“What we’ve got here is a failure to communicate.” This became an often-repeated popular line after its use in the 1967 movie Cool Hand Luke. A 1950s Florida prison warden (played by actor Strother Martin) says those words after an insolent remark by one of the prisoners (played by Paul Newman) results in the warden lashing that prisoner with a whip.
In the film, the message the warden is clearly trying to get other prisoners working on a chain gang to understand is that if you do not do as you are told or if you talk back to those with physical power over you, there will be consequences. Words, in other words, do matter, and you better make sure you understand what they are saying.
But being sure what meaning or message that words convey is not always unambiguous. This becomes a problem in any exchange of ideas when what you think the other person means by the words they are using is not what they have in mind. And sometimes the ambiguity surrounding the use of a word might even be intentional.
Imposter-Terms Like “Progressive” Confuse Our Understanding
The classical liberal author Albert Jay Nock (1870–1945) published an essay in the February 1936 issue of the Atlantic Monthly on what he called “Imposter-Terms,” that is, words that are used in ways meant to confuse or misdirect understanding. He actually took the phrase from the famous utilitarian philosopher Jeremy Bentham (1748–1832), who coined the term in his Book of (Political) Fallacies (1824).
More precisely, imposter-terms are words that are used to make more acceptable some idea or fact that would be viewed far more negatively if expressed in a more direct and clear manner — that is, something that would be doubted or even rejected as undesirable if described in words that capture the true nature of the subject or object. Imposter-terms, therefore, as explained by Bentham and Nock, may be intentionally applied precisely for purposes of deception and misunderstanding.
One instance of this, may I suggest, is the political use of the word “progressive.” Now, clearly, it originates out of the word “progress.” According to the Oxford Dictionary, progress refers to “forward or onward movement towards a destination,” or “development towards an improved or more advanced condition.”
“Progressive,” then, means “happening or developing gradually or in stages.” The dictionary makes clear that a progressive movement to a “more advanced condition” can be either positive or negative, as in the worsening severity of an illness. It also says that a “progressive” is someone who is “an advocate of social reform.”
Now, rightly understood, who can be against human and social progress? Who would not like a progressing decrease in poverty, or a progressing increase in literacy and longer, healthier lives for humankind? Who is not for progress toward more respect and regard for every person as a distinct individual with only one life to live? Who is not for all of these and far, far more than could be listed and lyrically expressed about the world and all those who live in it?
There have been a few who have called for an ascetic existence, a renunciation of anything but the mere essentials of human life, with no care for the material things of this earth. But the vast majority of those who have lived during every generation of human beings on this planet have wanted and wished for a material and social life better, richer, and healthier than the one that preceded them, and hoped that their children would have an improvement over theirs. For most people to think this way is, well, just human nature.
Classical Liberals Saw Human Progress Through Freedom and Markets
The question is, what are the best means and methods to achieve it? The classical liberals of the 18th and 19th centuries argued that the best hope for mankind in this “progressive” direction was for the elimination of political control and command over people’s lives.
The guiding classical liberal principles were: recognize and respect every individual’s right to freely and peacefully live his life as he personally chose; have the requirement that all human relationships be based on voluntary association and mutual agreement in the marketplace of exchange and in the area of civil society; make the narrow and primary duty of a limited government be the protection of each individual’s right to their life, liberty, and honestly acquired property, and the enforcement of all voluntary agreements among them. With the establishment of this type of social environment, the most will have been done that would be conducive to the possibilities for human progress.
This, also, was considered to be based on an appreciation of human nature. Individuals basically know their own circumstances and abilities better than any other who would presume to plan and direct their life for them. This was concisely stated by Jeremy Bentham in his Manual of Political Economy, written in the 1790s:
The interest which a man takes in the affairs of another, a member of the sovereignty for example in those of a subject, is not likely to be so great as the interest which either takes in his own; still less where that other is a perfect stranger to him….
In not one of these particulars is the statesman likely to be more than upon a par with the individual whose choice relative to the subjects in question he is so ready to control; in almost all of them he is constantly and necessarily inferior beyond all measure….
