Wednesday, December 5, 2012

James Galbraith — The Rich Have Plenty to Give, but Forget Deficits


Summary: Taxing the rich when the propensity to save is elevated reduces their saving and has little to no effect on the economy, i.e., it does not affect either consumer spending or firm investment, hence doesn't affect aggregate demand. However, taxing the middle class, or reducing their benefits, which amounts to pretty much the same thing mathematically, directly affects their spending, hence aggregate demand and the economy as a whole. Deficits don't matter, but if addressing the deficit is so important to some, then tax the rich and leave the middle alone.

The New York Time | Opinion
The Rich Have Plenty to Give, but Forget Deficits
James Galbraith | Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the University of Texas at Austin

17 comments:

Dan Lynch said...

Galbraith seems to be making the common assumption that the rich save most of their income, so taxing their income would have minimal impact on aggregate demand.

However, no one seems to have any data to back up that assumption !

The Citigroup Plutonomy memos claimed that the rich actually had a lower propensity to save than the rest of us. That spending by the rich was a huge driver of our economy.

I don't know if that is true, but on the other hand, I'm not going to assume that the rich save their income just because a 1950's textbook said so. Everything else the Plutonomy memos talked about seemed to be spot on, so I tend to believe their claims.

Tom Hickey said...

In the absence of data, I would assume that the argument hangs on the fact that income at the top has exploded since the crisis, while AD has tanked.

James Galbraith said...

Right.

JG

David said...

Yes, can't we please drop the phony equivalence between (minimal) tax increases on the rich "balanced" by spending cuts that will be devastating no matter which way you slice it.

y said...

Jamie's in the house

paul said...

"Galbraith seems to be making the common assumption that the rich save most of their income, so taxing their income would have minimal impact on aggregate demand."

This has been my argument since day 1. It should be obvious.

The top 0.1% is 315,000 people…compared to 314,685,000. Which group buys more?

How would Walmart's business model do if it could only sell to rich people?

"However, no one seems to have any data to back up that assumption !"

There is plenty of data to support the argument, Who says otherwise? The ratio between incomes of the rich and everyone else has gone up by about 3 to1 over the past 30 years.

Finally, business can't succeed without government spending (no one can), business takes more in revenue than it gives in investment in the aggregate, by about a 3:2 ratio. This is is mathematically impossible without spending and deficits.

Dan Lynch said...

Paul and James, I am no fan of the 1%, but if the Plutonomy memo is to be believed, their spending plays a huge role in the economy. Taxing their income will take money out of the economy -- unless the revenues are redistributed to people who need it more.

But that's not how it would work. The revenues would be used to pay down an imaginary deficit problem, or to pay for the latest war, or to pay for the next bank bailout. Expanded social programs are not on the table. I wish they were, but they're not.

My rule of thumb for tax increases is that any legislation to raise taxes should be linked to legislation spending those revenues to benefit the working class. I.e., any revenues from a FTT should go into the SS trust fund and be used to lower FICA taxes, dollar for dollar. Any revenues from raising income tax on the rich should be used to lower income taxes on the working class. Etc.. Don't just assume that Washington will do something worthwhile with the revenues -- they won't !!! It needs to be spelled out and included in the same legislation.

Tom Hickey said...

My rule of thumb for tax increases is that any legislation to raise taxes should be linked to legislation spending those revenues to benefit the working class.

You realize, of course, that such a view is "communistic" and is based on "class warfare."

paul said...

"Paul and James, I am no fan of the 1%, but if the Plutonomy memo is to be believed, their spending plays a huge role in the economy."

Dan, I'm talking about the top 0.1% mainly, and the money they spend is small compared to the money they extract from the economy. Yes, the money they spend is probably a pretty tidy sum…raising their taxes would have little if any effect on that.

Raising taxes on them would be raising taxes on excess saving, so it wouldn't affect spending at all.

