Europe, the Debt Ceiling "crisis" and Depression

I tend to think about financial matters by first looking at worst-case scenarios, deciding on the risk levels, and finally determining on a strategy.  So that’s how I will proceed here, first about Europe, then about the US.

1. I recently wrote in the NY Times that as long as governments keep nationalizing the bad loans of their creditor entities, and refuse to make both creditors and taxpayers share the losses in a reasonably fair way, the financial crisis will continue.  This thought applies primarily to the current crisis in Greece and Europe.  Since I think the people making decisions there are intelligent and knowledgeable, I remain optimistic that the crisis will be properly resolved.  But the risk has grown, perhaps to 30%, that it won’t.  Clearly, the fair solution demands a lot of sacrifice from privileged people who are ill-disposed to behave that way.

It looks to me as if the IMF, the World Bank, and the private lenders to Greece are insisting on full repayment.  While Greek politicians, desperate to keep the bankers happy in order to avoid default and the enormous problems that would befall Greece in that event, have agreed to unilaterally shoulder the losses that the creditors incurred, there seems no possibility that the Greek people will agree to the necessary austerity measures.  As with the majority of Americans who oppose raising the debt ceiling, they seem either ignorant or indifferent to the consequences if they fail to do what they are told.

If the creditors force Greece to default, I suspect that the government that would then emerge there, as in Germany during the Depression, would probably be a nationalistic, authoritarian one that in standing defiant would enjoy popular support.  Such a government could probably withstand great financial pain, and ultimately force the creditors to accept serious losses.  Portugal and Ireland would quickly follow the Greek lead, and Spain and others would either wring major concessions from their creditors or follow suit as well.  Credit would dry up everywhere in Europe very quickly.  In other words, the whole European financial system would collapse within a matter of weeks or months.  US markets would suffer a bit less, but all nations in the Atlantic world would head into a major deflation.

Europe aside, I am more optimistic about the chances for a reasonable agreement about the debt ceiling in the US, entailing a relatively sensible combination of spending cuts and tax increases (by whatever name).  We do not face the internal and international pressures that Europe does, and Congress seems to grasp the essence of the problem, as Obama certainly  does.  Still, it remains a very risky situation with, perhaps, a 5-10% chance of catastrophe.

Being an optimist, however, I also think the debt ceiling negotiations put within reach a number of important and desirable reforms that have previously been unthinkable: sharp cuts to military spending; reorganization and serious cost reductions in Medicare and Medicaid; measures to stabilize Social Security; higher actual taxes on the very wealthy and on corporations; continued payroll tax reductions. 

Moreover, by bringing matters to a head over the issue of the debt ceiling, I think the Republicans have created a very interesting negotiation “game.”  The negotiations are deadly serious in this game because everyone has implicitly agreed, it seems, to take them seriously, and in the face of apparent crisis they have more of a chance of major success than anything that has come along in a generation or two.  But if they fail, it will be easy to just kick the largely artificial debt ceiling “crisis” down the road, with no great harm done.

The major wild card in this negotiation is the Republican primary.  If they nominate electable candidates like Romney or Huntsman, who in light of Obama’s weaknesses stand a very good chance winning the Presidency in 2012, then it is hard to see the current Congress making significant progress on the debt ceiling negotiations.  The Republicans have too much to gain by deferring the debt ceiling issue until after the 2012 election.  Should they then capture the White House and the Senate, the party’s policies—regardless of the inclinations of their President—could well get enacted, with tragic consequences for us all.

Those are the major risks that I see, and they are truly frightening.  Indeed, should they materialize I have very little idea about how to avert personal financial losses.  I know that many people are buying gold, but that seems primarily a hedge against inflation, which I do not see coming.  The risks are all about deflation, resulting from a lack of credit that leads to a lack of demand—in short, Depression.  A carefully selected bond portfolio, or even just cash, might preserve capital in a Depression, but the governmental reactions could easily destroy such portfolios as well.  Moreover, it would be very difficult to select deflation-proof bonds.  In short, I know of no financial strategy, apart from sheer luck, for surviving Depression.  That being so, I might as well act as though those risks will not materialize.

Indeed, my current sense is that the risks I have elaborated have already driven stock prices so low that any reduction of the risks would trigger major rebounds.  In other words, at the moment the risk/reward ratio in owning stocks seems shifted toward reward.

