Category Archives: demand

The Growth Deficit

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I am a fiscal conservative, as well as a social moderate, which means that I don’t fit very easily into a standard mold.  I am non-doctrinaire, non-ideological and mostly nonpartisan.  I vote for candidates from both major parties as well as independents.  I prefer a balanced government with neither party in complete control.
My most direct sources of information on fiscal and economic issues are the Wall Street Journal and the New York Times, both of which I read assiduously on a daily basis.  When these two newspapers disagree on a particular issue, then I usually decide that the truth lies somewhere in between.
CaptureOur biggest national problem right now, in my opinion, is the stagnant economy.  In today’s WSJ, the lead editorial, “The Growth Deficit”, clearly describes how bad the situation is.  Since the Great Recession ended in June 2009, our rate of GDP growth has averaged 2.2% per year.  This compares with a 4.1% annual rate of growth for all post-1960 recovery periods.
Such a slow rate of growth causes all sorts of problems.  First of all, it explains why our unemployment rate is still so high at 6.7% after five years of recovery.  This means that between 15 and 20 million people are still unemployed or underemployed.  Such a large human toll means a huge increase in government welfare expenses for food stamps, unemployment insurance, etc.  Higher unemployment also means less tax revenue collected by the federal government.  This translates into much larger deficit spending, adding to the already massive national debt.
There are lots of things which can be done to increase growth, for example:

  • Lowering tax rates on individuals to put more money in the hands of the 2/3 of Americans who do not itemize deductions on their tax returns. They’ll spend this extra income and create more demand! Pay for this by closing loopholes and deductions, which are used primarily by the wealthy. Besides stimulating the economy, this will simultaneously address increasing income inequality.
  • Lowering tax rates on corporations to encourage multinationals to bring their foreign profits back home for reinvestment or paying dividends. Again, balanced by eliminating deductions enjoyed by privileged corporations.
  • Relax regulatory burdens on small businesses where most new jobs are created.
  • Reform immigration procedures by boosting the number of H1-B visas to attract more highly skilled, and entrepreneurial, foreign workers.
  • Grant trade promotion authority to the President to speed up new trade agreements.

We should be clamoring for our national leaders to be acting on these fronts.  A strong economy is the very backbone of our success as a nation!

Is America Falling Behind?

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Yesterday’s New York Times has a very interesting article, “U.S. Middle Class No Longer World’s Richest”, demonstrating that from 1980 -2010 the median wage in many other developed nations has grown faster than in the U.S.  The chart below does show that the U.S. median wage is still growing but just not as fast as elsewhere.
CaptureThe authors suggest three reasons to explain what is happening:

  • Educational attainment in the U.S. is growing more slowly than in the rest of the industrialized world.
  • A larger portion of business profits in the U.S. is going to top executives meaning less for middle and low income workers.
  • There is a higher degree of income redistribution (through taxation) in Canada and Western Europe than in the U.S.

The data presented in this article is more elaborate but nevertheless consistent with what other studies are showing.  We are still on top but we need to make some major changes in order to stay there.  For example:

  • Most states have adopted the national Common Core curriculum for K – 12 schools. In today’s highly competitive global environment, this will enable a more rigorous evaluation of educational attainment between the states and should, therefore, improve overall academic achievement.
  • The best way to raise salaries for middle and low-income workers is to boost economic output overall. Fundamental tax reform, with lower tax rates for everyone, offset by closing loopholes and lowering deductions for the wealthy, will put more money in the hands of the people most likely to spend it. This will increase demand and make the economy grow faster.
  • As a highly visible way of addressing economic inequality in the U.S., institute a relatively small, i.e. 1% or 2%, wealth tax on the assets of individuals with a net worth exceeding $10 million. This would raise up to $200 billion per year which could be used for an extensive infrastructure renewal program, creating lots of jobs and further boosting the economy, with a lot left over to devote to shrinking our massive federal deficits.

A program like this encourages everyone to work hard and reach their highest potential, including accumulating as much wealth as they are able to.  But the people at the very top, i.e. the superrich, will be required to give back a little bit more in order to benefit the entire country.

Response to a Persistent Critic

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You keep saying that we need lower tax rates to boost the economy but what makes you think this will help? Businesses are sitting on piles of cash. They have plenty of money to invest in expansion. What they need are more customers. The basic problem is not enough demand for more goods. This is what is holding back the economy. It doesn’t much matter what the tax rates are. If the demand and customers are there, businesses will spend their own money or borrow as much money as they need, at low interest rates, to produce all the products they can sell.                                                                                                                Anonymous Critic

I have several responses to this criticism:

  • First of all I want to make it clear that all cuts in tax rates must be offset by shrinking or eliminating tax preferences.   So there will be no loss of tax revenue. Two thirds of all taxpayers take the standard deduction and will therefore automatically benefit from lower tax rates. This will put tens of billions of new dollars into the hands of middle class wage earners who will spend most of this money because they have tight budgets. This will give the economy a big boost.
  • As I discussed in my blog post from October 26, 2013 “Where are the Jobs? II. How to Create More of Them,” most net new job creation comes from businesses less than one year old, the true “startups.” New business owners are typically not wealthy, with lots of personal tax deductions. They need all the financial resources they can muster. Lower tax rates will save them money and therefore help them get their new business going.
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  • In general, tax deductions such as for mortgage interest, municipal bond interest payments, state and local taxes, etc. benefit the wealthiest tax payers.  Therefore the lowering of tax rates, offset by shrinking tax deductions, represents a shift of funds from the wealthier to the less wealthy. This will at least slow down the increase of inequality which afflicts the modern world.

Conclusion: Lower tax rates will put more money in the hands of people who will spend it, thereby boosting the economy by creating more demand, provide support for entrepreneurs starting new businesses (which will create more jobs) and lessen income inequality. All in all this represents major progress!