A first Lord of the Treasury … of a Trade, or any other member of the Legislature, is not likely in the instance of any one of the many thousands of trades existing in the world, to form relative to the best mode of carrying on that trade a choice so good as that would be formed by a person embarked, or intending to be embarked, on the trade in question; still less in the instance of everyone one of those trades.
Freedom Produced Progress in America
Following the principles of freedom and free markets succeeded, wherever they were reasonably recognized and respected, and slowly but surely brought about a progressive improvement in the social and economic conditions of those respected in their personal liberty and in their peaceful and voluntary associations with others for mutual gain.
The idea and growing reality of human progress in improving or bettering social, cultural, and material conditions of mankind was one that most reflecting individuals were delighted to point to when making observations as the 19th century progressed. For instance, in his 1867 Harvard lecture, “The Progress of Culture,” the noted American essayist Ralph Waldo Emerson (1803–82), asked:
Who would live in the stone age or the bronze or the iron or the lacustrine? Who does not prefer the age of steel, or good, or coal, petroleum, cotton, steam, electricity, and the spectroscope? …
Consider, at this time, what variety of issues, of enterprises, public and private, what genius of science, what masters, each in his separate province, the railroad, the telegraph, the mines, the inland and marine explorations, the novel and powerful philanthropies, as well as agriculture, the foreign trade and the home trade . . . manufactures, the very inventions, all on a national scale.
Even in the immediate aftermath of the destructive events of the American Civil War that had ended only two years earlier, Emerson wondered at and was enthused about the continuing material improvements for so many that surrounded him in the United States at that time — though he was very far from being an uncritical observer of American political, social, and cultural life.
His references to coal and petroleum may shock some today, but it needs to be remembered what wonders of industry and communications, and gains in the quality of everyday life, were made through these means of supplying energy for reducing the exhaustion of physical labor and increasing the output of every worker’s daily efforts.
Coal and oil were and have been liberators from the niggardliness of seemingly uncooperative nature, that have assisted in lifting humanity from its natural condition of poverty. It has been forgotten how really nasty, brutish, and short human existence was for almost all those on earth before these energy engines of material progress. (See my article “Preserved Primitivism Versus Freedom and Prosperity.”)
Socialism and Impatience With the Speed and Forms of Progress
But some were impatient about the degree and directions of all this progress. They questioned the ethics of its forms and distributions. They wanted and wished for the political power to redirect its content and benefits. In the early and middle decades of the 19th century, many such individuals called themselves socialists or communists. Of course, they differed among themselves about how they saw a future of “progress” recast, but they mostly shared certain ideas about the means to bring about their, respective, images of a better collectivist future.
Almost all of them believed in the abolition of most or all private ownership of the means of production and ending private enterprise determining the direction of production. This would be transferred into the hands of the state, manned by those claiming to speak for the “true” and “real” interests of “all the people,” and not for only a handful of profit-oriented private businessmen narrowly guided by antisocial self-interest.
These new social engineers speaking and acting for humanity would set all things straight in the world. Production would be for “need” instead of “greed.” Wealth would be redistributed according to an asserted egalitarian justice that the central planners just knew to be the right and good one.
Critics of Socialism Warned of a Frightful and Violent Future
But soon voices were raised warning that with government economic control to do things for the people would also come the power by those in control to do things to the people — that is, to make all in society live within and conform to the designs and demands of those holding the levers of government authority in their hands.
For all of the nice-sounding words and promises, another word came to mind at the same time: tyranny! What freedom would remain when everything produced and every opportunity to work and live one’s life was dependent on an omnipresent and omnipotent government, from which there existed no autonomous area of escape for an independent and self-governing personal life?
The famous German poet and essayist Heinrich Heine (1797–1856) gloomily warned in 1842:
Communism is the secret name of the dread antagonist setting proletariat rule with all its consequences against the present bourgeois regime. It will be a frightful duel. How will it end? No one knows but gods and goddesses acquainted with the future. We only know this much: Communism, through little discussed now and loitering in hidden garrets on miserable straw pallets, is the dark hero for a great, if temporary, role in the modern tragedy….