Against Partisan Hack Martin Feldstein

Martin Feldstein’s partisan hack job in the 6/8/11 Wall St. Journal is shameful.  Not every criticism he makes of Obama's policies in dealing with the economic stinkpile he inherited from Bush is wrong, but the essence of his case is both fallacious and duplicitous.

His first claim is that the administration pursued misguided fiscal policies like the cash for clunkers program, the tax credit for new homebuyers, and the $830 billion stimulus program. The first two programs, he complains, had only a temporary impact. But that was exactly the point: to stop a spiral of despair and deflation, the administration’s programs were precisely targeted at breaking the  psychology of gloom that had taken hold after Bush’s debacles. And so they did. 

His critique of the stimulus package is that “both its size and structure were inadequate to offset the enormous decline in aggregate demand.” That is true. But he duplicitously fails to mention is that the size was limited by Republican obstructionism, and fell far short of what Obama and the Democrats thought advisable. Nor could any stimulus program have, in itself, offset the multi-trillion dollar decline in demand. As with the other programs, and in accordance with everything economists learned from the Great Depression, the goal was to reverse the deflationary psychology that had taken hold.  It would have been more successful if not for Republican obstructions, but it nonetheless managed to stem the depression and turn it into a recovery, much slowed due to Republican obstructionism.

Mr. Feldstein’s next claim is that by opposing further tax cuts for the wealthy, and in fact seeking to increase taxes on them, Obama increased the uncertainty of the investing class and caused them to withhold their investments. This claim comes at a time when the effective tax rate on the wealthy and large corporations is the lowest since World War II, a time when corporations have compiled over $2 trillion in savings. There is not a shred of evidence to suggest that companies and individuals who invested heavily under the higher tax rates of the Clinton administration are now holding back because of the administration’s threats to restore the Clinton tax rates. Feldstein’s is an absurd claim, an appeal to the grotesque ignorance and gullibility of his WSJ audience.

Feldstein’s third complaint is that the administration has not fashioned an explicit plan to deal with deficits. I have some sympathy for this complaint, although it rests on a critique of negotiating tactics that neither of us is really in a position to fathom.  The administration must negotiate tricky currents in formulating, with a hostile House, an approach to these issues, and we do not yet know the outcome of its approach.

Feldstein’s last critique, that the administration takes inconsistent positions with respect to the dollar’s strength, seems more naïve or stupid than anything else. As should be reasonable obvious to any observer, the administration is pursuing a highly pragmatic approach to the dollar’s position. It cannot publicly embrace a weak dollar, as that would undermine its role, highly benficial to the US, as the world’s principal reserve currency.  On the other hand, by allowing a gradual weakening of the dollar the administration has made exports much more viable, and allowed American workers and firms to once again participate in the explosive growth now taking place in the developing world—a policy that has proven immensely helpful in combatting the Bush Recession. I think the administration is very skillfully walking a narrow line in fashioning this policy.

Inflation or Deflation: Can Economists Tell Up From Down?

Much economic commentary today is gloomy. Even those investors and economists who sound bullish for the moment, are often somewhere between non-committal and bearish about the longer term when pressed for anything more than a sound bite. Enthusiasm for the immediate future is understandable. The economy appears to have stabilized following its near-death experience two years ago, and the stock market has enjoyed one of the sharpest rises in its history from the low point struck during the crisis. Most consumer prices, at least according the popular indices, are relatively stable. Yet almost no one believes that things are right with the economy, or considers an era of sustainable growth and trustworthy investment values to be just around the corner. It's hard to pick up an article in the popular press that doesn't make reference to bubbles of one sort or another, as though optimism and reckless illusion were indistinguishable.

So what's wrong? Our most dogmatic commentators are entirely clear about this, of course. The problem is that their ideas offer seemingly incompatible 180-degree perspectives. Goldbugs, often allied with the political right, warn breathlessly about uncontrolled deficits leading to avalanches of worthless money and hyperinflation. In their articles they like to show pictures of harried middle-class Germans pushing wheelbarrows full of paper currency out to buy groceries in 1923. Old-style political lefties, on the other hand, talk with equal fervor about a new Great Depression on our immediate horizon if we don't stop fretting about deficits and start driving the economy full-tilt with bigger government programs and projects. On their websites, they favor pictures from a decade later of people in baggy clothes, no currency at all in their pockets, waiting grimly in lines for bowls of free soup.

