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Try something novel when all else fails

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Partisans on the starboard of our listing ship of state maintain as a dogma of faith that tax increases are anathema to economic growth. Therefore, taxes should not rise ever till the end of times, although there is historical evidence to support a positive correlation between higher marginal tax rates and good economic performance--as in the Clinton years. Like the rejection of hard science with respect to global warming and Darwinism, ignoring the connection between high tax rates and economic growth borders on irrational denial. The ideological underpinnings of this position lead to the perversity of a war against the good of the country with policies that, if not the intent, have the effect of stalling the economic recovery. However, there is something wonderfully perceptive about the American people: they are not foolish. They hardly seem mesmerized by the sleight of hand of their political leaders. And they see through the political gamesmanships, the one-upmanship, the Congressional record of low production and high dysfunction; and the callous indifference to pro-growth and pro-jobs proposals from "adversaries."

The economy is clawing its way back from a most severe recession while Congress fiddles. To add further insult to injury, it did not help that Sen. McConnell made every effort to live up to his publicly stated boast that his goal was not to get us out of the recession and set the economy on a sustainable growth path--his "single most important goal . . . is for President Obama [the man the American people elected to the White House] to be a one-term president." And on compromise, Rep. Boehner said, "I reject the word." Hence, the abysmal approval rating of the Congress, which according to Gallup is 10 percent now. In other words, 90 percent of Americans disapprove of the House and the Senate--a pox on both houses, they seem to be saying. And when a popular bubblehead talk show host declared at the start of Obama's presidency, "I want him to fail," this smacked of cognizant dissonance for there was a time, a presidency one degree removed in fact, when such a comment challenged one's patriotism, which in war and recession is about pulling together for the greater good of the country.

Our abstinent leaders don't back down from their ideological purity perch no matter what.  They find comfort in groupthink that makes puppets of them and spurs them on to do the same things collectively like voting along party lines, again and again. Failure is no deterrent. Unfortunately, failure does not inform policy inflection or correction. A saying attributed to Albert Einstein goes like this: "Insanity is doing the same thing over and over and expecting different results." There is no surer indication of insanity than pursuing the same failed fiscal and monetary policy over and over and over again and expecting to turn the economy around, i.e. right our metaphoric listing ship of state. I don't want to assign an insanity classification to our elected leaders. I won't dare, because they're not insane; besides that would be rude . . . even impolitic. However, we sent them to Washington to get things done; and by that standard they've failed, opting instead to bruise one another in political Mortal Kombat. Any hint at pulling together for the wellbeing of the nation is greeted with sneers of socialism. And it seems people wax nostalgic for the go-it-alone cowboy, the swagger, and the rugged individualism of a mythical bygone era.

Wish our policymakers would review the results of what they have done; reject what's not working, and search for better ways of governing. Pols and pundits alike who advocate austerity need to come to terms with the fact that it does not work. It has not worked for the UK, Greece, Spain, and Italy. So, why should it work here? To insist on it . . . well, that's insanity. Hollering endlessly into megaphones demanding spending cuts, repeal of the Affordable Healthcare Act, and insisting on never raising taxes, is not governing--it is jingoism. It is pandering to diehard partisans, and worst, it causes bad things to happen like a slow economic recovery, rising joblessness rates, and protracted budget deficit debates with subsequential loss of confidence in Uncle Sam (the infamous credit rating downgrade comes to mind); plus the looming possibility of sequestration that threatens defense-spending cuts of $500 billion (over 10 years) starting January 2013, in line with the Super Committee's recommendations in the Budget Control Act.

