Nothing is Ever Settled
by Bruce Fisher
How re-tread arguments thwart achieving a saner economy
Mark Zandi, the chief economist of the news service operated by America’s biggest bond-rating agency, testified before Congress on January 27 that spending money on food stamps, unemployment insurance, and infrastructure repair is a much smarter idea than handing out tax breaks for capital gains. The Moody’sEconomy.com economist says that direct spending on those programs would result in at least four times the impact of extending the George W. Bush tax cuts for capital gains.
The nonpartisan Congressional Budget Office, all of whose staff have had excellent report cards since kindergarten, reported in 2002 that “capital gains tax cuts would provide little fiscal stimulus,” since most of the benefits of such cuts would accrue to high-income households. Such households are more likely to save than to spend, and anything but spending is counterproductive when the very aim of fiscal stimulus is to boost consumption across all income categories.
Then there’s research by Len Burman, who heads the joint Brookings Institution-Urban Institute Tax Policy Center. Burman’s research shows that over the last 50 years, real GDP growth has not varied in response to changes in capital gains tax rates.
Now a brand-new report by the Institute on Taxation and Economic Policy shows that, at the state level, preferential treatment for capital gains is just a handout to high-income households that take more of their incomes in the form of capital gains—and that since most capital gains are derived from assets that are not local (like stocks and bonds), then any local tax benefit is irrelevant to local economies except for the purpose of enhancing the incomes of people whose incomes are already high.
Capital gains, after all, are not like ordinary income from wages. You only have capital gains if you have capital to begin with.
But you probably won’t hear or read about any of these sober, fact-oriented studies in the coming weeks and months.
That’s because the mainstream media has become an amplifier rather than a filter for the ready rhetoric that Milton Friedman, Alan Greenspan, and other so-called “neo-classical” economists legitimized, and that Ronald Reagan and two presidents named George Bush empowered.
Paterson’s taxes: rekindling the old fires
The genius of the American political system, and its tragedy as well, is that no policy question is ever really settled. The same damned fights of 25 years ago are back before us, even after the financial debacle of 2008 should have mooted many issues of tax and fiscal policy.
Our media have been overwhelmed with stories about bailouts and about the new federal spending that Congress and the new president rushed into effect, but soon the talk will turn back to taxes.
That’s especially so here, in New York, where Governor David Paterson and legislative leaders Sheldon Silver and Malcolm Smith have decided to rescind George Pataki’s tax-rate reductions for tip-top incomes.
You will hear, if you haven’t already, that raising the top income tax rate on those whose incomes are over $250,000 will drive people out of Manhattan, our state’s bread-basket. You will hear that raising taxes is the very last act that a government should do in a recession. You will hear that increasing the top income tax rate, in a structure of graduated rates, will prevent business from growing here.
In short, all the usual suspects will trot out all the usual arguments against seeking revenue from those whose incomes have shot up dramatically in the nearly two decades since our previous governors dramatically reduced tax rates.
Today, the only real drama in that part of our state that lies west of the Hudson River is the quiet process of its emptying—a depopulation trend that a Wharton School study says will accelerate in the next 10 years. There will be far fewer people in the workforce in 2020 than there were in the 1980s when the tax breaks started, the ones that were enacted specifically to stimulate investment. Meanwhile, tax-break-peddling industrial development agencies claim to have created tens of thousands of jobs, but studies by the New York State Comptroller and others prove again and again that the costs of the tax breaks do not explain why the workforce is the same size or smaller here than it was in the 1980s.
In the 1980s, we had a name for those who ignored all this evidence and still called for tax preferences: We called them the “loophole lobby.”
That seems too polite today. Unemployment now stands at or above 10 percent. Some theorize that the bust of the most recent boom may have caused so severe a disruption in the way our economic system is organized that we don’t really know what’s around the bend—and that the last time economies got so screwed up, the world got Fascism, Nazism, Japanese militarism, and Communism, in addition to a bunch of anti-Semitic radio preachers like Father Coughlin of Detroit.
So the coming reprise of the 1980s fight over whether or not to give tax breaks for investment has a certain ugly, Freddy Krueger-like aspect. Can’t that rhetoric just die, so that we can be done with it for good and move on?
Mainstream economists vs. the Buffalo Keynesians
The reason why we aren’t going to escape our Freddy problem, according to George Cooper in his new book The Origin of Financial Crises, is that almost the entire economics profession is stuck in a fantasy-land.
Mainstream or so-called “neo-classical” economists believe that law, regulation, and notions of the public good just get in the way of the efficient operation of markets, which, they believe, are self-correcting. Honest, folks. Some very smart people still believe such notions, even after the demise of Lehman Brothers, AIG, and the Bernie Madoff world.
We should all wish that George Cooper, Kevin Phillips, Eric Janszen of iTulip.com, and their ilk were wrong. We should all click our heels and wish our hardest that we could just go home to the comfy orthodoxy we used to have, back before last fall, when University of Chicago economists like Milton Friedman and his disciples were always correct. Back when Alan Greenspan’s suspicions about regulations had a certain street cred.
But there’s no place like home—as you may discover this coming October, right here in Buffalo, where Friedman, et. al., have never really been welcome. Those of you who have been explaining to your friends in large cities why our way of life leads to a certain illusion-free insight will be getting some help when the neo-Keynesians (i.e., the intellectual kin of Cooper, Phillips, and Janszen, folks who have long warned about the insanity of orthodox economics) will come to a conference at Buffalo State College.
What you’ll hear, I expect, is that when the evidence mounts up against the theory that cutting the capital gains tax will lead to new investment, maybe it’s time to abandon that theory rather than to restate it with ever-more-elegant symbolic logic. In Buffalo this October, we might hear a paper on the problem of assuming that an unregulated market in derivative securities will be self-policing rather than a monster criminal enterprise. We might even hear a paper about the disruptive impact of localized politicized subsidies on regional economies—you know, actual empirical evidence that challenges the neo-classical economists’ notion that tax preferences for investment are inherently beneficial.
But it is still so very strange that we should have to witness another fight, just like 25 years ago, about whether John Maynard Keynes had it right about the role of government in the economy.
If this economics-speak is getting you down, fret not. All you really need to know about John Maynard Keynes is that he was the intellectual architect of the economic system that Ronald Reagan and the Presidents Bush dismantled as best they could. The late Milton Friedman and his disciples explicitly rejected Keynes’s view that government had to step in at times of economic crisis (as in the Depression, and now), and explicitly praised the notion of the “free market” as a better way to arrive at socially desirable economic outcomes than, oh, having government-guaranteed pensions or health care or workplace safety rules or minimum wages or any of that Keynesian New Deal stuff.
We shouldn’t have to have this conversation today, 80 years after the Crash of 1929.
But the economics profession, if George Cooper is right, won’t be able to shed its old ways. That means that we will still read editorials about how government should be cut at a time of great economic dislocation, unemployment and uncertainty, because the neo-classical economic notion of government as always and ever a problem is abroad in the land still, even after 1929, even after 2008, even after Madoff, AIG, Lehman Brothers et. al.
When I click my ruby slippers, it will be to wish we could just move on to the next big issue—which is whether America should forget about economic growth as previously defined, and talk instead about economic sustainability.