The economy is going down the tubes. This is the time to raise taxes. Conventional wisdom, version 1.0, is that when the economy goes sour, do nothing and it will take care of itself. This is the conventional wisdom that inspired the song “We’d Like to Thank You Mr. Hoover” in Annie. Conventional wisdom 2.0 is that if you’re running a country with an economy that’s tanking, you should start spending, even if you have to borrow the money to do it. That’s excellent advice, but there’s a kicker. When times are good, governments are supposed to live on their income and have a balanced budget. Back in 2000, then-candidate Bush said the anticipated federal surplus that Bill Clinton was handing over was so large that the government could afford to give some of it back. That wasn’t a good move.
So, now that the chicken in every pot has come home to roost, President Bush has announced that the administration has taken the appropriate action and borrowed another $168 billion in order to give everybody some money to spend to stimulate the economy. It won’t work, simply because consumer confidence is at its lowest level in 26 years, and will probably go lower as more people realize what’s going on. For the moment, it’s not clear how extensive the damage to the economy has been, but it may not matter—all it really takes is fear, and there’s more than enough of that to go around. When people are optimistic, an extra $600 seems like a windfall, an excuse to buy a digital camera, a new outfit, take the family out for dinner. Without optimism, the money goes to pay down a credit card balance, or just sit in the bank for when it’s needed. A series of surveys have already indicated that an increasing number of people simply plan to use the money to pay down their bills. The Federal Reserve lowered interest rates, but the Japanese experience has already demonstrated that low interest rates can’t stimulate an economy when nobody wants to take on debt.
While the official statistics show that the US economy grew by a nominal amount during the first quarter of 2008, thereby avoiding a recession according to official definitions, all the other news is disastrous. Home prices, which for years were the psychological measure of personal wealth, continued to fall—dropping 13.6% on the S&P/Case-Schiller home price index.
There is no simple solution—there never is. While the current economic problems were triggered by the high-risk mortgage loans, it will impact on millions of families that suddenly realize they haven’t been saving enough for retirement, and who will resist the effects of low-cost loans and tax breaks. Rising costs for energy, health and food will concentrate expenses in these areas, reducing discretionary spending and affecting every other area of the economy. In a clear example of economic ineptitude, a federal budget proposal that would go into effect on July 1 would cut Medicare reimbursement rates to physicians by 10%, showing that the haves and have-mores who created this mess don’t understand the problem. Physicians and surgeons may be upper-middle class, but the operative word is still middle. The economy has been maintained by working- and middle-class consumption, while the top 1% have been siphoning off the money supply for themselves, and not leaving enough to go around. Unless the rich and super-rich are willing to give something back, we may be in a hole that we can never get out of.
The first step is to get some money for the government to spend. Reversing the Bush tax cuts would be a first step, but increasing taxes on higher incomes even beyond pre-Bush levels and closing loopholes will also be essential. If rich people hire lawyers and accountants to find a way to beat the system, that’s fine—lawyers and accountants are middle class, and if they have extra job security they may be more inclined to go to a restaurant or buy a car. Use the extra income to fund social programs—support education and health care, so that teachers, nurses and technicians have a greater sense of job security. Some of the money could be used to improve public transportation, which could reduce energy imports while creating long term jobs in manufacturing. A one-time fix won’t work, but having people feel their incomes are secure just might.
What we’re looking at is the old “teach a man to fish” example. The United States, and to a large extent the world economy, has been fueled by feelings of confidence that made people willing to borrow against future earnings. The only hope is to restore confidence in the future, and it shouldn’t be asking too much to have the people who will profit the most to make a long-term investment.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.
From The Progressive Populist, June 1, 2008
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