The American economy continues to grow, though at a snail's pace. The gap between what the nation could produce at full employment, and what it is actually producing, the "GDP gap," is a serious problem. The economy is producing less than it could, resulting in unemployment, feeding back into deficient purchasing power and continued drag on the economy.
Another serious problem is income inequality, stagnant or declining incomes for the working poor and middle class. Income inequality is a direct cause of slow economic growth.
During the last several decades, labor has received a shrinking share of the wealth that it creates - a major cause of income inequality.
Another cause of income inequality is American fiscal policy, the system of federal taxes and expenditures. A major premise of Keynesian economics is that with unemployment and deficient aggregate demand, as the American economy is currently experiencing, it is the responsibility of the federal government to purchase goods and services to fill this gap in aggregate demand in order to bring about full employment.
The most effective measures of federal spending to produce additional employment include the following criteria: 1) It should employ domestic labor and use resources close to home, 2) Expenditures should be those that create a multiplier effect, and 3) Expenditures should be on those products and projects that make our economy more efficient, that is, on projects that need to be done in any case.
Civil engineers have long insisted that our roads, highways, bridges, water supply and sewerage systems are decaying and in need of repair. These items fit the above criteria for increasing employment. Increased spending on these items would employ local labor, as close-to-home projects cannot be shipped abroad. They would use domestic resources. Locally employed labor and resources would create a multiplier effect.
These projects would make our economy more efficient. And, insofar as interest rates are at record lows, this is the opportune time to make these expenditures, using borrowed funds, if necessary.
An argument often used against federal borrowing is that it would "crowd out" private investment. However, with the unemployed labor and resources of today, the "crowding out" argument loses any validity it might ever have had.
What about the federal deficit? One wouldn't know it from the mainstream media, but the federal deficit is currently declining due to the gradually improving American economy and higher tax receipts. In any case, it is the size of the deficit relative to the economy that matters. If the federal deficit grows but shrinks in proportion of our total economy, this is an improvement.
A related argument used against federal borrowing is the "burden left to our children." This argument is bogus in several respects. It is far better to pass on some debt and a healthy economy with good infrastructure than to pass on a failing economy with infrastructure needing complete re-building. And to the extent that the deficit is financed internally, as most of it is, the next generation also inherits the bonds.
We note that the hand-wringing concern for the next generation was conspicuously absent when, instead of using the budget surpluses of the Clinton administration to pay down the public debt, the cry on the right was to immediately use those surpluses as an excuse to cut taxes, mainly for the wealthiest of our citizens.
This brings us to the other side of fiscal policy: federal taxes. Most economists, on both ethical and economic grounds, favor a progressive income tax - higher marginal rates as income rises. The ethical argument is that even the most talented brain surgeon, Fortune 500 CEO, movie star, and professional athlete owes his/her success in large part to the nation and its institutions that enabled that success. Those most highly rewarded through being a part of this nation should contribute a larger share of their rewards to pay for public needs.
But don't these successful, talented people work hard and deserve that income?
Sure, CEOs and successful, talented people work hard. But so do those who work long hours at low incomes, performing useful work that enables this economy to function. People performing low wage, low financial reward work deserve to share in the wealth they help create.
The economic case for progressive taxes is that lower and middle-income people spend a greater proportion of an extra dollar on consumption, creating a higher multiplier effect. The multi-million dollar CEO will spend that extra million, but it will be on items such as bidding up land in Aspen, buying real estate in Costa Rica, or saving it, bidding up stock prices.
Am I saying that saving is bad? Hey, c'mon, I'm Swiss. Even as a teen-age enlisted Marine, I managed to save a few bucks from those paltry paychecks. But I was unattached. We can't expect low-income workers paying rent and all the rest of it to support families to save much.
The point is that to be most effective for the economy, tax cuts should be oriented toward lower income earners. Tax increases should be toward high-income recipients. The tax cuts of the last decades have been the opposite, mainly oriented toward the very rich. This has further augmented the disparity in wealth and after-tax income.
Higher taxes on the wealthy, especially on the upper one percent, and especially the one-tenth of one percent, and using that revenue to employ working people to improve our infrastructure would benefit the nation by making our nation more efficient, and would be a step toward increasing employment and reducing income inequality.
Even the wealthy would be better off with full employment and a vibrant economy, resulting in higher corporate profits.
With full-employment, higher returns to labor, and a more prosperous middle class, stock prices would rise - and the wealthy own by far the vast majority of stocks. It would be a win/win situation.
