The New Economy: More than Justice at Stake

With growing poverty and inequality, there is a clear social justice argument for challenging the central tenets of neoliberalism. But there is also a purely economic argument for challenging these trends. The American economy today, unlike during the Great Depression, is 70 percent consumption. That means only 30 percent is left for savings, investment and government spending. Thus the big driver of our economy is consumer spending -- not surprising given the $300-400 billion advertisers spend to keep us upping our internal debt limits. Those with less disposable income tend to have a smaller propensity to save and this means that tax cuts to the middle class in fact have a much larger positive impact on the economy that further tax cuts for the rich (see The New Republic for a longer analysis of this point).

Republicans have long argued that increasing taxes on the rich (aka "job creators") will cost America jobs and economic prosperity. But there is little evidence to support this contention. Certainly taxing at excessive levels lowers the marginal benefit of innovation and hard work, but we are generally talking about small increases (for example returning to the Clinton era top rate of 39 percent). In fact, if the government collects additional income from the wealthy, and then spends it on, say, a $50 billion infrastructure program, an extension of unemployment insurance and a Social Security payroll tax cut, as Obama has proposed, that would not only boost the economy, but help stamp some of the riskiest behavior among the Wall Street set. 

Tax cuts for the middle and working class thus are a stimulus to the economy, as they spend more of that additional income than would the wealthy. But the ancillary benefit might be more important. When the wealthy have additional income, they often invest that income in increasingly riskier ventures (the driving forces of Wall Street being fear and greed). While this is often an important impetus to innovation (ala venture capital funding), it can also lead to highly speculative investments that fails -- as was the case before the Great Depression and back in 2007-08. So a tax rise for the wealthiest Americans in fact has a two-pronged positive effect on the economy: by shifting income to those more likely to spend it and by better managing risk overall (a key function of Wall Street that they have largely abrogated over the past decade plus). As Americans spend more money, aggregate demand rises and thus the need for companies to supply that increase in demand. This leads to additional employment and still further increases in aggregate demand. 

The major argument against this approach is that it will cause upward pressure on prices (and wages) -- otherwise known as inflation. But if wages and prices rise at similar rates, inflation is only negative to long term investments (if the inflation rate is higher than the rate of return, there is a net loss on that investment for the period). While excessive inflation is a problem, a slight uptick is really only detrimental to, guess who? The wealthy again. Just as government investment puts upward pressure on prices, so does a real stimulus for the middle class. Yet in an economy where unemployment has remained historically high, real wages have declined and economic growth has been largely stagnant, it seems like the most sensible policy. The reality of the economy over the past twenty years is increases in corporate profits and productivity, but a worsening economic circumstance and quality of life for the average American. Isn't it time to do something about it? Unfortunately, the answer so far appears to be no -- as the end of the payroll tax cut and still increasing costs of healthcare have only worsened the situation for the middle class.