I would like to propose an untried way out of our current economic circumstances, which are decimating lives. Raise the top marginal tax rates for the rich--not in the spirit of class warfare--although for some these are the best of times, and yet for others these are the worst of time. Why is there a chance this could work? The answer at first blush is based on a plausible assumption that rich people--job creators, if you will--have a lower marginal propensity to consume (i.e. extra consumption due to a unit of extra income) than poor people. What I would expect from this is nothing. I mean, job creators would not be motivated by a marginal tax increase to change their spending behavior. They will not invest or consume more or less. They have everything money can buy and a few dollars more is just icing on the cake. But, of course, I presume too much. I am not in their shoes and cannot really speak for them. Yet, some rich folks such as Warren Buffet and George Soros have stated publicly that they won't mind paying more into the U.S. Treasury. Contrast this from some super-rich folks who are not willing to pay a penny more than they legally have to. Now, everyone pays taxes even a poor person who goes to the supermarket, buys a loaf bread, and pays the sales tax on it. It is the taxes on income that requires creative accounting to get around paying. Rich people can afford to hire the accountants to help them devise ways to reduce their tax bite through, among other things, Cayman Island and/or Swiss bank accounts. Or more insidious, from my point of view, is Steve Forbes' argument that unearned income (dividends, interest, rent, etc.) should not be taxed. Tax wages earners but not unearned income. That's class warfare. However, to repeat, who am I to tell people whose income is beyond my comprehension what to do? I won't be so presumptuous. In fact, maybe a word from them would go a long way toward stabilizing my financial circumstances. Alas, that ain't ever going to happen, however--you see, I don't personally know any rich persons. But I digress.

In terms of the Federal Reserve Bank low interest rate policy, the reasoning behind this makes sense. It makes money cheap, so people would borrow to consume and to invest. But it is not working. The economic recovery is still anemic--with growth rates mired below two percent with no improvement in sight, and unemployment stubbornly stuck at 8.2 percent. Theoretically, easy money should complement deficit spending in recessionary cycles to right the listing ship of state as it were. Now, what would happen if savers earned more on their savings (and checking) deposits, CDs, 401K's, pension funds, IRA's, T-bills, etc. It might not be much of a stretch to conclude they would spend it. Levering to buy durable goods like cars, houses, boats, etc. because of low interest rates, is highly desirable. The problem is that lending institutions such as banks, credit unions, and S&L associations, are not lending. And so far the Fed has proven impotent to make them change their minds. Jawboning and moral suasion have failed.

There is little assistance coming from a Congress devoted to frustrating any proposal that would create jobs and grow the economy. So, the Fed is in the job creating sea alone. There is no working together on job creation between the Fed and the Congress marred by obstructions, filibusters, partisanship, and an aversion to compromise. If anything, the Congress would like to rein in the Fed--for instance, such an effort was made when on July 25, Ron Paul pushed through the House of Representatives a bill to audit the Fed; it failed in the Senate.

At the risk of inviting further Congressional scrutiny, and for the sake of the good of country, the Fed could switch gears to a policy of higher interest rates. Such a policy would be counterintuitive to economic growth views grounded in theories of tax cuts among economists of different persuasions. Yet, if all else fails (and in order to avoid insanity), its time to try something else: to think outside the box, so to speak. Okay, suppose Fed Chairman Ben Bernanke walks the plank and raises interest rates. First, one caveat: there might not exist a critical mass of savers large enough to make raising interest rates viable as a pro-growth strategy. Yet, caveat aside, higher interest rates could accomplish two things: first, stave off possible future inflation by taking money out of the economy (that is, reducing the money supply would prevent higher prices and raise interest rates at the same time); second, increase savers' incomes and also make them feel wealthier. When people feel wealthier (and/or have higher incomes), they likely spend more. And more private spending expands aggregate demand in the economy and with it the employment. Try this--something else, who knows, it might just work.

 

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 
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The FED's money easing should many money cheap for... by Seymour Patterson on Saturday, Sep 1, 2012 at 3:58:27 PM
I have no opinion on this, but, when all fails, tr... by Mari Eliza on Saturday, Sep 1, 2012 at 4:00:33 PM
Dr. Patterson's idea of raising interest rat... by Reza varjavand on Saturday, Sep 1, 2012 at 8:59:48 PM
because it results in less people wanting to borro... by David Chester on Monday, Sep 3, 2012 at 5:16:21 AM
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS! &nb... by David Chester on Monday, Sep 3, 2012 at 5:26:49 AM