Throughout this year’s campaign season, the Republican Party promised to reduce the nation’s rapidly growing debt by slashing federal spending for everything but the military. But permanent fiscal austerity of the kind embodied by the Ryan budget and the Romney/Ryan campaign platform would exacerbate the biggest economic problems facing the country—inequality and unemployment—while also depriving the federal government of the tools it needs to correct them. By denying the government’s responsibility for the overall health of the economy, the Republicans’ fiscal and monetary policies would expose Americans, rich and poor, to the dramatic swings of the business cycle. The U.S. economy used to be much more volatile. Before the New Deal and World War II, there were bigger crashes and longer recessions. The regulation of business (especially banks and financial markets), the creation of a safety net, and countercyclical fiscal and monetary policy have all dramatically improved economic outcomes, and have led to a long period of economic growth and shared prosperity. In the postwar period, a rising tide really did seem to lift all boats.
Starting with the Reagan Revolution of the 1980s, however, the Republican Party—too often with the support of some Democrats—began to dismantle the policies that had promoted greater equality and kept recessions short and shallow. As worker protections were removed, real wages stagnated. With the deregulation of banks and financial markets, the incomes of the top one percent began to skyrocket and financial markets became much more unstable. Unregulated financial innovations—which were said to reduce risk—turned Wall Street into a casino. Investment banks, whose primary function had been to direct capital to real businesses that could make productive use of it, grew fat on reckless speculation. Washington, meanwhile, looked the other way, persuaded that the only restraint the financial sector needed was provided by the market itself.
Just four years after the crisis on Wall Street, the GOP has succeeded in rehabilitating this dangerous illusion. The central argument of the Romney/Ryan campaign has been that the government is getting in the way of economic progress. Government spending, they say, is crowding out private investment. High taxes and regulation are discouraging entrepreneurs. On this view, the real cause of unemployment is unemployment compensation, which takes away the incentive to find work. Likewise, welfare programs don’t relieve poverty; they make it worse. And health-care costs are high mainly because of tax benefits for employer-provided health insurance. Whatever the problem, government intervention only compounds it, and the market is always the solution.
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Paul Ryan has adopted an “originalist” interpretation of the U.S. Constitution as his guide for understanding the proper role of government in the economy. But our twenty-first-century economy has little in common with the economy our founding fathers knew. Back then, there wasn’t much the government could do to promote economic growth, besides enforcing property rights, providing law and order, ensuring a sufficient supply of (slave) labor for plantations, and taking land and natural resources from the Native Americans. Since then, the government has gradually taken a more active role in promoting the country’s economic development—from helping to develop Wall Street to subsidizing the railroads and the oil industry. With the New Deal, the federal government came to the assistance of workers, just as it had previously come to the assistance of rich industrialists. This eventually led to the middle-class majority that emerged after World War II.
Nearly every major technological development in the past seventy years can be traced back to government spending. It was research paid for by the government that led to computers and the internet, to the Green Revolution in agriculture, and to many other advances in science and technology that have greatly improved our standard of living. Of course, the government did not accomplish these things alone—businesses and universities were necessary partners—but few of the most important scientific discoveries and technological advances of the past century would have occurred without the government’s involvement.
One can obviously find examples of government interventions that were harmful to an economy, but no modern country has achieved economic success without a strong and active government leading the way. On page 42 of his most recent budget plan (.PDF), Ryan states that “no economic system in the history of mankind has done more to lift up the poor than America’s commitment to free enterprise.” In fact, most other developed countries have done a better job of lifting their citizens out of poverty. There is more upward mobility and less poverty in countries that make sure all their citizens have access to health care and higher education. So Ryan’s claims about the success of laissez-faire economic policy find no more support in other countries than they do in other periods of America’s own history. Whatever the intuitive appeal of his pet theory, it runs counter to the available evidence.
The central argument in Ryan’s budget is that we need to cut government “spending so the economy can grow.” Now, it is possible for government spending to crowd out private spending, but only when the economy is at or near full employment. In such cases—for example, during World War II—an increase in government spending will either come at the expense of the private sector or cause inflation. (During the war there were price controls and rationing to prevent inflation.) Today, however, when over 12 million Americans are still unemployed, there is no reason to think more government spending would inhibit private investment or lead to runaway inflation. And with so many people looking for work, it makes no sense to cut public-sector jobs hoping that will eventually lead to more private-sector jobs—as if only jobs that help an employer make a profit are acceptable. Jobs are jobs, public or private. A public-school teacher is no less employed—and no less well employed—than a banker or a sales clerk.