Wild, gloomy times are roaring toward us…. The future smells of Russian leather, blood, godlessness, and many whippings. I should advise our grandchildren to be born with very thick skins on their backs.
The Danger of Tyranny From Collectivist Control of Society
Forty years later, the classical liberal French economist Paul Leroy-Beaulieu (1843–1916) detailed what that collectivist future of government central planning would look like and lead to in his amazingly prescient treatise Collectivism (1885; English translation, 1908). He summarized its meaning for mankind:
The employee (and all will be employees) would be the slave, not of the state, which is merely an abstraction, but of the politicians who possessed themselves of power. A heavy yoke would be imposed upon all, and since no free printing presses would exist, it would be impossible to obtain publicity for criticisms or for grievances without the consent of the government. The press censure exercised in [Imperial] Russia would be liberty itself compared to that which would be the inevitable accompaniment of collectivism… And a tyranny such as has never been hitherto experienced would close all mouths and bend all necks.
And as if anticipating those who, today, say, “But it will be ‘democratic’ socialism,” Leroy-Beaulieu added:
How could human progress continue in a society subject to universal constraint and authority? Authority whatever its source, is always slow, pedantic, and a slave to routine; when derived from a democracy, these defects would be exaggerated; an immense bureaucracy would be established, and individuals who are exceptional in any way would be shouldered on one side and crushed by its complicated machinery…
Thus, collectivism implies a prodigious loss both to the individual and to civilization in general. At first a slackening of economic enterprise, then its complete cessation, soon to be followed by retrogression; these would be the inevitable consequences for humanity, or for any section of humanity that adopted this regime.
American Intellectuals and the German Historical School
How, then, could the socialist idea be saved from a growing inseparable connection to social and economic tyranny that would also threaten to end the progress seen all around the more liberal-oriented areas of the world, even if the speed of improvement and pattern of distribution in existing liberal society did not perfectly fulfill some people’s wishes?
Especially in America, where socialist ideas seemed particularly anathema to the spirit and beliefs of most people in individualism, free enterprise, and local and decentralized power and authority, how could the notion of greater government control and direction of social and economic life be successfully introduced?
The linguistic and rhetorical trick was to not use the term or minimize the negative connotations of what socialism would mean in society. This was brought about by an entire generation of American intellectuals who went over and studied at German universities in the last decades of the 19th century and in the first decade of the 20th century.
They came back to America after finishing their graduate degrees imbued with the conceptions of the German historical school, a group of German historians, political economists, legalists, and sociologists who insisted that the classical liberal ideas built on the classical economics of the first half of the 19th century were completely wrong. The classical economists insisted that there were universal and ever-present “laws of economics,” concerning supply and demand, and that there were social institutions invariably essential for human progress, namely private property, free markets, and a wide range of economic liberty.
The German historicists denied all of this. They declared that each time, place, and nationality had its own relevant “laws” of appropriate human relations and institutions that changed with the social, economic, and political evolution of each society.
In the words of American economist Edwin R.A. Seligman (1861–1939), in 1886, who did his apprenticeship at the feet of these German professors: “The economic theories of any generation must be regarded primarily as the outgrowth of the peculiar conditions of time, place and nationality under which the doctrines were evolved, and that no particular set of tenets can arrogate to itself the claim of immutable truth, or the assumption of universal applicability to all countries or epochs.”
Or as another important American economist and “progressive” of this period, Richard T. Ely (1854–1943), said at around the same time: “Political economy … is not regarded as something fixed and unalterable, but a growth and development, changing with society. It is found that the political economy of today is not the political economy of yesterday; while the political economy of Germany is not identical with that of England or America.”
A German or an American social reformist did not have to worry that the laws of supply and demand might challenge the likely effects resulting from government-fixed prices or mandated minimum wages. German economics was not the same as American economics. And, in addition, the “laws of economics” in the America of the 1850s were not the same as the ever-changing and relevant economic relationships and possibilities in the United States of 1895 or 1905 or 1925. (See my article “American Progressives Are Bismarck’s Grandchildren.”)
