Facing these conditions, expenditures have to be cut or more money has to be raised in some way. The next
question becomes who will pay to fix them, the “haves” or the “have-nots”? Obviously, it can’t be the have-
nots. Expenditure cuts are most intolerable for those who are poorest, so there needs to be more taxation of people
who can afford to pay more and there is a heightened risk of some form of civil war or revolution. But when the
haves realize that they will be taxed to pay for debt service and to reduce the deficits, they typically leave,
causing the hollowing-out process previously described. If bad economic conditions occur, that hastens the
process. These circumstances largely drive the tax cycle.
History shows that raising taxes and cutting spending when there are large wealth gaps and bad economic
conditions has, more than anything else, been a leading indicator of civil wars or revolutions of some type. To
be clear they don’t have to be violent, though they could be.
I see these cycles transpiring in my personal interactions where I live. I live in the state of Connecticut, which has
the highest average per capita income in the country, the largest wealth gap and income gap in the country, and one
of the largest per capita debt and unfunded pension obligations in the country. I see how the haves and the have-
nots don’t have contact and/or don’t worry about the other because they don’t have much contact with each other
and are focused on living their own lives. I have windows into what the lives of both the haves and the have-nots
are like because I have contact with the people in our community of haves and because the work my wife does to
help disengaged and disconnected high school students in disadvantaged communities brings her into contact with
people who live in the communities of the have-nots. I see how terrible the conditions are in those have-not
communities and how the haves who appear rich and decadent to the have-nots don’t feel rich. I see how they are
all focused on their own struggles—with the haves struggling with work-life balance, making sure their kids are
well educated, etc., and the have-nots struggling with finding income, food security, avoiding violence, trying to
have their kids well educated, etc.6 I see how they are more likely to have critical, stereotypical impressions of
each other that make them more inclined to dislike each other than to view themselves empathetically as members
of one community in which they help each other. I see how difficult it can be to help each other because of these
stereotypes and because the haves don’t feel that they have more than enough or that the have-nots deserve their
financial support and I fear what the future might hold because of the existing circumstances and how they are
likely to worsen. I have seen close up how COVID-inflicted health and budget shocks have brought to the surface
the terrible conditions of the have-nots and are worsening the financial gaps that could bring about the previously
described dynamic that happens when there is not enough money and taxes have to rise which drives the haves
away, expenses have to be cut which is inhumane for the have-nots, or obligations like those for debt and pensions
have to be defaulted on which is bad for those who were promised them, unless somehow they, like the federal
government, have access to the money creation that only the central bank can provide.
Averages don’t matter as much as the number of people who are suffering and their power. Those who favor
policies that are good for the whole—e.g., free trade, globalization, advances in technology that replace people—
without thinking about what happens if the whole is not divided in a way that benefits most people are missing the
fact that the whole is at risk. To have peace and prosperity, a society must have productivity that benefits most
people. Do you think we have these things today?
What does history show as the path that bankrupt governments can follow to raise productivity that benefits most
people? It shows that restructuring and/or devaluing enough of the previously created debt and non-debt
obligations helps a lot. That is classic in Stages 5 and 6. Once the restructuring or devaluation reduces the debt
burdens, which is typically painful at the time, the reduced debt burdens allow for a rebuilding.
An essential ingredient for success is that the debt and money that is created is used to produce productivity
gains and favorable return on investment rather than just being given away without yielding productivity and
income gains because if it is given away without yielding these gains the money will be devalued to the point
that it won’t leave the government or anyone else with much buying power. When we turn to Stage 3, we will
look at how that virtuous cycle typically arises from the terrible conditions in Stages 5, 6, and 1, and how the
conditions in one stage are good indicators of the probabilities of moving to the next stage. We will also look at
several historical examples.
History shows that lending and spending on items that produce broad-based productivity gains and return on
investment that exceed the borrowing costs result in living standards rising with debts being paid off, so these
are good policies. If the amount of money being lent to finance the debt is inadequate, it is perfectly fine for the