A Summer’s Night Dream

Larry Summers now believes that the way to solve income inequality is simply to raise taxes on the rich. No doubt that will help. However, taxes raises money for governments, and in today’s political climate, we cannot assume that such money would be spent on social safety nets.

The argument that Dr. Summers is making is in contrast to capping salaries on rich CEOs. Summer’s doesn’t believe that will work. Indeed, it’s an “iffy” at best solution. But there’s more than two ways to skin a cat.

Summer’s is forgetting the basic premise of economics: the distribution of resources. If you don’t have enough resources, then you have to grow resources. This has been a “social fact” since the time of Feudalism. Indeed, as Joseph Stiglitz has pointed out many times, few economists are concerned with GROWING the pie – they just was to re-divvy up the pie that already exists.

Let’s remember that Larry Summers was an “inflationista;” one of those Chicken Littles that said that inflation would cause the sky to fall in the aftermath that I now call the 2008 Economic Apocalypse. Inflation never came. But neither did wages. Within the framework of Summers’ thinking, here’s where the real problem lies (hint: it’s not taxes):

income to CPI

While inflation hasn’t come in the form of needing a wheelbarrow full of cash to buy a loaf of bread, people’s incomes have actually been decreasing in proportion to inflation. Larry Summers is concerned about people saving. The only way that can happen is if income exceeds inflation. The last time that happened was in the 1990s.

But more to the point, the very last thing that Summers should be concerned about is people saving. All economists should be concerned with people SPENDING. In Economic terms, this is called “aggregate demand,” which has been non-existent since 2008. Indeed, a recent Gallop poll says that 23% of Americans worry about jobs – with a 6.6% unemployment rate. We already know that when people worry about jobs, they don’t spend; assuming that they have money to spend.

Summers does make a good point about increasing the Earned Income Tax Credit for working families with the newfound windfall from taxing the rich. But even President Obama has shown a shocking willingness to burn the social safety net into a pile of ashes. In Bayesian Probability we call this “priors.” There simply few “priors” to show that Congress, or the President would be willing to spend newfound tax revenue on any social front.

It seems Larry Summers is having a dream; one where the pie never grows, and everyone plays on a level playing field. He’s ignoring the economic carnage measured in human lives (social costs) that have been suffering for a very long time.

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This entry was posted in Economics, Macroeconomics, Political Economy, Politics, Poverty, Public Policy, Socioeconomics. Bookmark the permalink.

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