Friday, October 28, 2011

Tax cuts for billionaires will not solve anything

Since the 1980s, Supply Side economics has been a staple of establishment economic thinking. Cut taxes for the wealthy, goes the argument, and the economy will grow.

Here's the problem. Right now there's plenty of supply. The Federal Reserve has been pumping money into the economy at an astonishing rate. The rich have the lowest taxes in modern history. Large corporations are sitting on piles of cash and are making quite respectable profits.

So... why has the economy not recovered? Well, ask why are large corporations sitting on piles of cash? Why are some banks suddenly asking those with savings accounts to pay maintenance fees on those accounts? Why are interest rates at absurd lows?

The answer is that nobody wants to spend the money. That is, corporations don't want to spend what they have, and banks can't find people to borrow what they have to set up new businesses. And nobody wants to do either because the problem right now is not supply, but demand. Demand is flat. People are worried about their underwater mortgages, and 9-16% of the country is looking for work and unable to spend money as a result. We all want to spend money, but we can't.

The argument for giving billionaires (or even the well off) even more tax breaks is that they'll stimulate supply, not demand. "Why tax the job creators" argue those proposing this point of view. Unfortunately, I can't see how the argument stands up in practice. Leaving aside the fact that business expenses can almost always be written off, the reality is that job creation starts with people affording to buy products and services. The more people who wave dollar bills shouting "I want!", the more jobs get created.

At this stage, our political establishment is obsessed with giving cash to those who don't need it, ignoring the problems of those who do, something that leaves us all the worse in the long run.

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