Inequality Matters, pt.3

Wrapping up this conversation on inequality (see part 1 and part 2), there is still plenty of opportunity to further clarify the economics behind wealth distribution. There are several issues that deserve attention, which only strengthen the argument for more equitable wealth distribution in the US.

How a financial crisis works

The Right likes to make the claim that "wealth distribution leads to economic bubbles." While this is emotionally resonant, this doesn't have much real-world support. Anyone is welcome to review the history of financial crises if they disagree.

What you'll notice in all of these cases is that a financial crisis is generally driven by speculation and twisted market psychology. The primary actors in all of these situations are unscrupulous bankers and executives who spur on financial speculation completely disassociated with economic reality, often committing fraud at the same time. Once their little back room poker game collapsed, economic chaos inside.

Don't worry, these scumbags routinely came out of the situation OK. It was everyone else who had to suffer.

A more equitable country is a stronger country

Of course, there is a limit to my argument about income redistribution. The statistic cited in the previous post, about how lower income people spend more than upper income people, only concern spending levels occurring after specific and focused tax breaks designed to stimulate the economy (in this instance, the stimulus of 2008). What would be truly damning is an assessment of US economic growth and marginal tax rates, with data that shows that at higher top marginal tax rates, GDP suffers.

Unfortunately, you won't find data supporting that argument either. In fact, you'll find just the opposite. There is no correlation between increased tax rates and GDP growth, and there is an inverse relationship between GDP growth and tax rates for the top 1/10 of earners.

Income tax rate vs GDP and receipts

I'll admit that the first case has limitations, and that a universal 90 percent tax rate would be disastrous. But the US has never seen anything like this, nor is anyone asking for it. All I want is a tax distribution similar to the one we had before 1980.

Top margin income tax rate vs GDP

All other things equal, the United States was economically stronger during periods where high tax rates for the very top margin prevented the accumulation of wealth. The revenues from that top margin were spent on infrastructure, schools and the like. The greatest public works project in world history, the development of the interstate system, began in 1956, at the height of 90 percent taxes for the top margin (remember, this doesn't mean that people earning 500k have to pay 450k in taxes; it just means that all money earned over a certain limit, say 400k, is taxed that way; there's still plenty of incentive to get super rich, even in this harsh of a system).

This kind of spending, by the way, benefits the poor more than the rich, creating low-income jobs and providing for the kind of community development (through schools) that the rich don't need.

The stimulus myth

The only strong correlation identified in the previous article was between GDP growth and total tax revenue.

This leads to an obvious conclusion: if you are concerned about short term deficits during an economic slump, the first order of business is to spend enough money to get people back to work and economic growth back on track. This kind of spending, not surprisingly, would benefit the poor over the rich, by making sure that the poor people who lost their jobs got back to work.

This never happened. Fiscal stimulus didn't "fail" as the right would like us to believe; it was simply never tried.

The Obama stimulus package was way too small to begin with, and it was offset by decreases in government spending at the state and local level. Germany, for example, paid to keep almost everyone employed and ended up spending much more money during the crisis than the US.

Not surprisingly, their economy is now leaving ours in the dust, growing at a rate of 9 percent annually.

At the same time, government employment rates are dropping at a scary rate. This will only put more people on the dole and make matters worse.

And while many people, have expressed concern about taking on too much public debt to restore the economy, it is important to keep in mind that this is not the highest debt level our country has faced.

Moreover, most of the current short-term debt countries around the world face is coming from lost revenues due to the downturn and paying for the newly unemployed masses.

A truly fiscally responsible government, and that includes one that addresses the increasing cost of health care in the US (which, um, the Democrats just did), will be able to pay these short-term debts down. And they will do this by eliminating massive tax breaks for the wealthy and restoring a tax system that I have been arguing for throughout.

Behind the wizard's curtain

In Wisconsin, need I remind everyone, thousands of public workers face benefit cuts and the destruction of their unions. In Washington, major programs like financial regulation, food stamps, the new health care bill and education face cuts. Entire government agencies, like the EPA, face defunding, which would lead to thousands of government workers losing their jobs.

Both situations are tragic examples of the politics of austerity. Both are the results of political games brought on fiscal crises that didn't exist. In Wisconsin, the budget crisis is the result of tax breaks to businesses that eliminated a pre-existing budget surplus. In Washington, Congressional Republicans insisted on granting 75 billion dollars in tax breaks to people earning more than 250k a year (from the original Economist article). With this gap in place, they've decided to cut the budget by 61 billion dollars.

Sadly, these won't even accomplish much. Having gutted most of the government, many people will lose their jobs. Economic recovery, the only thing that will eventually lead to increased tax revenues, will be further away. We'll end up playing this same game again in a couple years, with the backdrop of an even worse economic situation.

This is why inequality and an inefficient up tax system matter. Not renewing the Bush-era tax cuts would have given government more lee-way to improve the economy and not force through cuts that will harm middle class Americans. The writing is all over the wall. Police officers are getting fired, schools are closing, teachers are being forced out, and the budget cuts just keep coming. This isn't fiscal responsibility. It's economic warfare by other means, and average Americans are consistently the victims. Fixing this trend is more than possible, and it starts by acknowledging that growing inequality is at the root of most of these problems.