Ryan also claims that the poverty rate is increasing because of higher expenditures on programs like food stamps and that unemployment is high because so many people are receiving extended unemployment benefits. As with his argument that economic growth is low because of federal spending, Ryan is once again confusing effects with their causes. The high unemployment rate is due to insufficient aggregate demand, not to unemployment benefits spoiling potential workers. Making unemployed people more desperate for work by cutting their benefits will not create new job openings, and cutting benefits will only hurt the economy by further reducing demand. After all, the unemployed spend whatever money they get from the government, and spending is precisely what the economy needs more of right now. In fact, unemployment insurance is one of the most efficient forms of economic stimulus: according to the Congressional Budget Office, it has a 1.45 multiplier effect. By this measure, unemployment benefits are 3.65 times more effective at stimulating the economy than tax cuts for the wealthy and 7.25 times more effective than corporate-tax breaks. Just as important, most evidence shows that benefits to the poor are much too low to create a disincentive to work, and that tax rates on the rich are nowhere near high enough to discourage them from working more.
Ryan’s obsession, the deficit, is yet another area where he has confused cause and effect. The high deficits the government is now running are the effect of a weak economy and a lack of jobs, which together cause revenue to decline and expenditures to rise. The best way to reduce the deficit is to create jobs. Cutting spending now would cause the economy to shrink again, raising joblessness and thus increasing the deficit. The experience of European countries that have adopted austerity policies demonstrates what would happen here if the Ryan approach were followed. Of these countries, only Germany has seen any success—and this is because of growth in its export market. But not every country can improve its trade balance, for the simple reason that for every country running a trade surplus, there has to be a country with an equal trade deficit. Ironically, Greece’s economic problems have helped Germany’s exports by reducing the value of the euro. But as the economies of Brazil, Russia, India, and China slow down, Germany will run out of places to export its manufactured products. At that point it too will face rising unemployment rates, just like the rest of Europe.
While Ryan’s proposal to cut federal aid to the poor will cause an immediate increase in unemployment, his plan to transform the Supplemental Nutrition Assistance Program (SNAP) and Medicaid into block grants could end up being even more damaging. Ryan is worried that these programs are growing too fast; turning them into block-grant programs could limit this growth, but only by reducing eligibility or benefits. Such a move would also limit the government’s ability to stabilize a faltering economy. Entitlements are what economists call “automatic stabilizers”—changes in expenditure that kick in automatically to counter the boom and bust of the business cycle. While economists argue about the effectiveness of discretionary fiscal policy (when Congress votes to raise or reduce spending or taxes in order to slow the economy down or speed it up), few debate the effectiveness of automatic stabilizers. The problem with discretionary fiscal policy—for example, the stimulus package of 2009—is that it takes too long to work. It can take months to realize that you’re in a recession, months more to reach an agreement on what to do about it, and then another few months for the new spending to kick in. This is why there was so much emphasis in the 2009 stimulus package on “shovel-ready programs”: when the economy is in a steep decline, you want the spending increase to take effect as soon as possible. With automatic stabilizers, there are no lags. As soon as the unemployment rate starts to rise, spending on unemployment benefits increases without delay. Likwise, when the economy starts to grow again and the unemployment rate falls, spending on benefits falls off too. Most important, when the economy goes into recession the federal deficit goes up, providing stimulus to the economy and balancing the shaky portfolios of banks and corporations, as they move out of risky assets and into safe government bonds. And when the economy nears full employment, revenues increase, spending falls, and the supply of government bonds declines along with the demand for them.
This “portfolio effect” played a major role in stabilizing the financial system during the 2008 financial meltdown. Turning entitlement programs into block grants to the states would keep such programs from growing in response to greater need during a recession, or it would require special congressional action to increase the block grants. But even if Congress was willing to do this (which is far from certain these days), the economy would have to wait for months, if not years, for the adjustment to take effect. Thus, turning these federal entitlement programs into block grants would not only hurt the poor; it would make the entire economy significantly more unstable. Under the current system, the government is prepared for predictable downturns. Under the Romney/Ryan plan, the government would at best be playing catch-up.
