All Life Is Problem Solving

Joe Firestone’s Blog on Knowledge and Knowledge Management

All Life Is Problem Solving header image 2

Et Tu Bernie?

September 17th, 2010 · No Comments

Bernie Sanders appeared on Dylan Ratigan’s show yesterday talking about Elizabeth Warren’s appointment. Towards the end of his interview, he said a few words about his opposition to extending the Bush Tax cuts to the wealthiest Americans. His proposal was to end the tax breaks the high income people, take the $700 Billion freed up, spend $350 Billion on sorely needed infrastructure projects, creating millions of jobs over a 10 year period and taking the other $350 million in savings and applying it to deficit reduction.

So, Bernie’s heart is in the right place but he really doesn’t get the economics of it. The Bush tax cuts for the wealthy have some stimulative effect on aggregate demand, namely about $0.29 for every dollar of tax not collected. So, if we extended the tax cuts that would save $203 Billion in aggregate demand over the next decade. On the other hand, let’s say we took Bernie’s proposal and used $350 Billion for infrastructure. That would produce $557 Billion in aggregate demand, clearly better than the tax cuts for the wealthy. However, what if we took all $700 Billion and used it for infrastructure? Then we’d have $1.113 Trillion in aggregate demand and twice as many jobs as in Bernie’s proposal.

But what about the idea of saving half the tax cut and reducing the deficit, isn’t that important? Doesn’t that have value? the answer is no, not in the abstract. It might have value if the economy recovers enough to provide full employment, and we need to fight inflation. But if there is no inflation, then the money “saved,” is of no value to the Government (including the Federal Reserve Bank), or to the economy, since Government tax receipts don’t affect the ability of a Government like the United States presiding over a fiat currency, with full authority to create money through its spending, to spend. Government spends by marking up private sector accounts and adding to private sector assets. It doesn’t spend by using money remitted to it through taxation. In fact, it destroys that money, i.e. removes it as a financial asset of the private sector, and is in no way constrained from future spending because it destroys tax revenue.

So, Bernie’s proposal to “save” half the Bush tax cuts for the wealthy, doesn’t add a bit to the Government’s ability to spend. All it does is remove money from the private economy, and reduce the amount of the aggregate demand that might have been created. In fact, if Bernie had proposed extending only half the Bush cuts for the wealthy and using the other half for infrastructure, this would be better for aggregate demand than his proposal, and would generate an estimated $659 Billion in aggregate demand; $102 Billion or so more than Bernie’s proposal, but less than the $1.113 Trillion that would be generated if all of it were used for infrastructure.

In addition to getting higher aggregate demand, however, there is another reason why we ought to prefer doing $700 Billion in infrastructure spending to extending those tax cuts, and that is working towards economic justice. Over the past 40 years or so, the United States has seen a trend towards the kind of profound economic inequality that has magnified the political influence of the wealthy and threatened American Democracy. To save our Democracy we need to reverse that trend in any number of little ways, and we need to move much faster back towards greater equality, than we have moved towards inequality.

One of the things we ought to do is to move the tax code back towards a situation where those who benefit most from increasing productivity, must also pay their fair share of taxes. What that share is we all have to decide, but there’s a general consensus right now that marginal income tax rates for high income people ought to go up. Over time, political processes will help us to decide what is “fair” in this respect. But it does seem unfair to have an essentially flat marginal tax rate for most upper income people. It’s certainly grossly unfair for a family earning $300,000 in New York City to be subject to the same marginal tax rates as people with incomes over $5 million annually.

The goals of greater economic equality, and greater fairness in taxation don’t have to conflict with the goal of increasing aggregate demand. We simply have to keep in mind that raising taxes on high income people will cause a fall-off in aggregate demand. So, when we do increase those taxes, we need to make sure that Government spending is increased in areas that will produce higher aggregate demand than is being lost from increased taxation. For example, more spent on food stamps, payroll tax cuts, Federal aid to the States, and Federal Job Guarantee Programs are good, because all have very high aggregate demand multipliers.

So, there is no cause for worry that if we raise taxes on the wealthy that we will lose aggregate demand we cannot easily replace. But we do need a Government that can act to implement policies to get high aggregate demand without being diverted too much by the need for political compromise, and that, in the current American context, means a Government willing to get rid of the filibuster in the Senate so that blue dog Democrats and Republicans don’t have to be conciliated in passing economic programs that can end unemployment.

I’d be remiss if I didn’t mention Warren Mosler’s economic program at this point. Warren who is running for the Senate in CT on the Independent Party ticket has proposed a payroll tax holiday, Revenue grants of $500 per person to State Governments, and a Federal Job Guarantee (FJG) to end our economic difficulties in 90 days. All of these, are high multiplier fiscal policies for increasing aggregate demand, and the FJG program will eliminate involuntary unemployment. Bernie Sanders would do well to look at this program and begin to push it himself, rather than suggesting that we “save” half of the taxes collected through ending the Bush tax cuts for high income taxpayers.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Tags: Politics