There are, of course, more moderate voices suggesting nuanced versions of these same negative views. So-called "inflation hawks," like Dallas Fed Chairman Richard Fisher, often mention inflation risk to support calls for tighter monetary policy. Across the ideological fence, liberal economist and Nobel Laureate Paul Krugman routinely invokes Depression fears to justify ever-higher levels of fiscal stimulus.

People looking for reasons to be optimistic sometimes draw comfort from all this, like atheists who find hope in the dogmas of Jihadists and Christian fundamentalists. The implied assumption is that these people must all be wrong, since they can’t all be right.

Religion aside, however, maybe the time has arrived indeed to consider the counterintuitive possibility that all these diverse economic naysayers are onto something. Perhaps a few of them, including some of the more lathered Jeremiahs, see accurately into our current predicament, even when none of them has solutions to offer beyond revolution or gold bars and fortified bunkers.

Over at least the intermediate term, inflation risk is real. In the United States, chronic budget deficits continue to compound, while our politicians devote enormous energy to grandstanding about inconsequential reductions in federal spending or adjustments to the tax code. There is no politically viable solution even under consideration at the present time that brings deficits under meaningful control in the foreseeable future. New economic theories have arisen that conveniently purport to explain why we shouldn't worry about this. Yet the fact remains that the only reason we've gotten away with our financial high-wire act as long as we have is that the U.S. Dollar has so far retained its reserve currency status. Foreign governments continue to take down and rollover our bonds at low interest rates, regardless of the deficits. This kind of monetary power on the part of the United States is an historical anachronism and cannot be relied upon much longer. At the first real sign that the bond markets are becoming restive, rates will rise. Given the huge base upon which new interest would then start accruing, compounding interest costs would soon offset, and eventually overwhelm, hard-fought cuts in discretionary spending. At that point, we would find ourselves in an intolerable bind.

Our Federal Reserve is, of course, vigilant and fully aware of this potential scenario. Concern about it has to be one of the reasons it has dusted off the once old-and-obscure monetary tool that carries the appropriately obscure name "quantitative easing," even though economic stimulus has been the public rationale for its application. Once considered an extreme measure for dire circumstances, QE was employed during the height of the 2008 financial crisis and then, before much had settled, again last year. Rumors abound that QE3 may currently be in the works, and QE is looking increasingly as though it's been elevated to a standard weapon in the Fed's arsenal. We can be 100% confident that QE would be employed with an intensity not yet imagined in the event of a serious international run on the U.S. Dollar. At that point, new money would be pouring into our system and doing nothing whatsoever to stimulate the flow of new goods and services. That is one prescription for inflation, to put it in the blandest possible terms.

So if inflation risk is thus real, what can be done to circumvent it? Well, obviously in the minds of certain partisans, deficits have to be forced under control with tax increases, plus draconian cuts in entitlements and all other spending.

At this point in the debate we blunder haplessly onto the home turf of Professor Krugman and others who tirelessly and accurately point to the problem here. With unemployment still high, and economic growth anemic this far into a supposed economic recovery, austerity measures robust enough to make a difference would surely throw us back into recession. And another recession this soon after the last one, however our economists might choose to label it, would constitute a depression and probably intractable deflation.

That doesn't leave much middle ground, of course, but this is the nature of our problem. It seems depressingly obvious. Investors and savers trying to protect their money confront a dilemma, since investment portfolios prudently designed for one environment can be full of reckless exposures in the other.

Unfortunately it's politics more than economics that will determine which road we may actually be on. Voters contemplating the loss of their jobs, or the erosion of their savings and pensions, can be entirely unpredictable.

I just read an April report by Jeremy Grantham, who argues that in view of resource constraints we need to make serious policy changes. I agree that serious policy changes are desirable, but not simply because the cost of natural resources will now go up undefinitely, as Grantham predicts. It is almost always intellectually feasible to generate negative projections from a selection of current trends, as G does from the growth of population and wealth, the rising price of commodities, etc. He's a true descendent of Paul Ehrlich, who wrote the Population Bomb in the sixties. It is much harder, however, to generate positive projections for the simple reason that the driving forces are often unknowable.