The Republicans also claim that the tax system’s complexity is a major drag on the economy, and that simplifying it will lead to greater growth. History tells a different story. In the four years before Reagan simplified taxes (1983 to 1986), the economy grew at an average rate of 4.8 percent; in the four years following the simplification (1987 to 1990), the average growth rate fell by a third to 3.2 percent. While no one supports an unnecessarily complex tax code, there is no evidence that the current number of tax brackets is inhibiting economic growth. The charts in Ryan’s own budget show that high marginal tax rates on the wealthy are not a barrier to economic growth or job creation: the economy created more jobs in the 1970s, when top marginal rates were very high (between 70 and 90 percent) than it did in the 1980s, ’90s or 2000s, when rates were much lower. Over 20 million civilian jobs were added in the 1970s, compared with 18 million during the ’80s, 14 million during the ’90s, and just under 3 million from 2000 to 2009. Most economists who have studied the disincentive effects of marginal tax rates think they would have to be higher than 60 percent before they would become a disincentive to economic activity. (The top rate is now just 35 percent.) The fact is that when marginal rates go up, most people work more to keep their after-tax income from falling.
The Republicans’ use of the debt as an excuse for gutting entitlement programs they never liked in the first place is part of a long tradition of plutocrats taking advantage of the disastrous effects of their own policies to push through even more disastrous policies. As G. K. Chesterton noted long ago:
The key fact in the new development of plutocracy is that it will use its own blunder as an excuse for further crimes. Everywhere the very completeness of the impoverishment will be made a reason for the enslavement; though the men who impoverished were the same who enslaved. It is as if a highwayman not only took away a gentleman’s horse and all his money, but then handed him over to the police for tramping without visible means of subsistence.
Like the Great Depression, the Great Recession had many causes, but the most important cause of both was income inequality. When too much money goes to the very top, not enough money circulates in the real economy, where it would create jobs and raise people’s standard of living. Compensating for this problem requires higher levels of private investment and more debt, public or private. Not coincidentally, these were the things that fueled the last economic boom, which came to an abrupt halt in 2007. When reality finally caught up with the real estate market, only government borrowing was left to keep the economy from imploding. The only real path to lasting prosperity is more economic equality—making sure the average American has enough money to pay for the things the economy produces. Only by addressing inequality will we be able to lift up the poor, create jobs, and raise standards of living without the help of another bubble.
Joseph Dunn
Let me make myself clear. I am not challenging you, but questioning you. You speak a lot about patents, inventions, and Apple. You also seem to slant yourself towards the position that taxes are not the solution to our current problem. "So, if we resolve the fiscal cliff questions, will the resolution involve higher taxes on corporations and investors (which includes 47% of American households)? Or will we adopt some reforms that encourage investment?" I your previous post, you appear to accept the fact that America's economy grew at a greater rate during a higher period of taxation, and that growth was more equally distributed. You also know that corporations are currently sitting on a large sum of cash. So, I ask you, how do you propose that we encourage investment? Considering that these profits and stock market gains were made at the current level of taxation, it is obvious that taxation is not what is preventing investment. Three current tax proposals have been: The Buffett Tax (increase on the tax rate of millionaires), the Robin Hood Tax (a tax on speculative trading that the Vatican has endorsed), and a tax on capital gains (the most lucrative loophole for millionaire/billionaires). Do you support any of them? The Republican Party has vowed to oppose any new taxes. Also, if you don't, do you have any non-tax proposals as to how to encourage investment in a revenue neutral, or preferably revenue generative way? I guarantee you, if the money is taxed, it will get spent. The only idea I have yet to hear comes from Paul Krugman. He suggests that the Fed ramp up inflation to at least 4% to make that money corporations are sitting on become a liability. They will spend it quicker if it is losing value. However, I am unsure about this option. Although corporations may be encouraged to invest with a higher rate of inflation, I don't know if average wages will keep up.
Dear Charles, Jeff, and Paul:
Thank you for all the time you put into this discussion. As I stated earlier, I have little doubt that you all are not decent and intelligent people, and hopefully, good hearted Catholics.
I never had any intention of getting involved in back and forth party accusations, any more than I had intentions of getting into a deep discussion on economic theory. If you see it as a cop out on my part, my apologies, but I just can't do these types of disucssions any more, as they serve none of us in the final analysis.
For the record, I'm not a fan of either party, nor am I a Repbulican (or an Objectivist). I'm a registered Independent, ex Democrat, but prefer to ID myself politically, as simply, "Catholic." Consequently, I will be voting R as the best of the less than ideal, and hopefully enough to at least stop the bleeding and avoid the church taught intrinsic evils. Like you Charles, I don't write to "win", or even to have the last word. If one reader at least "prayfully" sees more Christ and less "politics", then the discussion and time invested was worthwhile.
