Capitalism has resulted in prosperity that, up til the present millennium, has been unmatched and broad based. But there are problems with this economy. At the end of this article is a brief discussion about the Effective Demand Limit having been met. This limits demand going forward.

There are problems with government and capitalist responses to the challenges faced by the economy. It isn't a problem of fairness, as Fox News would lead you to believe. It is about real demand and the health of the economy.

Will Rogers was the most popular man in America for pointing out the limitations of government and of the rich in their responses to both the 1921 Depression and ultimately the Great Depression.

Rogers said:

Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue. Nov 27, 1932 

So, now in this millennium we have seen the middle class falling behind. Even Pew Research, hardly a liberal organization, has said that the middle class is falling behind, even since 2011. Economic progress has increased the middle class wealth, but median income has stagnated since 2000.

Worse yet, wealth disparity has increased to the highest ever. Again from Pew:

A recent Pew Research Center analysis also found that the wealth gaps between upper-income families and lower- and middle-income families in 2016 were at the highest levels recorded. Although the wealth of upper-income families has more than recovered from the losses experienced during the Great Recession, the wealth of lower- and middle-income families in 2016 was comparable to 1989 levels. Thus, even as the American middle class appears not to be shrinking (for now), it continues to fall further behind upper-income households financially, mirroring the long-running rise in income inequality in the U.S. overall.

So, needless to say, I am concerned about the capitalist response to the wealth tax proposals recently put forward by the Democrats, which apparently have broad public support, upwards of 60 percent of the people. The response has been to label the idea of wealth tax or even higher income taxes as being "socialism".

That response, in my opinion, is a problematic response, when the proper response should be compromise. Yes, compromise from the very wealthy among us is appropriate, as the numbers don't lie.

This is why those who take advantage of sweet deals and know the advantage of high end wealth often say they can afford to pay more in taxes. The prime examples are Warren Buffet and Mark Zuckerberg and Bill Gates.

Gates said:

I've paid more taxes, over $10 billion, than anyone else, but the government should require the people in my position to pay significantly higher taxes.

Will Rogers once said almost a century ago, "The whole trouble with the Republicans is their fear of an increase in income tax, especially on higher incomes." 

The increased support for taxing the wealthy is certainly a backlash to the regressive tax breaks orchestrated by Donald Trump and Goldman Sachs alum, Gary Cohn.  The Goldman Sachs alumni wanted to establish volatility in the markets, and it appears to me that it was more for Goldman Sachs' bottom line, than for anyone else. Did Goldman have to raise quick cash for potential scandals upcoming? Makes one wonder.

There have been odious examples of the government and the banking system working for the wealthy, but not necessarily for the nation. A primary example is vilified leader of the senate Mitch McConnell. Mitch stated that he wanted Obama to be a one term president. Most economists believe that he plugged the stimulus faucet, resulting in a stimulus early in Obama's first term that was way too small. The beginning of the business cycle is the very best time for a large stimulus, but Mitch appeared to be more concerned about a black president and a socialist one at that, failing.

But Mitch hurt the nation, dragged out the Great Recession, and it is fairly obvious to most that his behavior has been uncovered. The masses of people are starting to understand that a stimulus at the beginning of the cycle is always preferable to one at the end, and that Mitch blew it.

Where It Gets Complicated

Of course, in the framework we have where debt is wealth, where treasuries are gold, the issues are complex. There certainly is a paradox working in that people must borrow for the system to survive. But most people prosper by breaking free of debt. We have learned that printed money, excess reserves, remain within the banking system. So, even the government borrows and everyone borrows. We can't just print it, unless it is some sort of one-time offering to the people, in the form of helicopter money.

But even then, we tried something similar in the Great Recession with the Bush administration rebate checks. But it was found that they didn't work the way that the planners wanted:

A December 2009 study found that only about one-third of the tax rebate was spent, providing only a modest amount of stimulus.^[12]

Well, if that little rebate didn't really work as well as hoped, the one-time issuance of generous helicopter money is most likely doomed even though it could work to increase the money supply safely over time.

Truth is, if no one needed to borrow, the banks would not make any money. This of course, was the dream of Will Rogers, who in leading up to the Great Depression said in WA #14, March 18, 1923:

You can't break a man that don't borrow; he may not have anything, but Boy! he can look the World in the face and say, "I don't owe you Birds a nickel." You will say, (if everyone stops borrowing) what will all the Bankers do? I don't care what they do. Let 'em go to work, if there is any job any of them could earn a living at. Banking and After-Dinner Speaking are two of the most Non-essential industries we have in this country. I am ready to reform if they are. 

But now we are stuck with bonds as gold. Do away with bonds and a lot of wealthy people will no longer be wealthy, and worse yet, many important financial deals will lack sufficient collateral that bonds provide. People borrow so they can spend. And spending keeps the economy going! The paradox of the benefits of debt on the macro level versus the benefits of being debt-free on the micro level is with us for as long as money exists.

The Compromise

The compromise between those who want a wealth tax and those who will have to pay it should be simple. The affirmation of the virtue of capitalism (as compared to other isms) coupled with a higher income tax for the very wealthy seems to be a reasonable arrangement. The capitalists still get to be capitalists, there won't be a wealth tax which could prove clumsy, and all that makes for a better alternative than the other isms. However, the way some people have been treated by the capitalists has been dreadful as I said:

...if the US government would simply attempt to pull up the lower rungs, the world would have more confidence in our way of life. As it is, China is fusing with Russia, Pakistan, and India to form the largest cooperative block of people in the world. The power in Asia is the people, and their ability to produce and to buy. In the USA, with the demise of union power, the economic power has gravitated almost completely to the capitalists, who appear to be investing less, and are just profit takers. They stole from the middle class in the housing bubble and crash, regardless of Rick Santelli's mindless concept that the middle class just bet on housing and lost. This is an example of the disrespect that many capitalists in America have for people who buy their stuff. And they wonder why many millennials have little respect for them now.

The compromise is obvious. It is in the long term interest of capitalism. Capitalists should take heed. After all, some socialism, like Social Security, has strengthened the mass support of capitalism. Lose mass support and you will get an odious socialism as existed in the old Soviet Union. Compromise is what makes capitalism acceptable in America.

Effective Demand Limit

Professor Edward Lambert has emailed me that capital is now making money off capital. Effective demand is capital making money off labor. As this transitions to capital making money off capital, the effective demand limit is reached.

This choking of consumer demand can be traced to wealth inequality. Consumer demand is only strong when the consumer reaps its fair share of GDP. It reaches its limit when its share of GDP fails to increase along with the increase in that Gross Domestic Product.

Seriously, capitalists, this must be repaired. The Millennials know something is very wrong with capitalism, with a majority leaning towards socialism. But it can be fixed, and the alternatives have proven to be worse. So, capitalists, only you can fix this fault in the only ism that can sustain us. Compromise with the Democrats. Pay more taxes. Pay your workers more. Quit speculating on housing so that workers are forced to demand more in wages than can be borne by the economy.