In my view, there are four forces that generate economic growth. (1) Throughout most of history, population increase was the only one measurably operating. (2) With the development of systematic R&D in the late 19th century, innovation became a second force for economic growth. The availability of new and desirable products stimulated demand, and there was resulting economic growth PER CAPITA, not just in gross. (3) The third force for economic growth is marketing, a force that intellectuals like me often deride. But marketing makes goods and services desirable, often vastly more so than technological innovation. I think that marketing has vastly improved in quality during the late 20th century as R&D and technology have made it more effective. (4) Finally, we should not neglect institutional improvement.  As with innovation, this force was very much hit or miss for most of history. But with record-keeping, historical and social learning, and improved education—even for politicians—our understanding of how institutions affect economic activity has greatly improved, political craziness notwithstanding. Compare the 2007-8 response to market crashes with those of 1930-31. 

If we look at the resource constraints that concern Mr. Grantham—a longstanding bear, as I recall—population growth obviously works in favor of increasing constraints and, therefore, costs. Even that effect is greatly exaggerated in straight-line projections, however, because it ignores substitution. If we now factor in the power of innovation, marketing, and institutional improvement, I think the long-term impact of resource constraints becomes inherently unknowable, and just as likely to diminish as to increase.

My case is best made, I think, by comparing the resources needed to sustain a given level of economic activity in 1970, say, with today. With the possible exception of rare earths, I cannot think of any natural resource whose use would not have significantly decreased in this comparison.

Moreover, if we look at the costs of production even in China, it becomes clear that labor costs far outweigh material costs, and increasingly so as production moves up the value scale.  And the labor cost impact, due to technology and marketing and institutional improvement may well continue to drop, temporary fluctuations notwithstanding.

In short, I am not very worried about INflation; it is still DEflation that keeps me awake, especially given the current political threats to both the Euro and the Dollar.

Comparison Between Rome and the U.S. - A Response

We need to be cautious with historical analogies because, obviously, no two historical periods ever track one another that closely, and the implications we draw from comparisons between them can easily drift astray. Furthermore, the less we know about any particular period, the greater the temptation there is for historians to connect whatever dots are available to them in a manner that suits their preferences. The resulting picture may ultimately tell us more about the ideas of the author than about the era itself. My suspicion is that Keith may be indulging in a bit of that here with his comparison between the late Roman Empire and our contemporary America. Nonetheless, historical parallels can be useful to ponder, and I think he is onto something substantive in his commentary that warrants further examination.

The rise and fall of empires has always been a favorite topic among historians, and probably no empire has received more attention over the years than that of the Romans. It’s “fall”, if such it was, has been attributed to everything from imperial overreach to impurities in the Roman water supply. Keith offers us a different perspective, suggesting that a key reason the Roman system broke down was widening class disparities, and with them, increasing gaps in wealth and opportunity between rich and poor. He then makes the leap to contemporary America and suggests that similar inequalities here could lead to an analogous outcome if something isn’t done to intervene.

What interests me about this thesis is that it goes beyond the conventional “fairness” issue, which tends to be a battle of axioms and is therefore difficult to debate analytically. The thrust of Keith’s argument is that extreme disparities of wealth, in addition to being unfair, wreck the very economic infrastructure upon which is based the wellbeing of all classes in a society, including the rich. As I understand the point, the underlying problem is the erosion of the middle classes, whose economic creativity and labor constitute the core source of a society’s wealth. In the ancient Roman world, this “robust class”, as Keith labels it, consisted of “knights, entrepreneurs, civic leaders, and well-paid retired soldiers”, among others. They are thus distinguished, one presumes, from the landed aristocracy, who enjoyed the lion’s share of that ancient world’s wealth and political power in return for essentially passive management of inherited resources. Maybe we could refer to this latter group as the "reaper class", in the sense that they reaped an economic harvest largely sewn by others.

Applying the analogy forward, our “robust class” would consist of those people whose work is essential to our economy. At the very least this group would include entrepreneurs, small business owners, engineers, technology innovators, and those workers producing goods and services demanded by free markets. Our productive class is in fact much broader than this and, I would think, must include some senior executives, some lawyers and accountants, corporate middle managers, teachers, workers providing essential government services, and all others whose often invisible contributions undergird the robust functioning of our society. As Keith argues, any social dynamic that diminishes or demoralizes this class of people while rewarding an oligarchy or "reaper class", threatens our economic bone and muscle.

