A lot of our public discourse about economic policy revolves around simplistic answers to questions that are intrinsically complicated. Are you for “high” taxes or “low” taxes ? Are you for corporate bailouts or not ? Ideological stances are determined by where you stand on these questions. Impassioned commentators and politicians engage in heated arguments based on these stances. Details, ground realities and the public interest are often, if not always, conveniently ignored. For example, what is a “high” corporate tax rate ? Also, since each bailout case is different, is it even possible to have ideological predilections about corporate bailouts ? And should not the answers to these questions take into account the shifting economic realities that the country encounters ?
What gets lost in the discourse is a realization of the fact that there are constraints on how a particular type of economy can be. For example, it is the opinion of this writer that right-wing economists tend to forget that economic policies that promote some abstract notion of “ efficiency “ while ignoring and jeopardizing the welfare net that tens of millions depend upon, and that is a hallmark of a mature and compassionate society, cannot be sustainable or durable. They can easily lead to social chaos and in the long run, they can undermine the same notions of “ efficiency “ that these right wing economists hold to be sacred. The late conservative economist Milton Friedman said something along the lines of – the economy has its own laws and they cannot be ignored just as the law of gravity cannot be ignored. I guess he meant it as a chastisement for imprecise thinkers in economics. In today’s context, his statement should be heeded by conservative economists themselves, especially those who would like to eliminate the American welfare system or severely curtail it. They cannot ignore the fact that economic policy exists for the people, not the other way around. This writer believes that Professor Friedman was himself guilty of forgetting his own sagacious advice in many instances. As somebody who spoke out against big bureaucracies and against the welfare system, he was systematically ignoring a fundamental reality of economics. That an economy that ignores the welfare of the masses, and leaves it to the whims of abstract principles like “ efficiency “, is an economy that can encounter serious stability problems. Those who think that America’s massive deficit problem and massive debt problem can be solved by doing unprecedented spending cuts while the rich and the high income-earners enjoy decade-long ultra-low tax rates are ignoring the fundamental reality mentioned above. Namely, that the people are paramount. A system that rewards executives of financial firms and other firms that grossly mismanage risk and production while undermining the interests of those who contributed to building up the economy with their sweat and blood will sooner or later have to face this reality. It is the opinion of this writer that the obsession of the conservative economists with abstract notions of “efficiency” has now descended to levels where serious introspection is needed as to whether the economic policies being followed are sustainable. And whether social cohesion is possible when economic policies are framed in these rarefied realms with utter disregard to the present and future welfare of the masses. Also, given the number of private firms that have failed and that have had to resort to government bailouts, the messiahs of “ efficiency “ have a serious image problem. It must be kept in mind that the well-being of the masses must take precedence over the image problems of these messiahs of “ efficiency “.
What are “ high “ or what are “ low “ corporate tax rates for the United States ? Similarly, what are “ high “ or what are “ low “ income tax rates for the United States ? It depends on what kind of society you want. The course of American economic policy makes one thing clear. It has not rendered the welfare system very secure for the future despite all the crucial social services the system has provided over decades. Something or the other gets in the way. It is just not a glamorous enough topic for the politicians, even though the implications for economic stability and social cohesion are enormous. Defense policy and the desire to appear like macho stewards of a dominant country somehow take precedence with many politicians. It seems there is some abstract notion of “ efficiency “ that has the American psyche in thrall. Some basic economic constraints are ignored in the process. Unless some radical new technological advances with mass appeal take place, one cannot expect the American economy to move on radically different growth trajectories. Efficiency improvements alone cannot take the American economy from a 0-4% growth trajectory to say, a 10% growth trajectory. Something more fundamental, like the assembly line production of motor cars or the electronic revolution, is needed. Several