In his latest letter to investors, GMO’s Jeremy Grantham says the only way that the U.S. economy will grow out of this downturn and become healthy again, is if we “divide the pie more evenly.” Years of inequality have destroyed this country’s growth machine and forced the average American worker to go into debt to feel prosperous.
Now our country has a debt addiction, and its going to take serious changes to remove the root causes.
..in the 10 years after 2000, the participation rate in the workforce has dropped dramatically and hours worked per person has flattened so that the only way for individuals to grow their consumption more recently was by borrowing even more and, to some extent, by speculating in housing. Rising house prices provided the (apparently) real backing for more debt and, even where that backing did not exist, the ingenuity (and, we must admit, greed) of the financial system still supplied the debt. And all of that has gone.
To start anew and re-balance wealth in our society, says Grantham, the U.S. may need to forgive debt on mortgages and change the way we collect taxes. Change, specifically, means higher taxes for the top 10% of Americans and lower income and sales tax for the bottom 75%.
I am not suggesting that we become some goody two-shoes Scandinavian country. But how about going back to the levels of income equality that existed under the Presidency of that notable Pinko, Dwight Eisenhower (see Exhibit 4). And don’t think for a second that this more equal income distribution somehow interfered with economic growth: the 50s and 60s were the heyday of sustained U.S. economic gains.
Americans want to feel rich again, and politicians want to please their constituents. But Grantham writes that is is good and normal for markets to stay down as the inflated value of our assets washes away. If we allow this to happen naturally, we can move into a financial world with less risk, anD less prone to bubbles.
And if we don’t?
Grantham fears the United States will go the way of the British empire, evaporating in a mere 20 years. However, tax reform and debt forgiveness are solutions that will be politically painful for politicians. They’ll have to accept short term pain in the markets (and at the voting booth, perhaps) for long term gain, instead of putting a band-aid on the problem and pretending it isn’t a structural issue.
But again, do politicians have the stomach to do what they have to?
Considering the fact that Grantham called the U.S. a Banana Republic, his answer to that last question is probably a “no.”