Political-Economic Feedback Loops


Posted by Bob Lord

[Hat tip to my friend John Gallagher for inspiring this post with his thought provoking Facebook links]

Those of us who read beyond the headlines on climate change understand the concept of a feedback loop. It occurs when a phenomenon feeds on itself. For example, as the planet warms, ice melts, causing the earth to reflect less sunlight and absorb more, thereby causing…..more warming. 

Do feedback loops occur in economic policy making by politicians? Quite clearly, yes. Indeed, these political-economic feedback loops may be the gravest threat to our way of life. For a few examples, follow me after the jump.

Consider the policy decisions of the past three decades that have given rise to the worst economic inequality since the early 20th century. Those policies have caused a dramatic migration of income from labor to capital. We've all seen the graph comparing wages and productivity, where wages and productivity move together until around 1980, then diverge sharply. That divergence represents the migration of income from labor to capital.

One effect of that migration of income from labor to capital has been to reduce the amount of Social Security and Medicare tax revenues. Since half of Social Security and Medicare taxes are paid by employers, corporate America has scored a massive tax savings in the process. The losers have been the Social Security and Medicare trust funds. When dollars move from workers' wages to corporate profits and executive pay, employment tax receipts decline. 

The result: We face eventual shortfalls in the Social Security and Medicare trust funds. 

There begins the feedback loop. As Joshua Green of Bloomberg reports, Obama's top economic advisor, Gene Sperling, now is telling Democrats they'll have to swallow entitlement cuts. Would this be happening if the Social Security and Medicare trust fund balances were at sufficiently high levels? No. Thus, the policy choices that have hurt workers by shifting income from workers' wages to corporate profits and executive compensation appear likely to cause more policy choices that hurt workers.

It gets worse. Our economy has reached a point where there are not enough jobs to go around. Ideally, in this situation, we would encourage workers to retire sooner rather than later, as that will free up jobs for those twenty-somethings just starting their careers. But the entitlement cuts will have exactly the opposite effect. Reduce Social Security benefits and raise the Medicare eligibility age and you cause workers to delay their retirement. 

This is crazy. The way to address the harmful effects of the woefully bad policy choices of the past three decades is not to acquiescence to more bad policy choices. Rather, it is to reverse the earlier misguided decisions. In other words, raise the minimum wage, strengthen organized labor, and take other measures to push the dollars that have migrated from labor to capital back to labor. 

We've seen the feedback loop at work here in Arizona as well. Remember the halcyon days of the boom here in the early 2000s? Back then, the Republican legislature and J-Nap agreed on income tax cuts that benefited primarily the wealthy and corporations. When the boom ended, as all booms do, it left us with a structural deficit that threatened our education system, thereby triggering a feedback loop. In order to restore educational funding, we voted on, and passed, an increase in the state sales tax. The net result? We replaced what should have been income tax revenues collected from corporations and wealthy individuals with sales taxes collected from middle-class and poor Arizonans. 

The ultimate feedback loop is the inequality feedback loop. As we enact policies that make our society more unequal, those at the top become ever more powerful. As their power increases, our policy choices move further in their direction, which causes inequality to worsen. And so on. 

Political-economic feedback loops signal the decline of a society. In any society, at any time, bad decisions can be made. Prohibition in America is a shining example. But in healthy societies, bad decisions ultimately are reversed, or otherwise corrected. In unhealthy, declining societies, bad decisions sprial into further bad decisions in horrific policy feedback loops like we've witnessed here in recent years. Indeed, these feedback loops define a downward spiral, the unique trajectory of a society in decline. 


  1. You’re correct that it isn’t about the trust fund balances for the attackers of Social Security, but it is about the trust fund balances for the would be defenders (Obama) who now are acquiescing to cuts. Even as recently as 2005, there was vigorous push back when Bush sought to privatize SS. If the trust fund balances were at higher levels, I don’t think we’d be seeing Gene Sperling out there talking cuts.

  2. “Would this be happening if the Social Security and Medicare trust fund balances were at sufficiently high levels?”

    Yes. It’s not about the trust fund balances. The attackers of Social Security want to get their hands on an enormous pile of money and/or they oppose public retirement programs on principle.

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