Crony Capitalism and Economic Growth


“If there is one thing that populists on the left and right can agree upon, it is disdain for crony capitalism.  It is a distaste for the cesspool of Washington influence in which big-business lobbyists canoodle with lawmakers to get their way.  It is anger at corporate welfare enriching America’s biggest companies at the expense of the little guy.”  So says the economics journalist Neil Irwin in today’s New York Times, “Why we’re All Crony Capitalists, Like It or Not”.
Specifically he is talking about the current debate in Congress over whether or not the Export-Import Bank of the United States should be continued.  It mostly helps big corporations like Boeing and General Electric finance sales to other countries.  But there’s a trade off.  If it shuts down, then American corporations will be at a disadvantage compared with international competitors who get help from their own governments.
CaptureIn fact, crony capitalism has a much wider scope than this.  Each year deductions and loopholes in the U.S. tax code, referred to euphemistically as tax expenditures, total $1.2 trillion in lost tax revenue.  As the above chart from the Congressional Budget Office shows,  50% of these tax reductions are enjoyed by the highest earning 20% of all U.S. households, with 30% of the benefits going to just the top 5%.
Many experts say that our stagnant economy is caused by a lack of consumer demand, in turn caused by the huge loss of wealth during the Great Recession.  If lower and middle income people had more money, they would surely spend it and our economy would grow faster.  This line of reasoning suggests a way forward!
We should enact fundamental, broad-based tax reform, whereby individual tax rates are lowered across the board, in a revenue neutral way, paid for by greatly shrinking the deductions and loopholes enjoyed by the top 5% of wage earners.  The two-thirds of taxpayers who do not itemize their deductions will receive a correspondingly significant increase in income which they are most likely to spend.
A plan like this would not only boost the economy but also boost public morale by lessening inequality.  A win, win plan!

The Anxieties and Worries of Middle America II. What to do?


Our economy has been stagnant since the end of the Great Recession five years ago.  The median household income has not nearly returned to its pre-recession level.  And now a new report has just appeared, “Room to Grow: conservative reforms for a limited government and a thriving middle class”, suggesting new approaches to address this major problem.
CaptureThe lead author, Peter Wehner, declares that “Americans do not have a sense that conservatives offer them a better shot at success and security than liberals.  … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
How can we raise median household income and put millions of unemployed people back to work, at the same time?  Deficit spending is no longer a viable option because our national debt is way too high already.  Quantitative easing by the Federal Reserve has been tried, hasn’t helped very much, and is now being unwound.
Consumer spending makes up 70% of GDP and so the most direct way to boost the economy is for people to spend more money.  Can this be accomplished effectively and efficiently with government policy?  The answer is yes!
Broad based tax reform is the way to do it.  Lower tax rates across the board for everyone, paid for by closing the loopholes and deductions which primarily benefit the wealthy.  Two thirds of the American people do not itemize deductions on their tax returns.  This means that lower tax rates for all of these middle income people will put more money in their pockets, most of which they will spend, thereby massively boosting the economy.
Of course there will be pushback to this course of action from the millions of affluent Americans who benefit from all of the loopholes and deductions in our tax code.  But our first priority by far is to help the many more millions of middle income Americans who are suffering from stagnant incomes at best or may still even be unemployed as a result of the recession.