Again, I don't discount the importance of the discussed issues, but quite frankly, none of them are the "fix" anymore than an aspirin is going to save an end stage cancer patient.
One thing that we probably all could agree upon is that as Catholics, we have failed our country. For that, we will all be held accountable, self included. Not only have we been "given much", but we are also the majority voting block, if, we truly voted as Catholics.
As Ron Paul said in one of the debates when asked about abortion, (parapharased), "When we change (meaning hearts), so will the people we elect and the laws governing our society." All that we see out there is simply a reflecetion of "us."
And the sight ain't pretty: Abortions on demand, same sex marriage, a contracepton mentality, useless wars, race baiting politics, idolatry, massive pornography addiction, attack on religious freedom, massive sexual abuse, drug addiction, single parent 'families' by choice, racial divide, and the list goes on, and on and on...
Dr. Peter Kreeft once said in one his many great lectures (again paraphrasing a bit), that "if we fail as Catholics, to whom much has been given, especially the Eucharist, God will send someone else to do the job." Who but God knows, but hey, maybe he's sending a Morman!
In the meantime, our main job is to "be Catholic" and the light, to those among us, allowing the Holy Spirit to use us to change one heart at a time. When and if we become "real Catholics", those around us will "want what we have", subsequently, the "politics", and the economics, will follow.
After all, the fight might be long and hard, but in the end, we already know who wins!
I have no idea whether the Congress and President will avoid the fiscal cliff, or how they might finally agree to do that.
The economic growth of AMerica's high tax era can accrues out of many forms of economic activity, including WW II, Korea, Vietnam, orders for capital goods as Europe was rebuilt after the war, and stimulative spending for highways, housing, nuclear arms and a space program at home. Let's not forget that this period ended in a bout of inflation that was particularly devastating to those on fixed incomes, and that (as I wrote earlier) this was an era of limited blessings unevenly distributed. I believe Professor Clark wrote that race-specific data on income- and wealth-sharing was not available until 1967, but there is little dispute that (1) blacks were economically segregated throughout that era, which produced the urban riots of the late 1960s, and (2) white women were limited in their career options in that era. The lack of detailed economic data does not permit discounting of the abundant historical records.
The ways to encourage investment in business and private-sector innovation are self-evident when we consider our own behaviors. Some part of a person's (or a corporation's, or an institution's) savings are usually kept in cash for near-term needs or emergencies. Beyond that, an individual, treasurer, or trustee, seeks a higher reward by committing some savings : opening a new business, to higher-risk ventures. The coporarte board and executives will commit the available cash (buy new equipment, hire more people, etc) if/when they believe there is an opportunity to grow the coporation's profits. An individual or institution decides to commit the available cash on the same basis, buying shares of corporations that are likely to increase their profits and thereby raise their share price. The tax treatment of corporate profits is an issue even for tax-exempt institutions, since only the after-tax profits can flow through to the investor or cause the share price to rise.
Warren Buffett is one of the century's most successful investors. He made much of his money in the public stock market that so many like to think is rigged, and all the while he was disclosing his methods annually in the Berkshire Hathaway Chairman's Letter. Mr. Buffett recommends a higher marginal income tax rate on higher incomes, and higher estate taxes, at least on large estates, to help ease the government's annual revenue shortfall and so to keep heirs, who might be poor stewards, from mismanaging large sums of money. But in The Snowball, a biography in which he was much involved, Buffett is reported to have given each of his children multi millions in birthday gifts, spread over many years, clearly leaving them able to live far beyond middle-class lifestyles, even if they never inherit a penny at his death. Mr. Buffett also has generously donated billions of dollars worth of stock to several foundations, including the Bill and Melinda Gates Foundation. It would seem that Mr. Buffett finds these foundations to be more likely better stewards of his legacy, (more likely to promote the common good?) than the federal government, to which he could have left these same billions. So, I read Mr. Buffett's tax-code prescriptions with some question about his core beliefs. Fortunately, his generosity is doing good work, and will do good for many decades, in the non-profit sector, whatever the rationale.
The Robin Hood tax (known years ago as a Townsend tax) raises the question: what is a "speculative" trade? There are many variations in this proposal, so it is hard to predict the outcome, but most verisons claim that "this would be so minor as to be of immeasureable effect--couldn't possibly have any negative implications--think of the fabulous sums of money to be raised." One lesson from history: When Woodrow Wilson signed the Underwood Act in 1913, as the nation's new federal income tax, it enacted a tax of one percent against only that income that exceeded a very generous exemption that excused most individuals and families from any income tax. In other words, it was a one percent tax on upper incomes. Sounds like so minor as to be of immeasuraable effect--couldn't possibly have any negative implications--think of he fabulous sums of money to be raised). Wow, how far we've come!