- John Wealth's column appears in the Times every Friday. He can be reached at jjwaelti1@tds.net.
Another serious problem is income inequality, stagnant or declining incomes for the working poor and middle class. Income inequality is a direct cause of slow economic growth.
During the last several decades, labor has received a shrinking share of the wealth that it creates - a major cause of income inequality.
Another cause of income inequality is American fiscal policy, the system of federal taxes and expenditures. A major premise of Keynesian economics is that with unemployment and deficient aggregate demand, as the American economy is currently experiencing, it is the responsibility of the federal government to purchase goods and services to fill this gap in aggregate demand in order to bring about full employment.
The most effective measures of federal spending to produce additional employment include the following criteria: 1) It should employ domestic labor and use resources close to home, 2) Expenditures should be those that create a multiplier effect, and 3) Expenditures should be on those products and projects that make our economy more efficient, that is, on projects that need to be done in any case.
Civil engineers have long insisted that our roads, highways, bridges, water supply and sewerage systems are decaying and in need of repair. These items fit the above criteria for increasing employment. Increased spending on these items would employ local labor, as close-to-home projects cannot be shipped abroad. They would use domestic resources. Locally employed labor and resources would create a multiplier effect.
These projects would make our economy more efficient. And, insofar as interest rates are at record lows, this is the opportune time to make these expenditures, using borrowed funds, if necessary.
An argument often used against federal borrowing is that it would "crowd out" private investment. However, with the unemployed labor and resources of today, the "crowding out" argument loses any validity it might ever have had.
What about the federal deficit? One wouldn't know it from the mainstream media, but the federal deficit is currently declining due to the gradually improving American economy and higher tax receipts. In any case, it is the size of the deficit relative to the economy that matters. If the federal deficit grows but shrinks in proportion of our total economy, this is an improvement.
A related argument used against federal borrowing is the "burden left to our children." This argument is bogus in several respects. It is far better to pass on some debt and a healthy economy with good infrastructure than to pass on a failing economy with infrastructure needing complete re-building. And to the extent that the deficit is financed internally, as most of it is, the next generation also inherits the bonds.
We note that the hand-wringing concern for the next generation was conspicuously absent when, instead of using the budget surpluses of the Clinton administration to pay down the public debt, the cry on the right was to immediately use those surpluses as an excuse to cut taxes, mainly for the wealthiest of our citizens.
This brings us to the other side of fiscal policy: federal taxes. Most economists, on both ethical and economic grounds, favor a progressive income tax - higher marginal rates as income rises. The ethical argument is that even the most talented brain surgeon, Fortune 500 CEO, movie star, and professional athlete owes his/her success in large part to the nation and its institutions that enabled that success. Those most highly rewarded through being a part of this nation should contribute a larger share of their rewards to pay for public needs.
But don't these successful, talented people work hard and deserve that income?
Sure, CEOs and successful, talented people work hard. But so do those who work long hours at low incomes, performing useful work that enables this economy to function. People performing low wage, low financial reward work deserve to share in the wealth they help create.
The economic case for progressive taxes is that lower and middle-income people spend a greater proportion of an extra dollar on consumption, creating a higher multiplier effect. The multi-million dollar CEO will spend that extra million, but it will be on items such as bidding up land in Aspen, buying real estate in Costa Rica, or saving it, bidding up stock prices.
Am I saying that saving is bad? Hey, c'mon, I'm Swiss. Even as a teen-age enlisted Marine, I managed to save a few bucks from those paltry paychecks. But I was unattached. We can't expect low-income workers paying rent and all the rest of it to support families to save much.
The point is that to be most effective for the economy, tax cuts should be oriented toward lower income earners. Tax increases should be toward high-income recipients. The tax cuts of the last decades have been the opposite, mainly oriented toward the very rich. This has further augmented the disparity in wealth and after-tax income.
Higher taxes on the wealthy, especially on the upper one percent, and especially the one-tenth of one percent, and using that revenue to employ working people to improve our infrastructure would benefit the nation by making our nation more efficient, and would be a step toward increasing employment and reducing income inequality.
Even the wealthy would be better off with full employment and a vibrant economy, resulting in higher corporate profits.
With full-employment, higher returns to labor, and a more prosperous middle class, stock prices would rise - and the wealthy own by far the vast majority of stocks. It would be a win/win situation.
- John Wealth's column appears in the Times every Friday. He can be reached at jjwaelti1@tds.net.
