May 03

A Lost Decade or Ten . . . .

This past Wednesday, Larry Summers and Paul Krugman both spoke at different events and both warned of a lost economic decade–or decades–in the United States. While I am loathed to accept anything spewing from the frothy mouth of Larry Summers, he was uncharacteristically cogent in his remarks. Mr. Krugman continued–much to his credit–to pound the drum for decreased austerity, increased stimulus, and more proactive programs to spur employment. Mr. Krugman is widely regarded as championing policies that hang precariously the fringe of mainstream economic thinking, while Mr. Summers has long been a technocratic proponent of free markets.

“For the first time in 75 years, we are experiencing a protracted recession due to a lack of demand,” Summers said during a speech to the Center for Global Development in Washington. “It’s now been about five years since the recession began and it appears the stagnation will be with us for another long interval.”

“There is not enough demand,” Krugman said during an appearance at the Economic Policy Institute, where he gave a talk to promote his new book, End This Depression Now. “We focused a lot – too much – on the financial sector’s problems. Yet that is long since gone and we still don’t have a steady recovery. That tells us the crisis was far more about household debt.”

Summers chose to focus on fixes to income inequality through progressive taxation as medicine for the demand problems in the United States, while Krugman focused on retracing the cuts in government spending at the federal and state level in order to increase expendable income, employment, and certainty. Both men are correct. Summers is correct in that if the United States is to allow the tax system to remedy income inequality rather than to implement tight regulation and limits on executive pay and compensation, then individual–namely wealthy individuals–and corporate tax revenues must necessarily increase. He also points out, falsely I believe, that much of the job losses caused by technological innovation in the manufacturing sector are to blame for much of the income inequality, and that nothing can be done to reverse that trend. Krugman is correct in that it was wholly irresponsible to react to a short term protraction in government revenues by slashing millions of public sector jobs. By failing to recapitalize state and municipal coffers, the federal government has exacerbated the huge demand problem and contracted government tax revenues. Krugman also points out that the long slog of short term fixes to the tax code and stop-gap measures on infrastructure funding have created an uncertain contracting environment for federal and state agencies, leading to the cancellation and procrastination of major improvement and repair projects. In doing so, the government has further dragged down consumer spending, employment, and government revenues. Continue reading

Apr 28

Neither Side is being Reasonable on Taxes

Ryan - ObamaAs the election draws near and the competing interpretations of deficit bean counting becomes louder and louder, taxes, specifically income taxes, will be occupying a more pronounced amount of the political space. On the one side, Republicans, who oppose raising taxes on anyone for any reason, and who have been so dreadfully frightened by Grover Norquist and his ridiculous tax pledge that its reasonable members don’t dare speak honestly. On the other side–because we only have two sides after all–are the Democrats, who oppose raising taxes on anyone making less than $250,000. How the Democrats arrived at that number has been the subject of debate, but the party has sufficiently pigeon-holed itself on that number, so it is just as if Moses himself carried it down the Capitol steps and announced it as God’s will. Neither side is correct, and neither side is moving.

The Republican position is uniquely barbaric. Assuming no legislative change from status-quo, the top wage earners in the United States in 2012 will pay a top rate of 35% on incomes over $388,350 and 33% on incomes roughly over $218,000. Comparatively, most European nations carry a top tax rate of over 40%, and significant sales taxes and luxury taxes. Germany has a top income tax rate of 42%, and is currently the only thing standing between Europe and total economic destruction, rightly or wrongly. The Republicans are demanding not only that the top tax rate not be raised, but rather that it and other taxes affecting top earners be lowered dramatically, to 25%. Each of the lower marginal tax brackets would be lowered to 10%. They offer no compromise on this position.

Democrats on the other hand are standing pat on the position that taxes should be raised to pre-Bush levels for top earners of as high as 39.6%, and proposing that marginal tax rates for lower income earners not be changed from current levels for families earning less than $250,000 and individuals earning less that $200,000. There is also a surtax on unearned income at the higher income levels of 3.8%. Further, any individual earning more than $1 million would pay a minimum income tax rate of 30%.

Setting aside any debate concerning the United States’ arcane corporate tax code, neither party is being reasonable. First, the Republican plan leaves the government $6.2 trillion short on revenues and would necessarily lead to drastic cuts in discretionary spending, be it from programs boosted by Democrats, or from Defense. Second, the Democratic proposal, although much more equitable, also leaves in place the irresponsible Bush tax cuts for lower wage earners. It isn’t smart economics or smart politics to propose tax changes that affect only a small group of taxpayers. Moreover, Obama and the Democrats had their chance to avoid this fight altogether in late 2010. With the Bush tax cuts set to expire, they instead chose to negotiate with the Congress for a two-year extension. That decision was neither politically smart or economically responsible. With deficts almost certainly to be a more resounding issue during the 2012 campaign than tax rates, the Democrats, primarily out of fear, intentionally exacerbated the deficit by signing the 2010 agreement, playing directly into the Republicans’ wheelhouse. Allowing the Bush tax cuts to expire for everyone would have been a much easier political sell for the President and Democrats if they had painted the Republicans as unreasonable and focused on the shared sacrifice inherent in allowing a return to Clinton era rates. Instead, Democrats must fight the battle battle again during an election year. Continue reading