There already is a tax on capital gains, so I'm not sure exactly what your question is. I do find it strange that we give "long-term" treatment to any investment held for one year plus one day, although few business people would agree that one year constitutes a real, long term commitment. Why not one rate for an investment lasting 366 days, another lower rate for an investment held 5 yrs, and a super-low rate for an investment held 10 yrs? That would promote investment over speculation, encourage savings and investment (a core of middle-class prosperity).
Mr. Bernake probably prays nightly for even 2-3% inflation, and seems to be doing everything possible to accomplish that, so I am not sure what Paul Krugman is proposing.
Let's think carefully about all these issues. Since non-profits take care of, ny definition, those who fall through the cracks of government programs, (thereby exercising a preferential option for the poor) we need to be very careful about limiting corporate profits or investment gains, as numerous studies have shown these to be the biggest determinates of charitable giving, and of the income that supports endowments, foundations, etc.
Joseph J. Dunn
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Joseph Dunn
Krugman and Bernanke disagree about the Feds current target for inflation.
http://news.yahoo.com/blogs/daniel-gross/krugman-fed-tolerate-higher-inflation-reduce-unemployment-131023690.html
You are correct in saying that there is a already a tax on capital gains, but the rate is much lower than the rate for ordinary income. It is the most lucrative loophole for top income earners who take a majority of their income in capital gains. So, I am talking about closing that loophole, which would imply raising the capital gains tax rate.
I think you an I agree that non-profits and charities serve the common good more efficiently than government. However, they rely on the generosity of donors, and I think it is unrealistic to assume that charities will "fill the void" of the proposed cuts to the safety net. Bread for the World estimated that every church in America would have to raise an additional $50k to offset Paul Ryan's proposed cuts to nutritional assistance. To compund the situation, the church's that serve the communities that will be hardest hit are the church's that will have the toughest time raising revenues. I don't see it happening.
The capital gains rate is the same for high and mid-income earners (there is actually an exemption for lowest income brackets, but that could go away if the "cliff" occurs). Let's also remember that the money that is invested (in stocks, bonds, etc.) has already been taxed once if it was earned as wages, salary or cash bonus, all at the applicable ordinary income rates. If the current investment was bought with money obtained as dividends or capital gains from earlier investment, then that money was already taxed multiple times (dividends are taxed once as profits on the corporation's income tax, again on the recipient's individual income tax). So, taxes paid on capital gains or dividends are funds paid to the Treasury for having saved and invested, rather than spent. I'm not arguing against taxes on dividends or capital gains, but this is a strong argument to be made for discounting these rates to something less than the rates on ordinary income. There is a strong social benefit derived from having businesses that can employ people, launch innovative products, and otherwise serve customers. Business formation does not happen without investment, and investment does not happen without opportunity for profit (after taxes) that persuade the investor to take the risk. This cycle of investment, its role in society, and its motivations, are a major topic of After One Hundred Years: Corporate Profits, Wealth, and American Society, because I realize it is little understood.
There is a noticeable tendency for many people to regard all wealth as suspect and to regard taxing it as vital to convert it to the common good. I think many people would be interested to read about the wealth that funded the work of Mother (now Saint) Katharine Drexel among blacks and Native Americans (probably the poorest of the poor, in her era), and the impact that the Depression had on her work. Her correspondence of the New Deal years is part of the historical record we need to consider. The work of John J. Raskob, who made a fortune as an executive of DuPont and GM, and who contributed vast sums to the work of the Church globally, and to his home diocese in Wilmington, DE, is also instructive. His letters of 1937 are part of the Depression story that is too little known, as are accounts of the Rockefeller, Carnegie, and other fortunes. We ought to be aware of these stories as we consider how best to restore our economy, especially with a preferential option for the poor. Those also are covered in my book. We will be a sadder society, by far, if we neglect these lessons of history, and as always the poor, or the least educated, will suffer the worst of it, as they did in the 1930s.
I don't assume that charities will fill the void left by cutting government funds to social programs. I do believe that some government funded programs spend inneficiently and I point to some examples. I also point to studies of the wealth and income gap that correlate these very closely with gaps in functional literacy. All of us have obligations to stewardship, as well as to charity and justice. To get to the whole story, I did six years of research. It is a fascinating human interest story, and I wrote it to point clearly to the most powerful levers of social justice, and how we might use them.
