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Obama's Tax Plans Will be up Against a Lot

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This post is in response to Alan Schram's "Stimulus Plans Don't Work," published January 20th, 2009.

Those on the political right have been shopping a notion, "the fact that government can't put money into the economy without first taking money out of the economy". On the face of it, government recycles money into the economy immediately. There is no "out" in the equation. By contrast, personal wealth tends to sequester money out of the economy. It is high time the right and left realized that taxation and government spending are economically neutral.

If there were no such thing as the M3, the aggregate of all money in circulation plus savings and long term investments, finding new money to put into the economy might be a problem. M3 includes increasingly large sums that are fallow in regard to the economy, such as stock funds, hedge funds, sovereign wealth funds. M3 and M2 components have increased an order of magnitude in the last thirty years while M0 and M1 have just doubled. In other words there is more "money" in the world, by an order of magnitude, than circulates at any economic moment. Borrowing money in this climate is simply tapping a reserve that is titanic relative to what the economy can even process.

Furthermore, the losses in the banking system due to bad debt and subsequent collections on credit default insurances have wiped out a trillion dollars distributed across the range of money supply measures. M1 is needed to operate the economy. Investments at the M2 and M3 levels depend on success in circulation at M1 levels, the actual economy. In the most fundamental sense, it behooves large concentrations of money to lend some of it to the government of the United States and other nations in order to maintain the value of their holdings. Otherwise the world's currencies will fail across the board and no asset values can be projected in that environment. And like right now, banks will not lend because they fear further declines in asset valuations.

Denigration of the spending programs of FDR is also rampant. The right wing may not realize it but they are in fact arguing that FDR did not spend enough soon enough. It, according to the most common argument, took WWII titanic spending to bring the economy out of the Great Depression. Spending on defense has no more intrinsic value to the economy than spending on consumables of any kind, cotton candy. FDR had the right idea but was hobbled by fiscal conservatives who feared high debt encumbrance. FDR had to dig us out of deflation and if there was any fault with the plan, it is that he did not print money, to shore up values, aggressively enough. Inflation is the correct remedy in a deflationary economic environment.

They touch on the truth with "Economic growth occurs when there is an increase in national income, not a redistribution of it". The only problem is that they have inverted the equation for what is needed now. Redistribution upward is what has been happening and has resulted in a slow death of the American economy. If by national income they intend to reference the measure NI (wages + rents + interest + profit + proprietors income),then increasing it is moot if it does not increase the purchasing power of the median family income. In other words redistribution is exactly what is needed, only down instead of up.

No economy can long survive a protracted decline in the purchasing power of the individual consumer. Low incomes are what defines a Third World economy. High incomes are what power and define a First World, prosperous, economy. This concept is mysteriously absent from current economic policy thinking, even though it is the most fundamental of all economic precepts.

The argument always seems to come back to the idea that tax cuts alone will stimulate an economy. The only problem is that there is no historical evidence that lower taxes do stimulate the economy. Taxes are in fact economically neutral. The reason for that is that it makes no difference who spends money, government through spending of tax revenues or private citizens spending a tax cut. The only difference is how the money is spent, on a school book or a six pack.

We are to trust that individuals will spend a tax cut more wisely than government will spend on programs intended to create jobs. Back to the cotton candy. If individuals will spend so much more wisely than government, then let them build schools and roads and bridges, erect border defenses, build their own aircraft carriers and main battle tanks, weather satellites and crop forecasting methods. Sadly, within government programs, a few bridges to nowhere will be built along with the publishing of twenty million school books and a new million miles of upgraded power transmission grid. So be it. Better spent than on a six pack or online porn.

Overlooked completely by the right is the fact that we are in a deflationary spiral. The Fed rate is effectively zero percent or less. The Fed is out of the equation now, doing everything it can do to prop up the economy by injecting liquidity, trying to cause inflation. The only additional means is to print money. A trillion dollars being injected into the economy matches the losses in markets. Were that money not replaced asset values will not recover. Everyone who owns a home, a stock, has a 401k, or a business with tangible assets will see their net worth level out below what it was before this started. How much below is too complex a question for which to expect a definitive answer.