critical technologies like computer memory chips and computer microprocessor chips run the risk of encountering fundamental technological limits that can severely constrain growth in these sectors. So, the technological realities are just the opposite of what is needed for a new growth paradigm. Rather, these technological realities portend just normal if not sluggish growth. The internet sector settled down into its equilibrium after a boom. The housing market in the United States is in trouble mode, to put it mildly. Green investment and green technology are sometimes thought to be possible drivers of future economic growth. That is possible, but not without fundamental change in the mindset of policy makers and significant technology breakthroughs so that new green technology can become both affordable and popular with the masses. Also, shifting to new green technologies means shifting out of many conventional technologies. Jobs created in new green technology will simply replace jobs in the conventional energy sector and the conventional transportation sector. Also, a lot of new investment will be necessary just to replace existing infrastructure if environmental catastrophe becomes more common. So, it is not clear at all that green investment can be the cause of extraordinary overall economic growth. In this kind of scenario, expecting “ efficiency “ improvements alone to somehow solve budget problems, either in the short run or in the long run, is extremely naïve. The basic problem I am trying to highlight here is the fact that there is tremendous political noise in the American system about cutting spending, but not that much noise about the elimination of elitist tax-cuts that were given about a decade ago. These ultra-low tax policies led to unprecedented public debt levels, contributed to overdependence on foreign debt and created a cheap national ethos where expensive wars co-existed with mass consumerism and low tax obligations. Despite the utter failure of these low-tax regimes, the political elite is amazingly daft when it comes to realizing the serious damage that these tax cuts did to the United States over a decade. Commentators given to facile analysis may well argue that this situation would not have arisen had spending been cut to the same extent. However, that kind of argument ignores that cutting non-defense spending is extremely non-trivial even if manipulative politicians have their hearts set upon it. And it was not possible to reduce defense spending during wars. No significant reduction in spending occurred even though the Republicans held the Congress and the White House together for several years. A lot of superficial analysis ignores fundamental realities about the need for social security, medicare and other expenditures. Those who argue for the privatization of the social security system, for example, must take cognizance of the fact that the values of the retirement savings of many people plummeted recently due to an asset market that mismanaged risk. Exposing social security to the same kind of risks is not a prudent idea given the lessons of the housing crisis, the diminution in value of mortgage-backed securities, the unprecedented levels of Fed intervention it engendered, the sharp decrease in the value of retirement savings it caused and the havoc it created in the domestic and the world economy. There is always a tradeoff between risk and efficiency. Whatever the reality about the efficiency of government programs may be, they have provided crucial services needed for human welfare over several decades. Irresponsible shifts from government management to private management are fraught with grave risks. Just like the lost retirement savings due to the financial crisis of 2008-2009, privatizing social security may well lead to similar drastic loss of value when the private sector encounters its next crisis, either due to structural reasons or due to mismanagement reasons. The one thing the financial crisis proved conclusively is that the private sector cannot always be trusted to be a good guarantor of economic value and that whatever “ efficiency benefits “ it advertises are open to serious doubt. One superficial and facile line of reasoning can press for privatized social security since all the fiscal problems of the United States make the government’s ability to sustain its future finances questionable. Let it be repeated here that ultra-low-tax policies and pro-corporate policies were responsible for this fiscal distress in the first place. These low-tax policies took a debt-deficit situation that looked manageable around 2000 and turned it into a fiscal nightmare. As for switching to privatized social security, in addition to the possibility of scenarios similar to the lost retirement savings due to the 2008-2009 crisis, it must be understood that a prudent combination of tax increases and decrease in spending may well be able to save the budget situation from something like a debt-default type of crisis.