Joe Dunn
Thank you for your time and input Mr. Dunn. I'm not sure I can stand with your position on capital gains. The rate is the same for middle and upper income earners, but middle income earners never can and never will take the majority of their income in capital gains as do top income earners. The tax rate on capital gains is less than the income tax rate for middle income earners, and that is what allows top income earners to pay an overall lower rate than the middle class. I do not think that greater investment alone is sufficient justification for this. If we are going to allow this loophole to continue, then I would think that at least the Buffett Tax is decent option. The debt crisis, budget cuts, and the fiscal cliff make these options all the more urgent. However, I realize I am not an expert, and I could definitely learn much from your research.
Voodoo economics is the gift which keeps on giving.
Prior to voodoo economics, we paid down the debt to GDP ratio from a post WWII high of 1.25, clear down to close to 0.3, at the end of the Carter administraiton. This happened during both GOP and Democratic administrations. It happened despite Great Society spending, Vietnam War spending, despite recessions, and despite stagflation.
We also had reasonable ratios of CEO pay to worker pay. We also were in no danger of developing a British-style, to-the-manner-born class system. We lived in a great country.
Then came voodoo economics. The idea that massive tax cuts would generate massive economic growth and, as if by magic, the economic growth would be so great that more revenues would come flowing into government, despite the lower tax rates, and that the tax cuts would actually pay for themselves.
This argument proved irresistable. What politician ever got into trouble by cutting taxes? What politician ever got into trouble by suggesting a tax increase? Mondale. What politician ever got into trouble by actually agreeing to a tax increase? George HW Bush.
Fast forward. Even conservative economists agree. Tax cuts don't pay for themselves. They bleed revenue from the government. They don't grow business as much as is claimed. Part of this is just common sense. When tax rates are cut, there is more incentive to take money out of a small business and invest it in real estate, secondary equities and securities, precious metals, foreign currency, art, and plain old creature comforts. With higher tax rates, there's more incentive to put profits back into the business (where they won't be taxed).
So what is the result? During and immediately after Reagan, the debt ratio exploded, back up above 0.6. With tax increases, the debt ratio came back down. With the Bush tax cuts, the debt ratio again exploded. With the Obama tax cuts, the deficit continued to soar.
With all those minimally-taxed profits, money was taken out of businesses and invested not in growing old or building new businesses, but in creating a stock market bubble and a real estate bubble. CEOs took home more money and got ever more greedy.
Rather then reward employees with raises (thereby avoiding taxes on profits), with low tax rates it increasingly made sense to keep wages low and maximize profits to be taken out of companies. With the gutting of the inheritance tax, we are watching the emergence of an American to-the-manor-born "scion class." The Waltons and Larry Ellison are endowing their progeny in perpetuity. It's going to change the fabric of the nation.
If a poor person wants to aspire to the American dream, he'd have a better chance in Denmark and a dozen other nations than he/she would have here in the USA.
I hate voodoo economics. It's a cancer. It's the worst thing which has happened to the USA during my Baby Boomer lifetime. And no one has the guts to do the right thing, which is to do the conservative thing, which is to pay our bills in real time, rather than borrowing money and digging ourselves into an ever deepening hole.
- Larry Weisenthal/Huntington Beach CA
Both Messrs. Keller and Weisenthal raise interesting points. But I submit that a "war economy", which is what prevailed almost continuously in the years 1940 (some might start at 1939) to the early 1990s is very different from a "peace economy." From 1940 to 1990, defense/military spending consistently exceeded 5% of GNP, and in the 1950s and -60s was often at or close to 10% of GNP. Most noticeably during WW II years, when most GNP was devoted to military purposes (national survival was the priority social need), much of those investments in plant and equipment were paid out of government funds. After the war, buildings and equipment originally funded by the government were auctioned off to civilian buyers, at market prices. War suppliers had little investment risk, as their contracts with the government assured full payment--no credit risk, and no risk that a competitor will suddenly produce a product that renders yours less desireable or obsolete. As long as the product meets specifications, payment is due. This is a model completely unlike a marketplace of sales to civilian customers where all of these risks are continuous. In a war economy, with relatively little risk to an investment, and relatively little up-front capital investment required, investors did not have any need for investment returns greater than that afforded by US Treasury bonds (at the time, known as War Bonds). So, the economy worked with high income tax rates. Quite simply, little risk required little reward. It did not, however, create new jobs as quickly as possible (see JFK speeches on this). The large numbers of active-duty military personnel were, by definition, out of the civilian workforce. In 1955, military personnel totalled 3 million; in 1965, 2.7 million, in 1975, 2.1 million, in 2010, 1.4 million. A smaller military means more civilian jobs, producing peacetime civilian products, are needed. That means more civilian, peacetime investment is needed.
