Tuesday, October 15, 2002

Half of a Good Idea- Stewart Buck points out this Robert Reich editorial which makes some sense; make the first $15,000 of income FICA-free. That would amount to at least a 7.65% and ultimately a 15.3% pay increase (the employer pays a matching tax) for that part of people's paychecks. However, his rationale needs some work.
Three weeks before Election Day, most American households are still mired in recession. The American economy lost 43,000 jobs in September, the biggest drop since last February. Many people who were looking for jobs last year have given up. The ratio of jobs to potential workers continues to drop. Meanwhile, take-home pay is going nowhere; last year median household income dropped for the first time in a decade. Workers dependent on overtime, commissions or bonuses are watching paychecks shrivel. And ever-bigger portions of their paychecks are going for health insurance — single coverage is up an average of 27 percent from last year, family coverage up 16 percent.
OK, things aren't going so well for the working stiff.
Americans look to Democrats for more secure jobs and better wages. So why aren't the Democrats making Americans' economic worries more of an issue in the campaign? The basic problem is that Democrats don't have a coherent view about what ails the economy and what to do about it. Some of them accept the supply-side belief that taxes are too high on corporations and the affluent and voted in favor of the Bush administration's huge tax cut. Most other Democrats cling to the neo-Hooverian orthodoxy of the 1990's that federal deficits are inherently bad. In their view, the tax cut is largely to blame for the prolonged recession because it put the federal budget in the red. They want to restore "fiscal responsibility."
Translation-"You're listening to Rubin and the deficit hawks too much! Where are the Keynesians when you need 'em?"
While President Bush's tax cut is unfair, there's no logical connection between it and what's happened to median incomes and jobs.
Hey, he found an acorn!
The problem after the late-90's boom and subsequent collapse is that there aren't nearly enough buyers for all the goods and services the economy can produce. Businesses have cut their capital spending because corporate profits have fallen.
We do have a bit of a slump in manufacturing capacity utilization but the capital spending cuts are more likely due to an increased cost of capital as to a decrease in profits.
And with disappearing profits, businesses can't give their employees pay increases and benefit packages. Instead, they have to cut wages and health-care benefits. And they aren't in any position to add more jobs. Such businesses also don't buy more components and equipment and they don't rent more space. They stop investing. Eventually profits of their suppliers begin to disappear, too, as do suppliers' payrolls.
OK, how do we help businesses, Dr. Reich?
We could enter a long and vicious cycle. Workers whose pay and benefits are shrinking and who are afraid of losing their jobs simply don't spend a lot of money. They wait for cheap deals. So company profits get squeezed even more.
OK, How do we break the cycle of economic violence?
Even if a war with Iraq were to cost $100 billion, that amount of government spending would be too little and too late to give the economy the stimulus it needs. The Federal Reserve Board, for its part, has cut interest rates just about as much as it can.
OK. How come I here some serious Keynesian action comin' on.
The only way to revive the economy is to get more money into the pockets of average working people. And the best way is through quick tax relief. Workers will spend most of a tax cut right away — because with declining take-home pay, they have to — and their spending will spark businesses to spend more.
No, given the gloomy prospects you just outlined, they might tuck the tax cut away for a rainy day.
The simplest way to put more money into consumers' pockets is to cut their payroll taxes, which will instantly fatten their paychecks. Congress could exempt the first $15,000 of everyone's income from payroll taxes for two years, beginning immediately. Everyone gets the same tax cut but it's more helpful to lower-paid workers since the payroll tax is so regressive. And since employers no longer have to pay their share of these taxes, they would have a new incentive to keep more people on the payroll.
This doesn't give people making more than $15,000 any incentive to work harder and the temporary nature of the cuts will keep people from spending it. The Perminent Income Hypothesis states that people tend to spend money based on long-term income prospects, so that a temporary tax cut would have a limited effect on their long-term spending power. A permanent tax cut would give people the freedom to spend more of that payroll tax cut. It does give a boost to aggregate demand but detracts from aggregate supply due to the higher interest rates that the resulting deficits would create.
Yes, this would add to deficits in the near term. But deficits aren't a problem when the economy has so much extra capacity.Lost revenues can be made up in future years by repealing President Bush's tax cut after 2004, when most of the cuts are scheduled.
Great, whack away at aggregate supply some more. What excess capacity we have a year from now will shrink even further if taxes are raised (yes, it's canceling tax cuts, but it will have the same effect), not to mention the damage that the tax increases will make to aggregate demand.
A payroll tax cut for working people is that most valuable of campaign initiatives: not only good economics but also smart politics for Democrats and even Republicans.
It's dubious Keynesian economics predicated on excess capacity out the wazoo. This isn't 1932, it's 2002. Reich is giving a deep-recession proscription in an recovering economy. I'd be interested in his payroll-tax proposal if it's permanent and comes with a flat-tax proposal that will help expand the economy. That will give the Democrats some help for the little guy and give the producers and workers a boost as well.

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