Enormous paranoia has been built up about reversing deep, elitist tax cuts when the economy is weak. However, the argument that tax increases necessarily lead to a negative effect for the economy in terms of investment sentiment is seriously flawed. For example, corporations that compete with each other in oligopolistic or free-market frameworks have no good reason to curtail investment due to higher corporate taxes. Competition and technology improvements are likely to make investment imperative in most scenarios. Rather, the ease with which corporations can get credit can play a bigger role. Here, the fiscal policy of the government is not likely to have a direct effect. Rather, if the government’s need to borrow decreases due to higher tax revenues, it will compete less with the private sector in the loan market, thereby freeing up a lot of credit and it can lead to lower interest rates for corporate borrowings. Since the credit market is no longer in the panic mode it was in during the 2008-2009 crisis of about two years ago, there is breathing room as far as this component is concerned. The new stock issue component of corporate investment can be negatively affected by higher capital gains taxes. However, with three sources of corporate investment funds – profit plowback, new stock issue and credit – it is not clear if the effect of this component alone will lead to lower investment. As for the effect of income taxes, private spending by individuals will decrease by the amount of higher taxes, if income taxes are raised, but there should be significant offsetting effect from the freed up credit because the government needs to borrow less. Individual borrowing and corporate borrowing can become easier. This will lead to higher corporate investment to the extent that corporate borrowing can increase due to this. And it will offset some of the decrease in personal spending. So, even in times of economic distress, short-run and long-run fiscal imperatives may make carefully chosen tax increases a desirable option. Whether public discourse, which has become used to repeating the same facile assumptions over long periods of time, will become mature enough to realize this remains to be seen. The need of the hour is not a reliance on overly simple and potentially misleading rules of thumb, but a sophisticated appraisal of tax policy that takes into account the fact that a lot of the paranoia about higher taxes is pure propaganda and that the mix of tax sources is tremendously important while deciding tax levels. Also, due cognizance must be taken of the fact that severe government spending cuts can have serious negative effects of their own. Even those given to elitist thinking need to consider the fact that the economy is a complex, interconnected mechanism. Has decoupling between the elitist economy and the economy of the masses happened to some extent ? It is not clear if this issue has been understood or quantified carefully enough. An insouciant elite that frames economic policies with utter disregard for the welfare of the masses runs the risk of social unrest and disturbance. Disillusionment with the democratic system can become exacerbated as a result. The channels of dialog between the elite and the masses can break down and can potentially lead to catastrophic outcomes. Furthermore, given the ridiculous management failures of the elites in the housing market, the credit market, the employment situation, the indebtedness situation and the fiscal stability situation, the masses will question the educational framework and the research framework that produces our policy makers. They may well clamor for a change in the ethos of economic management itself. And they may well be justified in thinking that taking over the economic management of the country from those who follow deeply flawed elitist policies, and instead running it in quasi-socialist, socialist or co-operative mode, may be needed. The trigger for significant public unrest and for radical changes in economic management in twenty-first century America cannot be similar to the consumption of dead rats by people in Paris slightly over two hundred years ago, when a French monarchy that ignored mass suffering had to face social explosion. And that was a hereditary monarchy, sanctioned by religious authority. Today, we have a political elite that is elected by the people, a technocratic elite that is paid by the public to manage its affairs and a corporate elite that is answerable to stockholders and the public. Repercussions should begin well before they bungle up Bourbon-style. The recent gargantuan failures of the political class, the technocratic class and the corporate class raise serious doubts about the intrinsic stability and sustainability of this system unless some of the elitist policies are reversed.
What gets lost in the discourse is a realization of the fact that there are constraints on how a particular type of economy can be. For example, it is the opinion of this writer that right-wing economists tend to forget that economic policies that promote some abstract notion of “ efficiency “ while ignoring and jeopardizing the welfare net that tens of millions depend upon, and that is a hallmark of a mature and compassionate society, cannot be sustainable or durable. They can easily lead to social chaos and in the long run, they can undermine the same notions of “ efficiency “ that these right wing economists hold to be sacred. The late conservative economist Milton Friedman said something along the lines of – the economy has its own laws and they cannot be ignored just as the law of gravity cannot be ignored. I guess he meant it as a chastisement for imprecise thinkers in economics. In today’s context, his statement should be heeded by conservative economists themselves, especially those who would like to eliminate the American welfare system or severely curtail it. They cannot ignore the fact that economic policy exists for the people, not the other way around. This writer believes that Professor Friedman was himself guilty of forgetting his own sagacious advice in many instances. As somebody who spoke out against big bureaucracies and against the welfare system, he was systematically ignoring a fundamental reality of economics. That an economy that ignores the welfare of the masses, and leaves it to the whims of abstract principles like “ efficiency “, is an economy that can encounter serious stability problems. Those who think that America’s massive deficit problem and massive debt problem can be solved by doing unprecedented spending cuts while the rich and the high income-earners enjoy decade-long ultra-low tax rates are ignoring the fundamental reality mentioned above. Namely, that the people are paramount. A system that rewards executives of financial firms and other firms that grossly mismanage risk and production while undermining the interests of those who contributed to building up the economy with their sweat and blood will sooner or later have to face this reality. It is the opinion of this writer that the obsession of the conservative economists with abstract notions of “efficiency” has now descended to levels where serious introspection is needed as to whether the economic policies being followed are sustainable. And whether social cohesion is possible when economic policies are framed in these rarefied realms with utter disregard to the present and future welfare of the masses. Also, given the number of private firms that have failed and that have had to resort to government bailouts, the messiahs of “ efficiency “ have a serious image problem. It must be kept in mind that the well-being of the masses must take precedence over the image problems of these messiahs of “ efficiency “.