As we raise taxes on investment returns through either the corporate or personal income tax systems, we reduce the incentive to take investment risk. In a peacetime economy (perhaps not universal peace, but in which military spending is less than 5%, as from 1990 to today), the amount of investment needs to grow. Promoting demand, perhaps through unemployment insurance and other economic stabilizers aimed at stimulating demand, still prompts less investment as we ratchet down the potential rewards for that investment risk. We cannot save our way to a sound economy (Professor Clark's point in this article, and he is correct) but we cannot tax our way to a sound economy either.
To Mr. Weisenthal's point, both the Kennedy tax cuts (passed after his death) and the Reagan tax cuts did grow federal income tax revenue. The revenue gains from Reagan's 1986 cuts were outrun by increased non-defense spending, thus the deficit growth. All of this can be confirmed with quick reference to the Statistical Abstracts of the US.
For me, the strongest indictment of the Buffett Rule as a guide to taxing is that in a peacetime economy we need both demand for civilian, peacetime goods and servoces, and we need returns on investment that are commensurate for the risk. ("We" includes the non-profits that benefit greatly in times of economic growth, and that see their incomes, as well as donations, decline in times of declining or anemic economic growth, and the poor who are the last to get a job, a raise, etc in such times). But the other indictment against the Buffett Rule is that Buffett does not follow it, as made clear in the biography, The Snowball, in which he actively participated. He has done much for his shareholders at Berkshire Hathaway, and contributed much to philanthropy, but the Buffett Rule he proposes (higher taxes on capital gains, and high estate taxes) contradicts the patterns he has followed throughout his own career.
We need to think carefully about what is truly effective promoting the common good.
Joseph J. Dunn
Mr. Dunn
In Buffett's defense, he admits to paying a lower tax rate than his secretary, and has never blamed the rich for not voluntarily paying more in taxes. He has always claimed the problem is systemic. The system that allows billionaires to pay less in taxes than their secretaries is the problem. He has never claimed that the problem is that the rich do not voluntarily donote to the federal budget.
You say that you are interested in Catholic Social Teaching, the common good, and maintaining revenues needed to continue federal programs aimed at promoting the common good. Yet, you appear to be opposed to all measures aimed at increasing revenue in order to reduce the severity of the cuts to those programs. You do mention that federal revenue increased following the Reagan tax cuts. Interesting for you to say. I think I know where you are going with this. Would you propose that another tax cut will lead to increased revenue?
First, I would say that it is debatable whether the Reagan tax cuts are what actually "caused" the gains in revenue. But, let us assume that they were the cause. I haven't heard any serious economist or policy center purport that we would see the same result now. Where on the Laffer Curve do you think our current tax rates fall? During the Reagan era, the top tax rate was 70%. One could reasonably argue that a tax cut will lead to a revenue gain. However, at 35%, that's a tough one to sell. The Bush tax cuts are widely viewed to have contributed to the deficit through the billions in lost revenue. I don't see how another tax cut would be any different. I might add that the top tax rate was raised by 5% at the begining of the Clinton administration without negatively affecting the economy. Also, in a recent survey of economists, the majority of them stated that we need to raise taxes in addition to cutting spending. http://economywatch.nbcnews.com/_news/2012/09/24/14048116-raise-taxes-and-cut-spending-business-economists-say?lite
You speak of the Reagan era as a golden age for innovation. I don't deny that the number of patents increased during that time period, or that it was caused by increased funds available to investors. Yet, you cannot deny the immediate and lingering consequences attributable to the deep cuts to the safety net. A dramatic rise in homelessness and violent crime were among some of the immediate effects. Also, as Professor Clark pointed out, wealth has shifted to the top. The top 1% of income earners have seen their wealth increase exponentially, while average worker wages have remained stagnant or declined. Politifact recently confirmed that the wealthiest 400 people in America own more than the bottom 50%. These are serious issues to consider in our search for the "common" good.
"Therefore, it must be borne in mind that grave imbalances are produced when economic action, conceived merely as an engine for wealth creation, is detached from political action, conceived as a means for pursuing justice through redistribution." - Pope Benedict XVI
Mr. Keller
Mr. Buffett needs no defense, and I commend, as I wrote earlier, his generosity and his leadership in business and philanthropy. I simply point to several inconsistencies between the "Buffett Rule" and his actions over many years.