“Progress” Required Political Paternalism and Governing Elites
Instead of generally using the word “socialism,” the advocates of moving away from limited government and free market liberalism — those American students of the German historical school — spoke of a new social or neo-liberalism, that could and should not be merely “negative” in protecting people in their older notions of life, liberty, and property, but should be “positive” in extending, securing, and guaranteeing certain opportunities in life that required regulating markets, redistributing income, and greater centrally directed planning for social development. The new social or neo-liberalism incorporated, therefore, the reasoning and rationale of an extensive and invasive interventionist-welfare state. (See my article “Why Neo-Liberalism Is Really Neo-Socialism.”)
But broader than simply the political agenda of this neo-liberalism was a conception of the wider requirements for human betterment. This was an outlook that transcended the now-declared atavistic ideas of self-interest, individualism, and personal autonomy. Mankind was evolving from the individualistic ethos to a larger and more inclusive societal sense of “community” that was greater than the mere person.
“Progress,” it was now said, was evolving from self-interest to social awareness and collective responsibility. The group was a transcendent reality over the individual. The increasing complexity of society could no longer be left to its own devices of “anarchistic” markets and decentralized philanthropy. There needed to be a centralized sense of purpose and direction, with those properly trained and guided by a higher sense of social responsibility leading the way and taking charge for the good of all.
“Progressivism” represented this social outlook, and the “progressives” who shared and advocated its vision were its standard bearers. There was an almost religious fervor in the enthusiasm of its proponents. For example, here is Richard Ely’s articulation, in 1895, of what this better “progressive” arrangement of society would require and look like:
Looking into the future we may contemplate a society with real, and not merely nominal, freedom, to pursue the best; a society in which men shall work together for the common purposes, and in which the wholesale cooperation shall take place largely through government, but through a government which has become less repressive and has developed its positive side.
We have reason to believe that we shall yet see great national undertakings with the property of the nation, and managed by the nation, through agents who appreciate the glory of true public service, and feel that it is God’s work which they are doing, because church and state are as one.
We may look forward to a society in which education, art, and literature shall be fostered by the nation, and in which the federal government, commonwealth, local community, and individual citizens shall heartily cooperate for the advancement of civilization…. We may anticipate an approximation of state and society as men improve, and we may hope that men outside of government will freely and voluntarily act with trained officers and experts in the service of government for the advancement of common interests.
Progressivism Has Served as the Imposter-Term for Socialism
This was and is the promise of the “progressives” well over a hundred years ago and today. Oh, the reference to a unity of state and church is no longer appropriately “politically correct,” and a declared focus on “great national undertakings” needs to be rephrased so that it doesn’t sound too, well, “Trumpian.” But the “progressive” message of then is still the same now: trained bureaucratic experts and elected officials who are only and always dedicated to nothing but the “public purpose” will guide the rest of society into the new promised land of paternalistic economic planning, coerced redistribution of wealth, and expected cooperation by all other members of society under this enlightened and superior leadership.
But what is this but the socialism and communism advocated in the 19th century and implemented in various places in the 20th century? For more than a hundred years, an “imposter-term” has been used to hide from view something through the rhetorical trick of not calling it by its real name.
“Progressivism” has been promises of something different and better than what exists under “capitalism” or market-oriented liberalism: with references to social ends that are higher than and superior to merely personal private purposes in the marketplace; with an implied denial that there are any economic laws reflecting an invariant human nature to stand in the way of undermining property rights, controlling markets and prices, and confiscating the wealth and income of some to give to others; and with an imposition of coerced plans on all in society while denying that it implies any loss of any important freedoms.
All of this has served and is serving the advancement of a socialist rearrangement of society without, most of the time, saying Heinrich Heine’s “secret name.” But now having persuaded so many over so many generations in America that a good and decent society requires all of these planning, regulating, and redistributing policies and institutions, it has come full circle.
All of this time, my fellow Americans, you have been listening to and incrementally been going along with, under the banner of “progressivism,” the premises and policies that when fully introduced and implemented reflect a socialist-type system imposed on society.
The imposter-term has done its job. We are nearly all socialists now, while not knowing it. And some of those who are still shocking us with the actual use of this term, though prefaced with the word “democratic” to still ease our conscience, are merely telling us the reality of the world and country we live in, and the beliefs too many of us now accept and cannot imagine life without.