What are “ high “ or what are “ low “ corporate tax rates for the United States ? Similarly, what are “ high “ or what are “ low “ income tax rates for the United States ? It depends on what kind of society you want. The course of American economic policy makes one thing clear. It has not rendered the welfare system very secure for the future despite all the crucial social services the system has provided over decades. Something or the other gets in the way. It is just not a glamorous enough topic for the politicians, even though the implications for economic stability and social cohesion are enormous. Defense policy and the desire to appear like macho stewards of a dominant country somehow take precedence with many politicians. It seems there is some abstract notion of “ efficiency “ that has the American psyche in thrall. Some basic economic constraints are ignored in the process. Unless some radical new technological advances with mass appeal take place, one cannot expect the American economy to move on radically different growth trajectories. Efficiency improvements alone cannot take the American economy from a 0-4% growth trajectory to say, a 10% growth trajectory. Something more fundamental, like the assembly line production of motor cars or the electronic revolution, is needed. Several critical technologies like computer memory chips and computer microprocessor chips run the risk of encountering fundamental technological limits that can severely constrain growth in these sectors. So, the technological realities are just the opposite of what is needed for a new growth paradigm. Rather, these technological realities portend just normal if not sluggish growth. The internet sector settled down into its equilibrium after a boom. The housing market in the United States is in trouble mode, to put it mildly. Green investment and green technology are sometimes thought to be possible drivers of future economic growth. That is possible, but not without fundamental change in the mindset of policy makers and significant technology breakthroughs so that new green technology can become both affordable and popular with the masses. Also, shifting to new green technologies means shifting out of many conventional technologies. Jobs created in new green technology will simply replace jobs in the conventional energy sector and the conventional transportation sector. Also, a lot of new investment will be necessary just to replace existing infrastructure if environmental catastrophe becomes more common. So, it is not clear at all that green investment can be the cause of extraordinary overall economic growth. In this kind of scenario, expecting “ efficiency “ improvements alone to somehow solve budget problems, either in the short run or in the long run, is extremely naïve. The basic problem I am trying to highlight here is the fact that there is tremendous political noise in the American system about cutting spending, but not that much noise about the elimination of elitist tax-cuts that were given about a decade ago. These ultra-low tax policies led to unprecedented public debt levels, contributed to overdependence on foreign debt and created a cheap national ethos where expensive wars co-existed with mass consumerism and low tax obligations. Despite the utter failure of these low-tax regimes, the political elite is amazingly daft when it comes to realizing the serious damage that these tax cuts did to the United States over a decade. Commentators given to facile analysis may well argue that this situation would not have arisen had spending been cut to the same extent. However, that kind of argument ignores that cutting non-defense spending is extremely non-trivial even if manipulative politicians have their hearts set upon it. And it was not possible to reduce defense spending during wars. No significant reduction in spending occurred even though the Republicans held the Congress and the White House together for several years. A lot of superficial analysis ignores fundamental realities about the need for social security, medicare and other expenditures. Those who argue for the privatization of the social security system, for example, must take cognizance of the fact that the values of the retirement savings of many people plummeted recently due to an asset market that mismanaged risk. Exposing social security to the same kind of risks is not a prudent idea given the lessons of the housing crisis, the diminution in value of mortgage-backed securities, the unprecedented levels of Fed intervention it engendered, the sharp decrease in the value of retirement savings it caused and the havoc it created in the domestic and the world economy. There is always a tradeoff between risk and efficiency. Whatever the reality about the efficiency of government programs may be, they have provided crucial services needed for human welfare over several decades. Irresponsible shifts from government management to private management are fraught with grave risks. Just like the lost retirement savings due to the financial crisis of 2008-2009, privatizing social security may well lead to similar drastic loss of value when the private sector encounters its next crisis, either due to structural reasons or due to mismanagement reasons. The one thing the financial crisis proved conclusively is that the private sector cannot always be trusted to be a good guarantor of economic value and that whatever “ efficiency benefits “ it advertises are open to serious doubt. One superficial and facile line of reasoning can press for privatized social security since all the fiscal problems of the United States make the government’s ability to sustain its future finances questionable. Let it be repeated here that ultra-low-tax policies and pro-corporate policies were responsible for this fiscal distress in the first place. These low-tax policies took a debt-deficit situation that looked manageable around 2000 and turned it into a fiscal nightmare. As for switching to privatized social security, in addition to the possibility of scenarios similar to the lost retirement savings due to the 2008-2009 crisis, it must be understood that a prudent combination of tax increases and decrease in spending may well be able to save the budget situation from something like a debt-default type of crisis.
