Monday, July 21, 2014

The myth of redistribution

Taking from the rich to give to the poor. The idea once overly romanticized by Robin Hood is now more often demonized with cries of "class warfare". The link between government taxes on the wealthy and spending for the needy is taken for granted by all across the political spectrum. And it's a myth!

It does appear that many on the left would dearly like to tax the rich more since they view their wealth accumulation as a problem that hurts the lower and middle class (and there's some truth in the wealth inequality gap problem, as we've discussed). Many see increased taxes as a legitimate redistribution of often ill-gotten wealth from the greedy to the needy. While their angst may be mostly directed at the uber-rich and "banksters", the tax proposals coming from the left usually sweep up the many small businesses and even upper middle class workers. This becomes an easy target for the opposition.

The right quickly responds with examples of the millions of small business "job creators" who would be punished by these measures and how jobs will be lost and investment/expansion reduced (and there's truth to this also). The idea of taking "what is rightfully mine" to give to someone else "who may not have worked as hard" (as is often the view) is greatly resisted. The very idea of it is often portrayed as unethical and a "moral hazard" that prevents people from working hard to get their own American dream.

During the Obama-Romney campaign, President Obama made a very awkward attempt to make the point that even businesses benefit from government funded resources such as education and infrastructure ("If you have a didn't build that"). The reaction was swift and effective and the intended message drowned out. The idea of the so-called "self-made" man/woman/business is alive and well in America. 

During that same campaign the President described income inequality as the defining issue of our generation. Tackling this problem would be a key part of his second term agenda. It fizzled immediately after the election. 

The left simply can't or won't touch the class warfare issue and yet we do have a real crisis developing related to declining real incomes, wealth inequality, and persistent unemployment. The right won't raise taxes and won't support any increase in non-military government spending without an offsetting "pay for" cut elsewhere. The left insists on tax increases for "the rich" to pay for government deficit spending. We're stuck.

What choice is left?

Once again, it is economic myths that guide our policy-makers and the voting public. The good news is that there's another and better alternative for currency-issuing nations. 

Taxes NEVER pay for government spending. Really, they don't. The link is a fiction. It is a self-imposed constraint to say X tax is needed to pay for Y spending. We have unnecessarily limited our options by insisting that the only way to provide income to the poor it to take it from the rich. Robin Hood can retire (or go fight other battles) - this isn't one of them. In fact, as described above, it is political stalemate to link the two. DON'T DO IT! It is not necessary to pick a fight with the powerful in order to address unemployment and poverty. And in the same manner, there is no fiscal reason to cut welfare programs or privatize social security in order to make a case for tax cuts. 

How does this work? All government spending is simply crediting bank accounts. Any spending we authorize is done simply by increasing account balances on computers. The government doesn't need our tax money and actually can't "use" it to spend. Taxes remove excess money already spent by the government, and the amount and type of taxes imposed is an entirely separate government operation. And remember that inflation is never an issue when we're so far below full employment and economic output. Yes, this means more deficits and "debt" - which when properly understood is to our benefit.

So if the left wants to make a case for increasing employment and incomes at the bottom, just make the case for it. Affordability is NOT the issue. No tax increases are needed. In fact, tax cuts (e.g. for the lower/middle class) could be part of the solution. For those on the right, there are way to fund beneficial growth programs without raising taxes and without government agencies taking over. Get creative. Fund more R&D. Support entrepreneurship programs. Educate and train unemployed persons in needed skills... 

Understand how we can use our own monetary system, educate yourself and your friends, and start asking your congresspersons to support solutions that build up people and the economy.

One place to start is to implement a job guarantee - a living wage job for anyone who is willing and able to work but is not currently employed in the private sector. 

Redistribution doesn't work politically, and it isn't how taxes and spending work either. Decisions on what, how, and how much to tax are entirely different than decisions on spending. We invented money exactly for this reason - let's use it wisely.