This far into his argument I concur entirely. Where I suspect I part company with him, however, is in the implied next stage of the argument, largely unspoken in this brief commentary. For if we must "repudiate oligarchy" and eliminate "grotesque disparities of wealth", we need tools to get the job done. And the tools Keith probably has in mind would be (1) higher and more progressive tax rates and (2) activist government programs aimed at re-distributing wealth downward. While at a theoretical level there is nothing wrong with considering these options, there is a great deal wrong I suspect with how they would probably pan out in practice. I can currently see very little to persuade me that, in America today, gains to be had from aggressive redistributionist policies would not be lost in a morass of perverse unintended consequences.

First of all, we need to try to understand who this "oligarchy" is that's so in need of being squeezed harder. It's interesting that President Obama, in pumping for more sharply progressive taxation, has pointed out that rich people themselves are saying they should pay more taxes. Presumably, here he's referring to people like Bill Gates, Warren Buffet, George Soros, and others in their class who, generally liberal-leaning in their political views, have indeed said exactly that. If it's possible to identify an elite super-rich oligarchy in America today, surely these are among the guys we're talking about.

Going beyond this small group of celebrity plutocrats and trying to uncover the broader universe of our modern-day oligarchs, there would be no more fertile ground to search than the hedge fund universe. Hedge funds are by definition investment vehicles for the very rich in America, since it's only by restricting their investor base to supposedly sophisticated high-net-worth individuals, or institutions, that they are exempt from the regulations applying to ordinary mutual funds. It's a revealing fact that hedge funds, being an important source of political contributions, have in general spread their money around between Republicans and Democrats and in fact, until perhaps very recently, have actually favored Democrats in the balance. Anyone who has spent time talking to hedge fund principals knows Democrats, and even liberal Democrats, to be well-represented among their numbers. Many of them support more progressive taxation and the ideals of interventionist government. George Soros, because of his liberal activism, is probably the most visible of this breed, but he is by no means alone.

None of this squares very well with Keith's picture of America's super-wealthy elite banding together like reactionary Roman aristocrats in a tooth-and-nail fight against economic democracy.

So what then is the real source of political resistance to the liberal economic agenda in America? A clue to the answer can probably once again be found in the words of President Obama. During the last Presidential campaign he put forward $250,000 in annual income as somehow a dividing line between "ordinary Americans" and the "super-rich". This line is, of course, orders-of-magnitude south of Warren Buffet's socio-economic turf. Still, Mr. Obama put the spotlight on this second group as being the ones who should bear the entire burden of increased taxation. The group was thus implicitly stigmatized as a pampered elite who could easily afford to pay more, and who should be made to do so anyway as a matter of economic justice. This distinction made for good campaigning, since $250,000 is far above what most Americans make in a year, and the majority would have no obvious reason to feel threatened by the suggested new tax burden.

The problem comes in thinking about exactly who would get caught up in this net thrown down by our soon-to-be President. It's not hard to imagine many people who might indeed deserve to pay more taxes, and who could be made to so without negative consequences to the economy. People living on large amounts of inherited money come to mind, as perhaps do investment bankers, some corporate executives, celebrities, lottery-winners, big-time tort lawyers, and anyone like Gates or Buffet who has made so much money, even when fairly gained, that he really doesn't know what to do with it all.

However, also represented in this targeted class is another group of people whose interests are closely aligned with our society as a whole, and for whom increased taxation would likely force a curtailment of vital economic activity. These would be owners of successful small and medium-sized businesses. Such enterprises in the aggregate make up a substantial portion of our economy, and represent a disproportionate share of our economic growth and new job creation. Their success usually means that they are contributing useful and innovative products to the economy, as well as vital employment opportunities. For expanding companies, profit means a source of low-risk equity capital for financing growth, more than a source of luxury-living for their owners. Diverting such income, through taxation, from productive investment and into government programs, even well-conceived ones, would in general lead to a net loss in economic vitality.

The other consideration to keep in mind here is the risk-return tradeoff that business people have continuously on their radar screens. Small businesses in general, and expanding ones in particular, are by their nature exposed to a high risk of failure and loss. Entrepreneurs willingly undertake such risk only because the prospect for outsized gains makes it attractive. If the risk remains while the gains, should they be achieved, are immediately subject to punitive taxation, businesses have little incentive to incur the risk of expansion at all. If such disincentives became pervasive, our economy would slide into chronic malaise that no amount of fiscal "stimulus" could do much about.

