Wednesday, February 13, 2008

Jolting the Economy

Robert Reich explains why this recession may be a bad one. Looks like our spending power is all tapped out.

The first way [we increased spending power] was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

So, to summarize, we’re all working, we’re all working our asses off and we’re all drowning in debt. We’re screwed unless something changes. Reich suggests, in the short term, we need to dramatically lower taxes on the lowest earners with the collection shortfall offset by raising taxes on the top earners. Since the highest earners are spending large amounts of their wealth on global investments outside the country (trickling down money to China and the like), their diminished spending power will not impact our economy. However, the middle and lower-middle class earners who receive the giant tax breaks will almost certainly spend the extra money within our economy (it’s trickle-up economics).

I can see the logic in this argument, although using the tax code as such a blunt instrument can have plenty of unintended consequences. Who does Reich mean when he talks about raising taxes on the wealthy? The top 5%? Not all of the top 5% of earners are happily throwing their money into foreign hedge funds. Many are running small businesses. Others are hard-at-work professionals who may own a Lexus and a plasma TV but are not blessed with an exceptional amount of expendable income. Over taxing these people may be more than just unfair, it might poison the top portions of the economy in a devastating manner.

Obviously, sitting back and just waiting out the economic turmoil is not the perfect solution (particularly if we’re as screwed as Reich argues), but I’m not sure fiddling with the tax code is a magic bullet, even as a short-term solution. A complete overhaul would be more useful but decidedly impractical at this point. To me, the most obvious and achievable stimulus would be infrastructure investment, a plan championed by Mike Huckabee during the debates and supported by plenty of others. (In all fairness, I heard Robert Reich himself promote infrastructure investment on an NPR segment I can’t find a link to).

Our infrastructure is in need of repair. Our economy is in need of an extended jolt. Rather than making tax law changes with undeterminable effects, why don’t we invest in projects which we know will create jobs and provide long-term advantages. There may be a better action to take but, if there is, I haven’t heard it.

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Anonymous Anonymous said...

Every time the economy gets into trouble Reich and his elk reach fro the old stand by - tax the rich. Who exactly are the rich? According to the IRS - those earning more than 100K? Maybe you cap it at 200K? How many dual income 2 kid families hit the 100K or 200K mark - do you think they consider themselves RICH? Hardly.

The "rich" already pay the vast majority of all taxes. Raising taxes on them won't appreciably increase the overall amount of tax revenue the gov.'t recognizes (see WSJ editorial from about a month ago that showed data for the past 30 years to support this). Lowering taxes on the poor won't really help the economy - they already pay little to no tax and spend as much as they earn. The grand irony is that Reich is also a proponent of "the US needs to save more" yet he wants to lower taxes on the poor so they will spend more?!? Did I miss something?

Cutting taxes on corporations would be a good 1st start. France and Russia - neither are exactly poster children for capitalism have significantly lower corporate tax rates than the US does. A flat tax might be another good start - see Russia and Chile, et. al. on this.
Infrastructure investment would definitely be good to help our long term competitiveness - but the bucket of cash isn't limitless - so how about cutting funding for the education department whose budget has practically doubled under Bush (some fiscal conservative he is!). If the last 40 years have shown anything its this - more money won't solve our education problem. Ask any democrat how much money it will take to fix education and you will invaribly hear "more". Define more. If Bush offered a deal that said - we will write a check for blank amount today to fix education, but nothing more after that check - they would run from the deal faster than imus' supporters ran from him a year ago.

8:09 AM  

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