By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives
Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own.
Reported today in the Washington Post:
President Obama on Tuesday unveiled an ambitious budget that promised more than $600 billion in fresh spending to boost economic growth over the next decade while also pledging to solve the nation’s borrowing problem by raising taxes on the wealthy, passing an overhaul of immigration laws and cutting health costs without compromising the quality of care. Obama seeks to raise more than $1 trillion – largely by limiting tax breaks that benefit the wealthy — to spend on building roads and bridges, early childhood education and tax credits for the poor.
Here’s the conceit: Uncle Sam is broke. He’s got a borrowing problem. He’s gone hat-in-hand to those who’s got, trying to borrow a few dimes off them. But they are ready to foreclose on his White House.
Obama knows his economy is tanking. Five and a half years after Wall Street’s crisis, we still have tens of millions of workers without jobs. Even the best-case scenarios don’t see those jobs coming back for years.
Obama will leave office with a legacy of economic failure.
Belt-tightening austerity isn’t working. He wants to spend more, but he doesn’t have more to spend. He’s run up his credit tab at the local saloon and the bar-keep won’t pour another whiskey.
So he’s got an idea: let’s take from the rich, and give to the poor, homeless and jobless. Robin Hood rides to the rescue.
Look we all love Robin Hood. Almost no one outside the One Percenters disagrees with the view that the rich have too much. It is immoral. It is easy to argue that public policy ought to aim at reducing their income and wealth. And giving some to the poor.
If you have any remaining doubt at all that the One Percenters deserve to be dispossessed of much of their wealth, take a look at this segment by Chris Hayes. Kevin Roose crashed their obscene party and secretly recorded their shenanigans. Their hatred of the 99% just oozes from the video.
Or look here at the Mother Jones piece on the Fabulous Fab, who’s now teaching recruits at the University of Chicago for Wall Street’s fraud machine.
No lesson learned. Or, rather, they’ve learned that fraud pays. Big time.
Now to be clear, I do not know that Obama would win on a tax the rich platform; indeed, I’m not sure I even believe he wants to do it. The top One Percenters are not just Bush’s “base”—they also got Obama elected. Twice. And, of course, they are Hillary’s base, too, so get ready for a couple of years of nonstop of the inevitable.
But why link this to Obama’s plans to spend more? You then automatically ensure that anyone against “soak the rich” schemes will oppose the Robin Hood plan to “take from the rich to give to the poor”. It is bad politics to put a poison pill into your stimulus bill.
And it is bad economics, too. Doubly bad.
First, if you are trying to stimulate the economy, you don’t enact a “trillion dollar” tax increase. I do believe there is something to the “balanced budget multiplier”: if you reduce the income of those who don’t want to spend but increase the income of those who do, you will get some stimulus. But we are literally trillions of dollars of spending away from full capacity. And Obama’s plan is, apparently, to tax $1trillion and spend $600billion. Uhmmm. Can he subtract? I calculate a $400 billion shortfall. I doubt the differing spending propensities involved would make that much of a stimulus.
Second, Uncle Sam is the currency issuer. He cannot run out. He cannot become insolvent. He always spends by crediting bank accounts with High Powered Money. He never spends “taxpayer’s money”. Unless we’ve got a nation of counterfeiters, every single dollar that a taxpayer pays to Uncle Sam came from Uncle Sam.
Uncle Sam can never wear out his welcome. As former Deputy Secretary of the Treasury Frank Newman put it: “The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.”
Yep, the winners get the safest asset on the planet and the losers are stuck with Wall Street’s toxic waste. You choose.
Y-O-Y would Obama want to muddy the waters by tying a good plan—spending more on roads, bridges and early childhood education (and cutting taxes on the poor—which of course is not “spending” but rather a reduction of income destruction)—to bad economics?
If he delinked and did manage to get the stimulus package he wants, he can still tackle the One-Percenters. As I’ve argued before, Predistribution is much better than Redistribution. First, it is politically more plausible: don’t let the One-Percenters get the outrageous income and wealth in the first place because once they’ve got it, they have all the wealth and power they need to fight to keep it.
Second, it is more coherent. The currency issuer does not operate like Robin Hood. The Sovereign credits the bank accounts of the poor, and debits the accounts of the rich. While we can link these in a sentence, they are logically distinct operations—and we can do either one of them without doing the other.