There are many studies that show that raising top marginal tax rates to the 65% range would increase economic activity. Further, the strongest period of growth in the county's history occurred when top marginal rates were 90%.

Where do you think the $12 Trillion in deficits that has been spent into the economy has ended up?

Greg said...

Problem is Dan, when you tie those two things together then eventually those who are funding those things with their taxation say "Stop, Im T.E.A." and those other things go away for lack of funding. Its crucial to break the link between taxation and govt programs so no one can talk about "Spending my money on welfare queens!!"

I suspect that the numbers you are quoting about where the spending comes from have an element of truth to them..... especially now. They are the only ones with extra income to consume so yes, they are carrying the consumption torch.... nominally.

They buy most of the new cars, most of the new houses, they buy most of the inventory in most of the shops around America.

But think about what would happen if the rest of everyone else stopped buying their used cars? Or stopped buying their used houses?

Looking at the numbers and seeing that most of the consumption is coming from about 5 million Americans should be alarming, not used as a talking point to encourage rewarding them more.

Where were the numbers 40 years ago? I imagine then the middle class took a much larger share of the consumption than today.

Matt Franko said...

"Its crucial to break the link between taxation and govt programs so no one can talk about..."

Greg, This looks like what Wray was saying in his part 4... This is good imo... we should try to break this "linkage" that people have.... then the paradigm has changed for them...

rsp,

paul said...

"Its crucial to break the link between taxation and govt programs so no one can talk about…"

It's good (important) to break the semantic link but the mathematical link is there…it's a feedback loop and if we removed it I believe all hell would break loose.

Does anyone think we could maintain $5T+ spending strictly by printing new money every budget?

paul said...

"My rule of thumb for tax increases is that any legislation to raise taxes should be linked to legislation spending those revenues to benefit the working class. I.e., any revenues from a FTT should go into the SS trust fund and be used to lower FICA taxes, dollar for dollar."

That only makes sense…funds should be spent on those that need it and for infrastructure. Regardless of where we spend it initially the bulk of the dollars always end up in the same place…the top 0.1%. The system is designed that way.

paul said...

"They buy most of the new cars, most of the new houses, they buy most of the inventory in most of the shops around America."

I doubt this is true…the 0.1% cohort numbers 315,000 or so, how many cars are sold each year in the US?

Housing is another story,most households that could afford to buy a house had one 10 years ago…so we started lending money to those that couldn't. The rest is history.

And the 0.1% aren't shopping at Walmart or Target either.

I'm a skeptic on this one.

Greg said...

Paul

Im not referring just to the .1% , Im referring to the top 5-10% or about 20-30 million people.

Warren said something like 9-10 million cars were sold I think. I imagine over two thirds of them were bought by those top twenty million or so.


And I agree that the important link is the semantic one. No doubt some money needs to be removed each year as inflation control.

Somehow linking removal of money from paychecks to keeping inflation in check would be nice. If money were removed every April July October and Jan after each GDP/inflation report is released maybe it would be more palatable.

Tom Hickey said...

That only makes sense…funds should be spent on those that need it and for infrastructure. Regardless of where we spend it initially the bulk of the dollars always end up in the same place…the top 0.1%. The system is designed that way.

That's the way capitalism works and why modern economies are all mixed economies to one degree or another. Pure capitalism is socially instable, as well as being financially instable.

paul said...

"Im referring to the top 5-10% or about 20-30 million people"

Greg, I don't consider these folks "rich" so I suppose we have been talking past each other a bit. It's good to flesh these things out though.

The top 1% includes people making more than $375k a year. I have no desire to raise their taxes, they aren't the parasites in my view.

Even the lower range of the top 0.1% is not that bad, say up to $1 Mil a year, but the distribution gets ridiculous from there it seems to me.

I'm also not big on taxing regular income, just rents.

The tax increase proposal for those above $250k are modest and I suspect the starting point would be raised if it weren't for the existing framing of the Bush tax cuts and how difficult is is to get anything done in this environment.