Popular Economics Weekly

The debt ceiling debate is about to begin again, and House Speaker Boehner has said he will continue to press for more tax cuts without raising additional revenues, reviving the possibility of more budget gridlock and credit downgrades. "I believe that raising taxes at this point in our recovery is a big mistake," Boehner told reporters. "At a time when we’re trying to help small businesses create jobs, this proposal would kill jobs."

But it is a mistake to cut taxes without raising revenues. We know GW Bush’s tax cuts enacted in 2001 and 2003 to revive an economy flattened by the dot-com bubble bust have cost plenty. And we know what happened to all that money saved by corporations and individuals.

Not much. Just 3 million jobs were created during Bush’s 8 years, household incomes did not even keep up with inflation, and yet corporate profits are up more than 14 percent as a percentage of GDP—the highest in history.

So most of the money flowed to corporations—who are currently hoarding more than $2 trillion in cash—and the top 1 percent income earners who benefited most from the tax cuts. And since the top 1 percenters spend less of their money than the 99 percenters, much of it is being held in banks that have almost $1 trillion in excess ‘zero sum’ deposits that aren’t being put to work to revive this economy.

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Graph: CBPP

Then what would really put all that cash back to work to grow jobs and the economy? We know the answer is to invest more money to grow the future, but how without even more debt? Dr. Robert Shiller of Irrational Exuberance fame, and Cornell Professor Robert Frank have written wonderful New York Times Op-eds on just how to do it.

It’s almost absurdedly simple in principle. Dr. Shiller says that William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Nobelist Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.

“It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged.”

And Professor Frank disputes austerity proponents who say governments can’t spend beyond their means indefinitely, any more than businesses or families can. He says “It’s a fair statement if we’re talking about the long run. But in the short run, it’s utterly false…Consider an indebted family that must decide whether to borrow $5,000 to install additional insulation in its attic, a project that would reduce its utility bills by an average of $100 a month and require loan payments of $50 a month. In the short run, obviously, the project would increase the family’s indebtedness. But can there be any doubt that the family would be better off, in both the short and the long run, by going ahead with it?”

In other words, one must spend money to make money, and it can be done in a balanced way. That also means it can be done with either public or private monies that gives a public benefit, such as making up the $2 trillion deficit in infrastructure repairs. And if private business won’t invest sufficient funds, as at present, then public monies must be used.

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Graph: CBPP

We also know that tax cuts don’t create jobs or spur growth by themselves. The Bush tax cuts are the most current example; in fact helped to cause the Great Recession. For much of the excess profits were spent on market speculation—especially in subprime loans and payday lending to the poorest among us—that caused the housing bubble.

An excellent book by Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc. — How the Working Poor Became Big Business, documents that “Poverty Inc. was a roughly $150 billion-a-year industry at its peak, Rivlin calculates, after totting up revenue at pawnbrokers, payday lenders, money-wirers, rent-to-own operators, tax preparers who offer instant tax “refunds,” subprime credit-card providers, subprime-mortgage lenders and all the rest”, according to a Bloomberg News review.

We also know the cost of the Bush tax cuts, which had to be paid for with taxpayer dollars, since they were one of the major causes of the deficit due to the lost revenues at a time we were paying for 2 wars.

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Graph: CBPP

It’s more than $3 trillion to date, according to the CBPP, and would cost taxpayers another $3.6 trillion if extended over the next 10 years. In fact, if the Bush tax cuts were allowed to ‘sunset’ this year, the federal budget deficit would stabilize. So it makes no economic sense to advocate tax cuts without revenue enhancers, and there are plenty, from closing loopholes, to certain interest exemptions. So austerity is not the answer—neither here nor in Europe.

Harlan Green © 2012