Enormous paranoia has been built up about reversing deep, elitist tax cuts when the economy is weak. However, the argument that tax increases necessarily lead to a negative effect for the economy in terms of investment sentiment is seriously flawed. For example, corporations that compete with each other in oligopolistic or free-market frameworks have no good reason to curtail investment due to higher corporate taxes. Competition and technology improvements are likely to make investment imperative in most scenarios. Rather, the ease with which corporations can get credit can play a bigger role. Here, the fiscal policy of the government is not likely to have a direct effect. Rather, if the government’s need to borrow decreases due to higher tax revenues, it will compete less with the private sector in the loan market, thereby freeing up a lot of credit and it can lead to lower interest rates for corporate borrowings. Since the credit market is no longer in the panic mode it was in during the 2008-2009 crisis of about two years ago, there is breathing room as far as this component is concerned. The new stock issue component of corporate investment can be negatively affected by higher capital gains taxes. However, with three sources of corporate investment funds – profit plowback, new stock issue and credit – it is not clear if the effect of this component alone will lead to lower investment. As for the effect of income taxes, private spending by individuals will decrease by the amount of higher taxes, if income taxes are raised, but there should be significant offsetting effect from the freed up credit because the government needs to borrow less. Individual borrowing and corporate borrowing can become easier. This will lead to higher corporate investment to the extent that corporate borrowing can increase due to this. And it will offset some of the decrease in personal spending. So, even in times of economic distress, short-run and long-run fiscal imperatives may make carefully chosen tax increases a desirable option. Whether public discourse, which has become used to repeating the same facile assumptions over long periods of time, will become mature enough to realize this remains to be seen. The need of the hour is not a reliance on overly simple and potentially misleading rules of thumb, but a sophisticated appraisal of tax policy that takes into account the fact that a lot of the paranoia about higher taxes is pure propaganda and that the mix of tax sources is tremendously important while deciding tax levels. Also, due cognizance must be taken of the fact that severe government spending cuts can have serious negative effects of their own. Even those given to elitist thinking need to consider the fact that the economy is a complex, interconnected mechanism. Has decoupling between the elitist economy and the economy of the masses happened to some extent ? It is not clear if this issue has been understood or quantified carefully enough. An insouciant elite that frames economic policies with utter disregard for the welfare of the masses runs the risk of social unrest and disturbance. Disillusionment with the democratic system can become exacerbated as a result. The channels of dialog between the elite and the masses can break down and can potentially lead to catastrophic outcomes. Furthermore, given the ridiculous management failures of the elites in the housing market, the credit market, the employment situation, the indebtedness situation and the fiscal stability situation, the masses will question the educational framework and the research framework that produces our policy makers. They may well clamor for a change in the ethos of economic management itself. And they may well be justified in thinking that taking over the economic management of the country from those who follow deeply flawed elitist policies, and instead running it in quasi-socialist, socialist or co-operative mode, may be needed. The trigger for significant public unrest and for radical changes in economic management in twenty-first century America cannot be similar to the consumption of dead rats by people in Paris slightly over two hundred years ago, when a French monarchy that ignored mass suffering had to face social explosion. And that was a hereditary monarchy, sanctioned by religious authority. Today, we have a political elite that is elected by the people, a technocratic elite that is paid by the public to manage its affairs and a corporate elite that is answerable to stockholders and the public. Repercussions should begin well before they bungle up Bourbon-style. The recent gargantuan failures of the political class, the technocratic class and the corporate class raise serious doubts about the intrinsic stability and sustainability of this system unless some of the elitist policies are reversed.