Reexamining the Economic Costs of Debt
House Budget, Reexamining the Economic Costs of Debt, November 20, 2019
The existence and size of the national debt does not harm the economy at all, at least not until the European Union consolidates the debt of its members and supports it with a joint progressive income tax. Then the party is over. The real impact of the debt on the economy comes from other aspects of fiscal policy.
Spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases.
Revenues are usually about 18% of GDP. Currently, they are 16.5%. Unless you are funded by rich donors or their foundations, this is a real problem. Apologists for Wall Street justify tax cuts as a boon to the economy. It is not unless you make your money on inflating asset prices. My response to such nonsense can be found in Attachment One, which examines the impact of the Tax Cut and Jobs Act.
Inflation is an increase in prices chasing the same goods, which also increases the supply of goods of lesser quality, such as Cryptocurrency and private equity financing of mortgage backed securities. These are the next asset crisis. The money has already been sucked out of these ventures, so a crash is imminent.
Cutting current discretionary or entitlement spending simply makes the problem worse. Both of these increase consumption in the same way that tax cuts fund the savings and speculation sector. Plant and equipment still follows from expected sales (consumption), not the cost of credit.
If any witness ever comes before this committee and claims that the problem is entitlement spending (I can think of a few who do), inquire about who their donors are after swearing them in.
When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class (again, as explained in Attachment One). The only way to keep consumption going is to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth.
The reason the economy continues to grow is increased spending. For details, see Attachment Two, which is an excerpt from our comments to the committee from last February’s budget hearings, as updated in June and enclosed in our opposition to S. 2765, The Bipartisan Congressional Budget Reform Act.
S. 2765 ignores the problems with the TCJA, so we must oppose it. Dealing only with spending cuts harms the general population, leading to a slower economy. Indeed, any spending cuts must be avoided. If anything, secular stagnation is an endemic issue because low marginal rates on high income CEOs invites the rent-seeking we warned about in 2017. This can be remedied by tax increases, a higher minimum wage and increased transfer payments and salary levels.
When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.
The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder.
The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.
The current factor is $13 if debt for every dollar of income tax. Using tax distribution and debt levels from the last available year, the top 1% owe $7 Trillion. The next 9% owe $6T. The next 40% owe $5T. The bottom 50% owe $570 Billion. The top 1409 households owe more than half the nation at $610B. No wonder many of the rich give money to Americans for Tax Reform. See Attachment Three for more on Debt Liability.
To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock.
Attachment One – The Tax and Job Cuts Act
The existence and size of the national debt does not harm the economy at all, at least not until the European Union consolidates the debt of its members and supports it with a joint progressive income tax. Then the party is over. The real impact of the debt on the economy comes from other aspects of fiscal policy.
Spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases.
Revenues are usually about 18% of GDP. Currently, they are 16.5%. Unless you are funded by rich donors or their foundations, this is a real problem. Apologists for Wall Street justify tax cuts as a boon to the economy. It is not unless you make your money on inflating asset prices. My response to such nonsense can be found in Attachment One, which examines the impact of the Tax Cut and Jobs Act.
Inflation is an increase in prices chasing the same goods, which also increases the supply of goods of lesser quality, such as Cryptocurrency and private equity financing of mortgage backed securities. These are the next asset crisis. The money has already been sucked out of these ventures, so a crash is imminent.
Cutting current discretionary or entitlement spending simply makes the problem worse. Both of these increase consumption in the same way that tax cuts fund the savings and speculation sector. Plant and equipment still follows from expected sales (consumption), not the cost of credit.
If any witness ever comes before this committee and claims that the problem is entitlement spending (I can think of a few who do), inquire about who their donors are after swearing them in.
When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class (again, as explained in Attachment One). The only way to keep consumption going is to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth.
The reason the economy continues to grow is increased spending. For details, see Attachment Two, which is an excerpt from our comments to the committee from last February’s budget hearings, as updated in June and enclosed in our opposition to S. 2765, The Bipartisan Congressional Budget Reform Act.
S. 2765 ignores the problems with the TCJA, so we must oppose it. Dealing only with spending cuts harms the general population, leading to a slower economy. Indeed, any spending cuts must be avoided. If anything, secular stagnation is an endemic issue because low marginal rates on high income CEOs invites the rent-seeking we warned about in 2017. This can be remedied by tax increases, a higher minimum wage and increased transfer payments and salary levels.
When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.
The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder.
The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.
The current factor is $13 if debt for every dollar of income tax. Using tax distribution and debt levels from the last available year, the top 1% owe $7 Trillion. The next 9% owe $6T. The next 40% owe $5T. The bottom 50% owe $570 Billion. The top 1409 households owe more than half the nation at $610B. No wonder many of the rich give money to Americans for Tax Reform. See Attachment Three for more on Debt Liability.
To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock.
Attachment One – The Tax and Job Cuts Act
Attachment Two - The Budget and Appropriations Process, February 27, 2019
Attachment Three - Debt, The Future is Calling: It Wants a Refund, 2019
posted by Michael Bindner at 10:00 AM
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