Taxation & Wages (Redistribution) Circulates Money Supply

Alan Greenspan has a new book and the New Republic critiques his polices in an excellent article. Check out a few excerpts from the article below, followed by commentary and a simple conclusion.

Hindsight leaves no doubt that it would have been a great idea to prick the housing bubble early. They would surely have been pilloried for destroying a nice prosperity in midstream and creating painful unemployment. And for what? To prevent a later financial crisis? But no financial crisis would be actually visible, not in this version of history. How could anyone know that one had really been averted? It was still a mistake to have let the bubble continue, blandly claiming that it would be easier to pick up the pieces later on.

The second mistake, the bigger one. An unregulated financial system. Greenspan was a prominent opponent of financial regulation.

Why are businesses not buying more plant and equipment? It is not for some lack of saving: corporations are flush with cash, and borrowing costs are historically low. No, businesses are not investing more because they have no confidence that they will be able to sell their added output of goods and services profitably. There are not many eager buyers out there or in the offing. Suppose that families, firms, and governments suddenly decided to save more. That is the same as deciding to spend less. There would be fewer eager buyers out there and even less incentive for businesses to invest, even in new products.

A government budget deficit is a form of negative national saving. So reducing a budget deficit (or increasing a surplus) amounts to increased saving. The same logic applies: deficit reduction is bad policy in an economy that is not fully using the productive capacity it already has. What that economy needs is more buyers, not fewer.

There is another side to the central (unproved) claim that social benefits crowd out national saving dollar for dollar. The upper income groups pay most of the government’s income tax revenues. Most social benefits go to recipients lower down in the income distribution. So, even apart from deficit finance, social benefits are a transfer of income from richer people to poorer people, which is indeed their purpose. But the well-off save a substantial part of their (after-tax) incomes, while the poor naturally spend all or most of what they get (which is indeed the purpose). Social benefits are not only a transfer from richer to poorer, they are a transfer from saving to consumption.

This is to interpret the New Republic's critique to mean that taxation is (and always has been) a redistribution of wealth --- and that "taking from the rich and giving to the poor" is a good thing, in that it increases spending; because the rich have a tendency to hoard their cash when the can't generate maximum returns --- the way big commercial banks do with quantitative easing when holding U.S. Treasury bonds, instead of lending.

Taxing this otherwise idle and un-invested money helps to circulate the money supply throughout the economy, thereby generating more economic activity, while also creating more jobs in the process.

One example might be: If someone like Bill Gates had $1 billion of idle cash crammed under his mattress doing nothing, if it were taxed 50% by the government, $500 million could be spent on building roads and bridges (putting people to work). Then those same people could go out and buy Bill Gates' newest version of Windows.

Besides the CEO's hoarding their enormous salaries in offshore tax havens such as the Cook Islands, or manipulated through various "foundations", U.S. corporations also have $2 trillion in profits hoarded away. Alan Greenspan believes that taxing them more (this transfer of rich to poor) is an "injustice" to the rich. (The New Republic article also notes that it is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand.)

But a very wealthy investor named Nick Hanauer can better explain all this:

"Somebody like me makes hundreds or thousands as times much as the median American, but I don't buy hundreds or thousands of times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and shirts a year like most American men. Occasionally we go out to eat with friends. I can't buy enough of anything to make up for the fact that millions of unemployed and under-employed Americans can't buy any new cars, any clothes, or enjoy any meals out. Nor can I make up for the falling consumption of the vast majority of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages."

And this extraction and hoarding of the wealth by the few versus a more fair and equitable redistribution of the wealth for the many doesn't just apply to taxation, but to wages as well. (Walmart --- nuff said.)

The American voters should press their leaders to force the repatriation of overseas corporate earnings for taxation (at a statutory corporate tax rate, not an "effective" tax rate with mega tax loopholes); tax capital gains at the same progressive marginal tax rates as regular wages; eliminate the Social Security "cap" on wages; raise the minimum wage to $15 an hour (indexed to inflation); and finally, make Obamacare mandatory for part-time workers too.

From the NJFAC (the National Jobs for All Coalition):

All these needs can and should be met by federal action—as was done during the 1930s when the New Deal put millions to work doing useful jobs that have made a lasting contribution to our country—roads, bridges, schools, libraries, housing, parks, arts, culture and much more. These jobs, we maintain, partially pay for themselves because workers with decent jobs pay more in taxes and don’t need unemployment compensation or food stamps.

Tax revenues from corporations, banks and other who have benefited from bailouts and economic recovery without doing their part to create jobs can pay for the remaining costs. We must convince the public that an updated New Deal model—paying living wages and treating all jobless workers fairly—is well within the competence of our country—one far richer than it was when the Roosevelt administration put millions of desperate, unemployed people to work in the service of the nation.

In conclusion: Only then can the middle-class rise again; but the Republicans (and too many Democrats) will never agree to a rising tide that can lift all boats, when their only concern has been for the yachts.