Richard M. Ebeling
Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina. Ebeling lived on AIER’s campus from 2008 to 2009.
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November Business Conditions Monthly
AIER’s Leading Indicators index held steady in October, remaining slightly above neutral. Slow growth continues as economy remains vulnerable.
AIER’s Business Cycle Conditions Leading Indicators index was unchanged in October, staying slightly above neutral at 54. The Roughly Coincident Indicators index rose to 92 while the Lagging Indicators index remained unchanged at 67 for the third consecutive month (see chart).
Third quarter real gross domestic product rose at a modest 1.9 percent rate, slightly below the 2.0 percent pace of the second quarter. Over the last four quarters, real gross domestic product is up 2.0 percent, the slowest pace since 2016. Consumer spending accounted for the entire gain in real gross domestic product in the third quarter as other sectors had small offsetting contributions.
A strong labor market remains the primary support for consumer spending and consumer confidence. Uncertainty about trade policy, monetary policy, immigration policy and fiscal policy has the potential to undermine consumer and business confidence. Furthermore, extreme partisanship in Washington is likely to worsen as impeachment proceedings ramp up and the 2020 election cycle gains momentum. Overall, the economy continues to expand but at a slow pace, and remains vulnerable to continued erratic policies and extreme partisanship.
Leading indicators index remains slightly above neutral in October
The AIER Leading Indicators index suggests continued economic expansion, but caution is warranted.
The AIER Leading Indicators index was unchanged at 54 in October. The index has been range bound between 25 and 75 for 11 consecutive months, posting an average over the period of 47. Fluctuating around the neutral 50 level is consistent with the overall mixed performance of many economic reports. The general message is continued economic expansion albeit at a slow pace and with a heightened degree of uncertainty.
The tally of the leading indicators was the same as the prior month. Six of the 12 leading indicators had positive trends in October, with 5 trending lower and 1 indicator was neutral. However, three indicators changed direction with offsetting impact on the final index. Positive trends were seen in real retail sales and food services, real new orders for consumer goods, total heavy-truck unit sales, real stock prices, the 10-year–1-year Treasury yield spread, and housing permits. Among those, the positive trend in total heavy-truck unit sales was an improvement over the prior month when that indicator was in a down trend.
A neutral result came from initial claims for unemployment insurance. This indicator was in a favorable trend in the prior month. Initial claims for unemployment insurance is a bound indicator, meaning it can not go below zero and in practical terms is about as low as can be expected. Therefore, it’s not surprising to see the indicator move to a flat trend. It’s not as worrying to see this indicator move to neutral compared to an unbound indicator such as sales or orders. If the initial claims indicator turns to an unfavorable trend, it will be more concerning.
Debit balances in customers’ margin accounts moved to a downtrend in October, joining real new orders for core capital goods, the ratio of manufacturing and trade sales to inventory, the University of Michigan index of consumer expectations, and the average workweek in manufacturing.
Overall, the Leading Indicators index remains slightly above 50, indicating continued expansion is likely. However, the fluctuation around the neutral level over the past 11 months combined with the other mixed economic data and erratic policy suggest a high degree of caution is warranted.
The roughly coincident indicators index rose to 92 in October from 83 in September. The industrial production indicator improved from a negative trend to a neutral trend in the latest month. The improvement may be short-lived as other data suggest a very difficult environment for the manufacturing sector. Overall, there were five indicators trending higher and one, industrial production, now neutral.
AIER’s Lagging Indicators index was also unchanged in the latest month, holding at 67 for the third consecutive month in October. The index has been above neutral for four months following a pair of 42 readings in May and June. Among the six lagging indicators, four indicators are trending higher, two are trending lower, and none are neutral.
The economy slowed in the third quarter
Real consumer spending was the only major contributor to third quarter growth.
Real gross domestic product rose at a 1.9 percent annualized rate in the third quarter, down from a 2.0 percent pace in the second quarter. Growth was driven primarily by a moderate gain in consumer spending. Housing investment and government spending made small positive contributions while business investment, net trade, and inventory change made small negative contributions in the calculation of gross domestic product.