Looking forward, no amount of deficit spending or tax cutting that results in deficit spending will be enough to restore the economy. For the last ten years the economy has been fueled by easy credit and profligate speculation on housing appreciation. That era is at a close because the instruments and practices that enabled it have been decisively proven to be of higher risk than anyone in the banking industry could imagine. What is left is to redress the imbalance that easy credit allowed to happen, namely that wage growth has stagnated and has fallen behind measurable productivity gains.

Obama's middle class tax cut alone will not restore the economy, because a deficit is still just a deferred tax, and the burden going forward will simply increase, year over year, until the deficit and debt are retired. The only way to do that, eliminate the deficit and retire the debt, is to tax the people and institutions that have profited to the greater degree in the tax holiday of the Reagan Era. They have benefited while the public has fallen behind. And, again looking forward, the further the public falls behind, the worse will be the economy, eroding the profits of business across the board, and making every day that passes in which taxes on the rich are not increased another day closer to the day on which even they will not be able to pay taxes.

That is the brilliance of Obama's campaign proposal, a tax increase for the rich and break for everyone else results in a redistribution of wealth in the correct direction, down the income ladder, where it will actually benefit the economy. The fear that this will cripple investment is laughable. There is more money laying fallow in the world than at any other time in history. That money will go where a profit can be made and no profit can be made unless a market exists. Therefore a lower and middle class pay raise will actually increase investment and raise profit potential. It will shutter some small businesses, but the low wage pressure environment that allowed them to limp along will continue to erode their potential anyway. The hard assed right wing saw of letting the weak fail, here, applies.

Even more seriously for the wealthy, their assets, dollar, real, tangible and intangible assets will be eroded by a declining global economy. Their wealth will be substantially lost as the ability of the economy to support valuations heads down the chute. Wealth is not immutable, it is a consequence of and is supported by economies. If the common man has no money then the price of even gold will fall to nothing. Could we get there? We could easily get there if the economic philosophies of the right wing are not unmasked as the path to exactly that end. High relative concentration of wealth in the hands of a few can lead to only one thing, bankruptcy for everyone.

The time was when the United States could operate on cash raised solely from tariffs and borrowing in a pinch from the well to do. That was all well and good in a pre-industrial world. In a modern world, government has more responsibilities and higher relative expenses than in the past. Defense is no longer a matter of a few long rifles, powder and shot. Mass production of goods requires efficient and reliable infrastructure. Brain power is required to design and operate complex systems and sophisticated tools. The burdens of these expenditures has rightly fallen to government and has caused the growth of taxation.

The burden of taxation has always been on those with the ability to pay. Prior to the income tax, taxes were levied on the wealthy on an as needed basis. The current tax code is, if anything, fairer in the way it operates than systems that preceded it, laying at least some of the burden on the middle classes, who, like the rich, benefit most from, but in less tangible ways, the existence of government. Free food, medicine and education may seem to favor the poor in greater proportion. But without these support systems, in lieu of pay, the country could be a much more awful, criminal, and dangerous place. The 1% of the Federal budget that goes to social programs does make a difference in the quality of the lives of the middle and upper classes. By contrast, a much better value than the 70% of income tax revenues that are spent on defense, or even the 29% spent on other federal projects and programs.

So when the right talks, and they do incessantly, about cutting taxes, it is without regard to the benefits that accrue to the public from funding government. It is a litany, a prayer to increase after tax profits as if some miracle will allow government to provide the same benefits to them without them being financed. It is childishness and petulance, and worse, disregards the fact that beyond a certain level required for capitalization, wealth actually sequesters money out of the economy. We are going to have to grow up and soberly asses what it will take for us all to survive the ideological ravages of the Reagan Era, now, thankfully in disrepute.