Wednesday, March 17, 2010

Economic prescription: Soak the rich

Given the country's ongoing economic meltdown, there isn't really much discussion in the traditional media about what could - or should - be done to turn around the decline in living standards.

As Joseph Stiglitz says in his book Freefall, the popping of the housing bubble might have just led to a regular recession if it was not accompanied by the collapse of the financial system as well. The consequences of the housing bubble and the collapse of the financial sector are further exacerbated by the economic inequality created by 40 years of Republican economics in which tax cuts for the rich were accompanied by government spending cuts which inordinately hurt the poor and people of color.

As the inequality expanded in the 1990s and 2000s, consumers, whose spending makes up about two-thirds of the domestic economy, turned to extracting capital out of their houses and plain old debt to finance the continuance of the American lifestyle, despite not having the incomes to continue.

To read the traditional press and watch the talking heads blather on the tv machine one would be led to believe there is no way out of this dilemma, and that Americans have no choice but to downgrade our civilization, making extreme cuts to the social safety net. But the reality is that there is another way: Soak the rich. As Stiglitz says:
For total American consumption to be restored on a sustainable basis, there would have to be a large redistribution of income, from those at the top who can afford to save, to those below who spend every penny they can get. More progressive taxation would not only do that but also help stabilize the economy.
If the government raises taxes on upper-income Americans to finance an expansion of government spending, especially on investment, the economy will expand - this is called a "balanced budget multiplier."
Supply-side economists, popular in the Reagan days, argued that such taxes will discourage work and savings and thus lower GDP. But their analysis (if correct at all) applies only to situations where production is limited by supply; now there is excess capacity and production is limited by demand.
But with the dominance of "conservative" voices in the media, this macro economic solution is not on the table, to say the least. But it should be.

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