Consumer spending decelerated in the third quarter, rising at a moderate 2.9 percent pace compared to a 4.6 percent growth rate in the second quarter. The deceleration was broad-based across the major segments of consumer spending, with durable-goods spending rising 5.5 percent versus 8.6 percent in the second quarter, nondurable-goods spending up 4.4 percent versus 6.5 percent, and services gaining 1.7 percent versus 2.8 percent. Consumer spending contributed all 1.9 percentage points of the 1.9 percent real GDP growth rate versus 3.0 percentage points in the second quarter.
Investment in business structures and equipment fell
Business fixed investment fell at a 3.0 percent annualized rate in the third quarter versus a 1.0 percent pace of decline in the second quarter. At annualized rates, the drop was led by a 15.3 percent fall in spending on structures while spending on equipment declined 3.8 percent. Investment in intellectual property products rose 6.6 percent continuing a run of 11 consecutive quarters of growth. Real business investment deducted 0.40 percentage points from overall real GDP growth versus a 0.14 percentage-point deduction in the second quarter.
Housing posts a gain
Residential investment, or housing, rose at a 5.1 percent pace in the third quarter compared to a 3.0 percent decline in the prior quarter. The gain breaks a string of six consecutive declines for residential investment. Housing had benefited from a drop in mortgage rates over recent months. However, future activity continues to face a challenging environment with interest rates starting to rise again and home prices continuing to rise, albeit at a slowing pace.
Altogether, business and residential investment declined at a 1.3 percent pace in the third quarter, subtracting 0.22 percentage points from total GDP growth compared to a 0.25 percentage-point deduction in the second quarter.
Inventories and trade had little impact in calculation of GDP
The pace of inventory accumulation by businesses was little changed in the third quarter, slowing to a $69.0 billion pace in real terms, from $69.4 billion in the second quarter. The decelerating in inventory accumulation reduced real GDP growth by .05 percentage points in the third-quarter after subtracting 0.91 percentage points in the prior quarter.
Net trade also had a small negative impact in the calculation of overall GDP growth in the third quarter, subtracting 0.08 percentage points. Exports rose at a 0.7 percent pace while imports grew at a 1.2 percent rate. The outlook for trade remains highly uncertain given erratic trade policy and slowing global growth.
Government Spending rose
Government spending rose at a 2.0 percent annualized rate in the third quarter compared to a 4.8 percent increase in the second quarter, contributing 0.35 percentage points to growth versus a 0.82 percentage-point contribution in the prior quarter. Government spending rose in nearly every category, with federal defense spending up 2.2 percent, federal nondefense spending up 5.2 percent, and state and local spending up 1.1 percent. Exploding federal deficits remain one of the most significant risks to the medium- and long-term outlook for the economy.
The labor market has softened
Job creation has slowed, and openings have fallen recently.
Job creation was better than expected in October and disappointing gains in September and August were revised higher. Furthermore, October employment was held down by the strike at General Motors. Overall, job gains over the past few months appear significantly stronger than initially estimated. However, the pace of gain is still slower than the strong gains in 2018.
U.S. nonfarm payrolls added 128,000 jobs in October, after an increase of 180,000 new jobs in September and 219,000 in August. Government census workers helped boost August and September payrolls.
For the private sector, nonfarm payrolls added 131,000 in October following a gain of 167,000 in September and 163,000 in August. October private payrolls were also held down by 46,000 striking workers at GM. With those workers included plus the upward revisions to prior months, the three-month average gain for private payrolls was 169,000, a solid result but well below the 215,000 average for 2018.
Goods-producing industries lost 26,000 jobs in October. Construction led on the upside with the addition of 10,000 new employees, while durable-goods industries lost 41,000, though 46,000 were striking workers who will return to payrolls in November.
Within private service-producing industries, which typically account for the lion’s share of job creation, payrolls rose by 157,000 workers, led by a 61,000 gain in leisure and hospitality industries. Health care and social assistance added 34,200, while professional and business services posted a gain of 22,000 jobs. Financial services added 16,000 and retail employment rose by 6,100. Information industries eliminated 4,000 positions.