It is, of course, then government spending itself that represents the other prong of the liberal agenda. Proposals for such spending are often sold politically on the basis of either correcting social injustice or stimulating the economy. Such promises are often plausible on the surface but a little vague upon closer examination. In practice, too often federal money gets channeled into standing bureaucracies that grow relentlessly, whether or not they continue serving their missions. They also become conduits for federal money enriching networks of private contractors wedded to them politically and economically.

Liberals are, of course, not alone in facilitating this kind of wasteful application of government resources. Among the most entrenched federal bureaucracies is surely the United States Defense Department, long the darling of conservative Republicans. Decades ago President Eisenhower, himself a former general, coined the derisive term "Military Industrial Complex" to convey the omnivorous nature of this particular public-private partnership, and its lack of real accountability. This syndrome is typical of how government bureaucracies can learn to function once they gain access to the institutionalized flow of money from taxpayers and government bond sales.

Getting back to Keith's commentary, I think he's made a provocative analogy between ancient Rome and the contemporary United States. Just as Roman citizens enjoyed a relatively stable and prosperous way of life for many years, so do many of us today. And the fact that the Roman system eventually devolved into discord and relative poverty for most should be read as a cautionary tale.

Furthermore, I believe that Keith has identified an interesting correlation in the decline of Rome and the disintegration of its middle classes. Any healthy economic system depends on a "robust class" of hardworking pragmatists who innovate, solve economic problems, and keep the flow of goods and services moving to the maximum number of people. If this class becomes diminished or demoralized, the entire system is at risk because takers and consumers and start to overwhelm the producers.

In the United States, our commercial classes are essential to the healthy functioning of our society. Too often our politicians take this group for granted and, even when giving lip service to its importance, seem ready to burden it with ever increasing levels of taxation, regulation and litigation exposure. The beneficiaries of these policies often are not so much disadvantaged citizens as government bureaucracies, crony capitalists, and tort lawyers.

The closest thing we have to true "oligarchs", our hedge fund millionaires and billionaires, remain happy and don't seem to care that much one way or the other.

Statement of Purpose

The purpose of these pages will be to post opposing views on a variety of political and economic issues, and to encourage their resolution through constructive debate.

                  Keith Roberts and Mark Bachmann have had many years of business experience between them. Keith is an attorney, business-owner, recently-published author and a liberal Democrat. Mark is a retired financial analyst and executive, author of an unpublished book on American business culture, and a moderately-conservative Republican.  Related by marriage, we’ve been friends for many years and have argued continuously over just about everything under the sun. We enjoy the process and have always found that it leads to more informed positions and a framework for better ideas.

                  Both of us are disappointed in the tone of much of the current political and economic debate in America. Arrogance, ad hominem attacks, and the trivialization of complex issues are more common than a search for practical solutions. At the same time, we both know enough history to understand fully that there’s nothing new in this state of affairs. Nevertheless, legitimate and useful common grounds can be found when people with different views and understandings  listen to each other and synthesize new ideas from their pragmatic contributions..

                  We believe this spirit still to be the driving force in American democracy.  It's our objective with these pages to do our part towards keeping it active in the current environment.

                  We urge readers to reply to our posts. While we'll strike unfocused diatribes or personal attacks, we encourage aggressive counterviews. 

The Decline of Rome and of the US: a Comparison

Current American social and political forces alarmingly resemble those that helped push the late Roman economy in Western Europe into the Dark Ages.  As then, there has been a fragmentation of society, and the concepts that previously unified it, at least to a significant degree.  To quote the poet, “the center does not hold.” While this fact is widely perceived, the late Roman experience may help explain the forces that are making it happen.

In The Origins of Business, Money, and Markets I describe these forces in some detail because they explain the decline and near disappearance of business activity in Western Europe after the 3^rd century AD, ushering in a period of economic depression that would last a millennium. We do not, of course, wish to see THAT repeated!

The basic similarity between late Rome and present-day America is that in each case manmade political and social developments seriously damaged a formerly robust commercial world, leading to enormous disparities in wealth and opportunity. The few who possessed that wealth and opportunity in the Roman world then demanded tax and legal concessions from the central government that greatly weakened the government, atomized the State, and ultimately destroyed its legitimacy. The concessions that Congress is granting to America’s super-rich today—constantly reduced taxes, freedom from legal restraints—could lead in the same direction.

