Simkhovitch, V. (1916): “Rome's Fall Reconsidered”. Political Science Quarterly Vol. 31, No. 2. Open Access at JSTOR:
https://www.jstor.org/stable/2141560?seq=1
When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. When wealth concentrates faster than it grows, you get the downswing.
I'm going to quote Simkhovitch again. I'll pick up where I left off on the 18th, this time the first few sentences of the paragraph. And I will interrupt to talk about the ideas. Page 217:
The entire history of Rome is but a series of illustrations of this story. Steady is the legislation against interest and drastic are the measures against the money lenders, but unchecked is the concentration of landed property even in spite of social resolutions and social wars.
"Steady is the legislation against interest and drastic are the measures against the money lenders," Simkhovitch says, "but unchecked is the concentration of landed property..."
I don't see that "the concentration of landed
property" has much to do with the lending of money. The people who owned
the massive properties of ancient Rome probably didn't need to borrow
to buy more. Adding to their property was a form of saving. The buyers had the money they needed.
The people who had to sell their properties to the massive landowner, I figure those people had been doing some borrowing. But they wouldn't have needed to borrow more just to sell their few acres of land.
I believe policy should be changed to reduce our reliance on credit today, by reducing the incentives that encourage the provision
and
use of credit. I believe money (money that requires neither interest
payment nor repayment of principal) should be increased at the same
time, to sustain spending levels.
But I also believe that policy
must be
changed to encourage accelerated repayment of debt, to counterbalance the encouraged borrowing.
(And to fight inflation. But we already have policy to fight inflation.
What we lack is policy to offset the unnaturally rapid growth of debt
that is caused by policy which encourages borrowing.)
Because I know policy can be
highly effective, I figure that these changes will reduce the cost of
using money and will therefore boost the nonfinancial economy. I believe
economic policy can be highly effective. But the
Simkhovitch quote suggests that he would not agree. The "steady"
legislation against interest and the "drastic" measures against lenders in ancient Rome must be considered strong
policy. Simkhovitch says it was not effective.
I think the Roman response was incorrectly targeted. It did not stop the concentration of wealth in ancient Rome because punishing lenders is not the way to limit the concentration of wealth.
To reduce and reverse the concentration of wealth in our time, I believe the business income tax must be changed.
In our economy, a business spends its capital to create output, then sells the output to recover its capital plus a profit. But under our existing tax code, only the profit is subject to income tax. Recovered capital is not taxed, because property is held to be sacred. (This is not tax advice. It is a general overview. Do not try to do your taxes based on what I'm saying.) Recovered capital is not taxed, because property is held to be sacred.
The failure to tax capital (the failure, that is, to tax gross business receipts) creates a tax advantage for business that is not available to consumers. This tax advantage shifts income and wealth from consumers to businesses. Among businesses, the greatest tax advantage goes to the business with the most capital to spend. The least advantage goes to the business with the least capital to spend. Property-is-sacred policy, therefore, if allowed to continue, will lead to ever-more-extreme concentration of wealth. More extreme, even, than what we have at present.
The
property-is-sacred principle is embedded in our tax
code. Our tax code is creating the extreme concentration of wealth. And
the concentration of wealth is leading us, as it led Rome, to the fall
of civilization. Our tax code must change.
The property-is-sacred principle is embedded in our thinking. Therefore it appears in the tax code, in our encouragement of corporate mergers and acquisitions, and everywhere economic policy reaches. This, more than anything, is what must change. Our thinking must change.
It is not property, but civilization that is sacred.
The principle of parallel
evolution supports the view that ancient Rome would have had property-is-sacred policy similar to our own.
Based
on what Simkhovitch says, the property-is-sacred principle was not
constrained in ancient Rome. Nor was it constrained if we judge by the size
of latifundia -- they became "as large as provinces" Simkhovitch says on page 222, in the Rome's Fall Reconsidered essay linked above.
The latifundia are evidence that Rome had property-is-sacred
policy. The rise of such massive concentrations of "landed property" is evidence of it.
The latifundia are evidence also that Rome created no policy
that effectively undermined the property-is-sacred principle and the
resulting concentration of wealth.
Given the reverence people have for the property-is-sacred principle, that principle continues to operate until the government no longer exists, the government that wrote it into the tax code. When that government falls, the latifundia become the new centers of government -- subject, of course, to things being worked out hands-on during the darkest, most militaristic free-for-all centuries of the dark age.
Long after the dark age, the ultimate form of property-is-sacred emerges: divine right of kings.
I want to put a stop to the concentration of wealth by eliminating property-is-sacred from our tax code.
Exhaustion
of the soil led to a general decline of income because most of the
people in ancient Rome were farmers. Simkhovitch says exhaustion of the soil made farming unproductive, leaving income unable to meet "ordinary expenses". We can see this as a chain of causality:
Exhaustion of the soil => decreasing productivity => declining income
"The progressive exhaustion of the soil", Simkhovitch writes, "was quite sufficient to doom Rome".
His most significant expression of the forces at work appears on page 217: "The increasing weight of accumulated
interest on the
loan and the
decreasing productivity of the land seal the fate of the landowner." This combination of forces is nearly identical to that described by J. W. Mason and Arjun Jayadev in Fisher Dynamics in Household Debt: The Case of the United States, 1929-2011:
In particular, the 1980s can be understood as a slow-motion debt deflation (or debt-disinflation), with the combination of slower nominal income growth and higher interest rates producing rising debt-income ratios despite a substantial fall in household spending relative to income.