Public sector employment fell by 3,000 in October after adding 130,000, or an average of 32,500 per month, over the prior four months.
Average hourly earnings rose 0.2 percent in October, pushing the 12-month change to 3.0 percent, down from a cycle peak of 3.4 percent in February. Combining payrolls with hourly earnings and hours worked, the index of aggregate weekly payrolls rose 0.3 percent in October and is up 4.3 percent from a year ago. This index is a good proxy for take-home pay and has posted relatively steady year-over-year gains in the 3 to 5 percent range since 2010 but has now been decelerating after hitting a 5.7 percent pace in January. Continued gains in the aggregate-payrolls index are a positive sign for consumer income and spending, and are likely to support continued economic expansion.
Federal government deficit worsened in latest fiscal year
Worsening deficits are unprecedented at this stage of an economic expansion. Rising debt may be a disaster waiting to happen.
The federal government continues to run massive deficits. For fiscal year 2019, the deficit totaled $984 billion, $205 billion more than in the prior fiscal year, a 26 percent jump. As a percentage of gross domestic product, the federal deficit for fiscal year 2019 totaled 3.8 percent, the third consecutive year of worsening and the worst deficit since 2013. The deficit as a percentage of gross domestic has never worsened for three straight years this late in an economic expansion.
Total public debt outstanding as October 31, 2019 was $23 trillion, the highest ever. The latest projections by the Congressional Budget Office show deficits are expected to continue to run between 4.5 and 5.0 percent of gross domestic product every year over the next 10 years, adding significantly to total debt outstanding and increasing interest expense.
Health care spending continues to rise
Total spending on health care is estimated to be $3.6 trillion in 2018, a 4.4 percent increase over 2017. Projections from the Center for Medicare and Medicaid Services show spending is expected to average 5.5 percent through 2027, pushing the share of gross domestic product from 17.9 percent in 2017 to 19.4 percent in 2027.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
Related Articles – Business Conditions Monthly
The Times’s Editorial Page Lies with Statistics
As the debate over wealth taxation rages on, journalists have assumed a central role in the dissemination of empirical claims about the distribution and historical trajectory of U.S. tax policy. Unfortunately several leading media outlets have approached this task by engaging in political advocacy on behalf of Elizabeth Warren and Bernie Sanders’ tax plans, sacrificing factual accuracy in the process.
A recent statement by the New York Times editorial board reveals just how politically distorted the coverage has become.
Promising to set “a few things straight” about wealth taxation, the Times advanced an astounding claim:
“The wealthiest Americans are paying a much smaller share of income in taxes than they did a half-century ago. In 1961, Americans with the highest incomes paid an average of 51.5 percent of that income in federal, state and local taxes. In 2011, Americans with the highest incomes paid just 33.2 percent of their income in taxes, according to a study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman published last year. Data for the last few years is not yet available but would most likely show a relatively similar tax burden.”
As with previous editorializing by the Times, this piece relied upon controversial empirical work by Piketty, Saez, and Zucman. Over the last several weeks this group of left-leaning economists has cluttered the U.S. tax debate with a veritable French “Reign of Error” of deeply misleading and perhaps intentionally manipulated statistics to prop up the case for the Warren tax plan. By continuing to rely upon the PSZ triumvirate without acknowledging the substantial criticisms of their data, the American press has ventured into the territory of journalistic malpractice.
But the Times’ most recent editorial took this ongoing politicization of economic data reporting even further, giving a false impression that tax rates on the wealthy have dropped by over 18 percentage points in the last 50 years.
The Times did so by cherry picking its numbers from the 2018 iteration of the PSZ statistics in the Quarterly Journal of Economics, which is less controversial than newer revisions released by Saez and Zucman. This study at least has the benefit of having undergone peer review, and attempts to estimate the overall tax rate of the top 0.1% of earners over time.
The problem with the Times’ accounting arises from the years they chose to bookend their claim, 1961 and 2011.
Let’s consider each in turn.