When Marcus Aurelius became Roman emperor in 161 AD, ruling the largest State the world had ever known, it was “the period in the history of the world,” according to Gibbon, “during which the condition of the human race was most happy and prosperous.” Today, many would say the same for the 21st century USA.  In the Roman world, a robust class of knights, entrepreneurs, civic leaders, and well-paid retired soldiers inhabited the Empire’s many cities and towns, enjoying a market-based and monetized economy. The Empire’s per capita money supply was nearly 80% of that which circulates in the US today. Even in primitive northwestern Europe, where Rome stationed its army at frontier posts like Cologne, Mainz, and Vienna, cash salaries and pension payments, plus the use of private businesses to supply food, arms, and other necessities, ensured a city-centered, money-based market economy.

The social and economic restructuring of northwestern Europe in Roman times began with a series of disasters and wars, just as the Great Recession and multiple wars have afflicted the first years of Obama’s Presidency.  The Roman population declined, as did production. Marcus’s foolish son Commodus squandered the Empire’s substantial treasury, and his early 3^rd century successors launched expensive wars of choice against family enemies, greatly enlarged the imperial armies, and raised military salaries. The emperor who followed Commodus, expressing a view somewhat akin to that of recent Republican administrations, advised his sons: “Be of one mind: enrich the soldiers; trouble about nothing else.”

Since the tax revenues from a diminished Empire could not meet these increased military expenditures, the emperors tried to depreciate their coinage, creating rampant inflation. Credit and commerce collapsed during the 3^rd century (much as they did under Germany’s hyperinflation of the 1920’s), and barter became the primary method of trade in poorer parts of the Empire like northwestern Europe, whose land values plummeted. Peasants fled, the urban middle classes floundered, and by the end of the 3^rd century the surviving towns and cities, barely hanging on, could no longer protect the countryside and its farms. Only the very rich–Roman senators, imperial generals and the like—had the diversified investments that allowed them to escape the poverty and dangers that engulfed virtually everyone else.

From the late 3^rd to the 5^th century these wealthy Romans acquired huge tracts of land at bargain prices, becoming the owners of northwestern Europe’s most productive assets. They could offer protection and aid in return for loyal service, and desperate men flocked to their employment (mostly tenancy). The emperors now had to bargain with these great powers for the taxes and manpower they needed to protect the Empire. These bargains gradually sapped imperial power, and soon after the Vandals sacked Rome itself in 455, the last emperor was sent into retirement.

The crisis of the 3^rd century AD and its aftermath demolished the happy Roman world that Gibbon described, and led to a social and economic restructuring of late Roman society. In northwestern Europe it produced an oligarchy of a few exceptionally wealthy families. The elevation of the extremely wealthy to oligarchic status is happening differently today, but the earlier example makes the outcome of such a shift troubling to contemplate.

As the very wealthy assume political power through the virtually unlimited campaign spending that the US Supreme Court now allows, do they not also demand tax relief and legal protections? And if their power becomes overwhelming, is it not foreseeable that their demands will debilitate our military strength, and the government’s ability to protect the public interest within its own borders?

Oligarchy in northwestern Europe also froze the economy at near-subsistence levels. The self-sufficient landowners had little short-term interest in maintaining roads, protecting those who were not employees, sharing benefits with those who were their employees, or generating prosperity for others.  Except for their own households, life was largely reduced to the terms of subsistence, and in the absence of a more widespread demand for goods and services, even the richest could no longer find or acquire luxuries that had once been commonplace. The same economic laws still apply. If the very rich can use their power to monopolize wealth today, and a prosperous middle class disappears, then the disappearance of demand will force even the wealthiest to suffer a sharply reduced style of life.

Despite its dire economic consequences, the late Roman structure of society suited the powerful, whose dominance could not be challenged, and would last many centuries under the name of feudalism. An oligarchic structure could prove equally stable in the US. We do, however, have two crucial advantages. One is that we know where this road leads, whereas the Romans did not. The second is that, as a democracy, we still have the chance to repudiate oligarchy and the grotesque disparities of wealth that such a political structure brings, and so change our fate.