I am opposed to proposals which are well-intended, and which the proposers may honestly believe would benefit the common good, when the clear lessons of history (including the work of economists) show that the proposals would actually be detrimental to the common good. The historical experience, and the economic studies, are described in human-interest style in 414 pages in After One Hundred Years, and are therefore hard to summarize here. Similarly, it is difficult to point to one or a few quotes from an encyclical or scripture to capture the full scope of CST. All of the information in After One Hundred Years is carefully footnoted, so a reader can have confidence in it. I wrote it to provide information that would advance the goals of CST, as set forth in the encyclicals and episcopal letters.
To your questions: Would I propose that another tax cut would lead to increased revenue? Dr. Christina Romer, chair of President Obama's Council of Economic Advisors, has studied every change in federal taxation since the end of WW II. Her study concluded that every tax increase (by definition, including the Clinton tax increase) caused a significant, negative impact on GDP, and every tax reduction caused a significant positive impact on GDP. Those interested in promoting employment and service to the poor (often accomplished by non-profits) need to be aware of that, as do our legislators. Similarly, federal tax revenues rose after the Kennedy tax cuts, just as they did after the Reaan tax cuts, especially the massive 1986 cuts. In each event, the change in tax revenue between pre-cut an post-cut are documented in federal records: lower tax rates did produce rise in revenue growth. There is also the urban legend that Reagan cut non-defense spending as he cut taxes. But the record (see Statistical Abstract of the US, 1993, Tables 509-512) shows that non-defense spending (also known as human resources spending) increased 10% annually in the fiscal years 1986-91. So, "deep cuts to the safety net" did not happen, and if there was a "rise in homelessness and violent crime" (I don't have any statistics, so I cannot agree or disagree) they did not come from "deep cuts in the safet net." Urban legends can distort our thinking about tax policy and how best to rebuild prosperity for the middle class and security for those in need. We need to work from facts. This is important, not just because right moves aid the middle class and the poor, but also because wrong moves cause real misery.
Where on the Laffer cuve do I think we are, and would another tax cut work the same as earlier ones have? The Laffer curve is a valuable graphic for making an important conceptual point, essentially the point that Dr. Romer's research confirmed. It is not calibrated to any particular rates between 1% and 100%. It was originally drawn on a napkin at a dinner discussion. If we are looking for innovation to boost new job growth (as President Obama urges), tax changes that in the past have boosted innovation would seem logical, and changes that suppress innovation would seem illogical and, by the way, harmful to the unemployed.
I don't argue with a statement that says we need more revenue as part of getting, at some point, to a balanced budget. I do argue with any statement that says higher tax rates will produce more revenue. Too much history and too many economic studies argue against that broad statement.
Something to ponder: Pennsylvania's income tax has long been a simple affair. One rate, 3.07%, is charged against all income except pension income. No deduction for home mortgage interest, local taxes, blindness, number of children, etc. The only deductions are for work expenses required by law or by the employer (uniforms, safety equipment, etc). Dividends and capital gains net of losses are taxed at the same 3.07% rate. Simple, direct, everybody gets the same deal. Would that approach (I don't presume to know what the rate should be) be better for the common good than the current federal income tax approach?
The wealth gap has indeed shifted in the past 30 years. Let's look closely at the factors involved, as a guide to how we might address the causes. Several studies have documented simultaneous growth of a literacy gap, and importantly, an increase in the percent of adult Americans who are functionaly illiterate. There is also a very visible correlation between literacy levels, income, and wealth. The findings of these studies are so compelling that I believe we need to formally acknowledge a new disenfranchised minority: those who are functionally illiterate. If we define our underpriviledged in that way (rather than by race, ethnicity, zip code, etc) we might design programs that directly address causes of low employment prospects, high reliance on public welfare, etc. We might very well start to address a leading cause of the income and wealth gaps, and our rapidly growing life-expectancy gap, in a very constructive way, and possibly by using current expense dollars more effectively. A longer discussion of this issue and the studies involved is in After One Hundred Years.
Bottom line: redistribution has been with us in the form of charity since Biblical times, and as part of public tax policy since the late 1800s. Sometimes it has produced benefits to the common good, but not always. At times it has caused real suffering. We can learn much from our history, and I believe that stewardship requires us to do so.
Joe Dunn