The fall of Rome was caused by declining income, the growth of debt, and the inability or refusal to resolve these problems. We face exactly the same problems and we, too, are unwilling or unable to resolve them.
In our case, though, the problems do not arise from exhaustion of the soil. The primary source in our case is bad economic policy.
In our time, exhaustion of the soil is not responsible for the decline of income. Rather, policymakers believe that inflation results primarily from excessive wage increases. The relative decline of income is largely a result of anti-inflation policy. At EconomicsHelp we read:
Rising wages are a key cause of cost-push inflation because wages are the most significant cost for many firms.
If this is both true and relevant, or even if it is only what people believe, it is enough to make wage restraint perhaps our most effective and certainly our most used approach to controlling inflation.
In our time, the relative decline of income is not responsible for our growing debt. Rather, policymakers believe that using credit is good for growth. The inexplicably massive debt of our time is largely a result of policies built on the notion that the use of credit is always good for economic growth. Two quotes I presented a few years back:
- Steve Waldman: "I am not a fan of the Great Moderation. Central bankers and economists found it pleasant at the time, but sustaining that comfort required that cash wage growth be suppressed [and] that credit be expanded..."
- Edward Harrison: "Also, regarding economic policy in the United States, policy makers aren’t gathering around a table and asking “how can we drive down wages and goose consumption at the same time?” Rather, this is the de facto policy which is inherent in monetary and industrial policy."
The growth of
debt results primarily from our policies because policymakers spent decades creating policy based on the idea that using more credit is always good for growth; and because we have no policies designed to accelerate the repayment of debt and thus no way to offset the
unnatural increase in debt resulting from the policies that encourage credit use.
Simkhovitch makes a convincing argument that in ancient times, exhaustion of the soil was responsible for the fall of Rome. In our time it should be obvious that bad economic policy is the source of our troubles. First on the list, in chronological order, are policies based on the idea that using credit is always good for growth.
Certainly, when we have too little debt, using more credit helps to improve the economy. But when we have too much debt, using less credit helps to improve the economy. There is a happy medium that has been overlooked: There is an optimum level for debt, a narrow range that best promotes economic growth and employment, and minimizes inflation.
How much debt is best? I can't calculate the number. But my limited abilities are not the problem. The problem is that few economists are looking for the optimum level, and none of them think in terms of an optimum level of debt. Many of them still think using more credit is always good.
The parroting of old, overused ideas cannot solve the problem. Civilization, it has been said, demands an artist.
I have suggested as a way to reduce the growth of debt, that we need credit to grow more slowly than money. This could be achieved, perhaps, by means of permanently high interest rates. But permanently high interest rates are a property of the dark age, so this solution seems inappropriate. High rates, in addition, are not conducive to economic growth. (Existing policy uses high rates to slow economic growth when fighting inflation.) And high rates increase financial cost. Permanently high rates are not a good solution.
Consider this
alternative: We should have tax credits that encourage debtors to make
extra payments on their debt; the encouragement is that the tax bill is reduced commensurately.
Economic policy encourages borrowing. Our policy causes
unnaturally rapid growth of debt. This is how we came to have so much debt in our
economy. It is why our debt continues to grow, even now.
If we insist on having policy encourage the use of credit, then we must also have policy that accelerates repayment of debt. By this method we can reduce the growth of debt to a more natural level.
We should aim to reduce debt to the level that best promotes economic growth.
I propose using fiscal policy to accelerate the repayment of debt. Fiscal policy is tax policy. But let me say clearly that I am talking about new incentives and disincentives that induce us to make extra payments on our debt, by reducing our taxes when we do so. I am not talking about changing the level of government revenue. I do not take a position on changing the level of government revenue. I do not take a position on it because the root of the problem lies elsewhere. It lies in the mix of cash and credit that we use for money. The more credit there is in the mix, the more costly it is to use money. The less credit there is in the mix, the less costly it is to use money.
There was ten times more credit in use (per dollar of money) in 2007 than there was in 1947:
 |
| Figure 1: Dollars of Credit-in-use per Dollar of M1 Money |
The graph shows almost continuous increase in the cost of using money. If interest rates never changed, interest cost per dollar in 2007 would have been 10 times what it was in 1947.
Maybe that's good for bankers and creditors. It is not good for most people today, just as it was not good for most people in ancient Rome.
The 1947-2007 increase is due almost entirely to bad policy and to the wrong-headed thinking that says increasing our use of credit is always good for the economy. We did not recognize the error in this thinking in the 15 years before 1947. And we have not recognized it in the 15 years since 2007. But it is not yet too late to learn from our mistakes.
The recommended objectives of the policy I propose are these:
- The volume of credit-in-use (or "debt") should grow more slowly than the quantity of money.
- Repayment
of debt should be accelerated by policy, to counteract the rapid growth
of debt which results from policy that encourages the use and provision of
credit.
- To eliminate the factor most responsible for the
concentration of wealth, the business income tax must tax gross receipts
rather than net income. Tax rates should be adjusted down so that
government revenue is not increased by the change in taxable income.
To preserve civilization, it is not the solution simply to have Elon Musk buy Twitter.
