal spending cuts to rein in public debt do not rank high among political priorities. US President Joe Biden’s unexpectedly large – and popular – stimulus and investment program has pushed austerity further down the agenda. But, like mass tourism and large wedding parties, austerity is lingering in the shadows, ready for a comeback, egged on by ubiquitous chatter about impending hyperinflation and crippling bond yields unless governments re-embrace it.

There is little doubt that austerity is based on faulty thinking, leading to self-defeating policy. The fallacy lies in the failure to recognize that, unlike a person, family, or company, government cannot bank on its income being independent of its spending. If you and I choose to save money that we could have spent on new shoes, we will keep that money. But this way of saving is not open to the government. If it cuts spending during periods of low or falling private spending, then the sum of private and government spending will decline faster.

This sum is national income. So, for governments pursuing austerity, spending cuts mean lower national income and fewer taxes. Unlike a household or a business, if the government cuts its spending during tough times, it is cutting its revenues, too.

But if austerity is such a bad idea, sapping our economies of energy, why is it so popular among the powerful? One explanation is that while they recognize that state spending on the impecunious masses is an excellent insurance policy against recessions as well as against threats to their property, they are loath to pay the premium (taxes). This is probably true – nothing unites oligarchs more than hostility to taxes – but it does not explain staunch opposition to the idea of spending central-bank money on the poor.

If you asked economists whose theories align with the interests of the wealthiest 0.1% why they oppose monetary financing of redistributive policies that benefit the poor, their answer would hinge on inflation fears. The more sophisticated would go a little further: such largesse would eventually hurt its intended beneficiaries because interest rates would soar. Immediately, the government, facing higher debt repayments, would be forced to cut its expenditures. An almighty recession would then ensue, hitting the poor first and foremost.

This is not the place for yet another rendition of that debate. But suppose for a moment, and for argument’s sake, that everyone agreed that printing another trillion dollars to finance a basic income for the poor would boost neither inflation nor interest rates. The rich and powerful would still oppose it, owing to the debilitating fear that they would end up like Peel in Australia: monied but bereft of the power to compel the less monied.

We are already seeing evidence of this. In the United States, employers are reporting that they cannot find workers as pandemic lockdown rules are lifted. What they really mean is that they cannot find workers who will work for the pittance on offer. The Biden administration’s extension of a $300 weekly supplementary payment to the unemployed has meant that the combined benefits workers receive are more than twice the federal minimum wage – which Congress refused to lift. In short, employers are experiencing something akin to what happened to Peel soon after he arrived in Swan River.

If I am right, Biden is now facing an impossible task. Because of the way financial markets decoupled after 2008 from actual capitalist production, every level of fiscal stimulus that he chooses will be both too little and too much. It will be too little because it will fail to generate good jobs in sufficient numbers. And it will be too much, because, given many corporations’ low profitability and high debt, even the slightest increase in interest rates will cause a cascade of corporate bankruptcies and financial-market tantrums.

The only way to overcome this conundrum, and to rebalance both the financial markets and the real economy, is to lift working-class Americans’ incomes substantially and write off much of the debt – for example, student loans – that keeps them bogged down. But, because this would empower the majority and raise the specter of Peel’s fate, the rich and powerful will prefer a return to good old austerity. After all, their most important interest is not to conserve economic potential. It is to preserve the power of the few to compel the many.