First, their 1961 figure purporting to show a rate of 51.5% on the top 0.1% of earners comes from a section of the PSZ study that is almost certainly unreliable. In 1962 the IRS introduced microdata reporting of its tax statistics – a more refined set of numbers that allows researchers to dig deep into distributional questions about the federal tax burden. No such numbers existed however in 1961, which means the PSZ study had to rely on a series of imputations taken from an older estimate of the income share distribution published by Piketty and Saez in 2003.
Yet as my own investigation of these data has shown, the older Piketty-Saez 2003 study is marred by several data quality issues prior to the introduction of IRS microdata in 1962. It systematically overestimates top income shares across the board from 1917 to 1961 by erroneously adjusting for tax code discrepancies in this period, and by underestimating the total amount of tax-eligible income earned in each year. It is therefore unreliable to use as a baseline for estimating top tax shares.
We may see this problem directly in the PSZ-2018 numbers where a clear discontinuity exists. According to the PSZ series, the average total tax rate on the top 0.1% dropped from 51.5% in 1961 to 43.6% in 1962, even though the main federal tax rates were not changed during those years. Indeed, from 1950 to 1961 the PSZ estimates consistently place this rate around 50%, whereas after the microdata estimates become available it drops instantaneously to the low 40s.
By selecting the last year before the better microdata files became available, the Times thereby artificially inflates the tax rate paid by top earners in this period.
Second, turning to 2011 reveals that it is an equally bizarre choice for the Times to use while bookending its argument. Contrary to what the editorial claimed, 2011 is not the most recent year with available data – 2014 is. And further contradicting the Times’ argument, the PSZ statistics for 2014 show a higher tax rate on the wealthy (39.8%) than the 2011 number (33.2%) quoted in the editorial.
The reason for the discrepancy may be found by digging deeper into the underlying data. 2011 reflected a temporary trough in overall effective tax rates across the board, likely attributable to the wake of the 2008 financial crisis and recession.
These events appear to have disrupted the normal revenue yields from capital gains taxation, which is historically sensitive to business cycle events. As a result, the overall tax rates paid by the wealthy temporarily dipped from 2009 to 2012. In 2013 they returned to their pre-recession norm of about 40%, as the highlighted image below from the PSZ data files shows.
Source: Piketty-Saez-Zucman (2018) data appendix file
In short, the Times appears to have selected 1961 and 2011 to create the illusion of an 18 percentage point decline in the average overall tax rate paid by the wealthiest earners. The actual decline, measured from the earliest microdata year 1962 to the most recent available year in 2014 shows a top average tax rate change from 43.6% to 39.8% – or only 3.8 percentage points in 50 years.
We may see further evidence of the severity of the Times’ misleading portrayal by looking to how top rates held up over the last half-century. For his own part, Zucman recently tried to lend credibility to a Times-style contention by tweeting claims of a dramatic double-digit drop in tax rates over this same period.
In reality, even the PSZ estimates reveal only an exceedingly modest cut in taxes on the top earners during this period.
Let’s consider the average top tax rate for the two decades prior to 1980 – the year Ronald Reagan was elected, allegedly portending a dismantling of the progressive tax system according to the Times, Saez and Zucman, and Elizabeth Warren. From 1962 to 1980 the overall tax rate on the wealthiest earners averaged 43.1% per year.
Compare that with more recent decades. From 1981 to 2014 the rate on the same category of earners averaged 38.6%. And if we further limit that group to just the period between 2000 and 2014, it averaged 37.7%.
So according to the PSZ series used by the Times, overall tax rates on the wealthiest earners did decline in the last half-century – but only slightly. The tax cut amounted to no more than about six percentage points, or less than a third of what the Times editorial board claimed.
When debating tax policy it is important to use empirical evidence to inform the discussion of what rates the top earners currently pay and what rates we would like them to pay, or if a rate change is even warranted at all. We cannot have that discussion, however, when academics such as Saez and Zucman put their fingers on the scale of their own measurements, and when top journalism outlets that claim to be papers of record present such blatantly distorted and politicized picture of what the empirical evidence reveals.
Phillip W. Magness
Phil Magness is a Senior Research Fellow at the American Institute for Economic Research. He is the author of numerous works on economic history, taxation, economic inequality, the history of slavery, and education policy in the United States.
