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A Big Piece in the Deficit Puzzle

November 17, 2010

The New York Times has posted a deficit puzzle that challenges you to balance the federal budget by 2040. It seems to me that allowing the Bush tax cuts to expire would be an excellent place to begin:

Simon Johnson agrees:

I’m not in favor of raising rates generally, but as my proposed budget shows, I do raise tax rates for the highest paid and wealthiest people. The process of job polarization in the United States looks set to continue — the people at the top of the educational attainment ladder are going to do very well; others not so well (this is why median wages haven’t increased). Even the Peterson Foundation — not a left-wing group — points out that the richest are paying less tax today.

Note, however, that I’m less sanguine than even most self-proclaimed “fiscal hawks” about our current budget situation. Consequently, I would eliminate all the Bush tax cuts, and this substantially takes care of our short-term projected deficit. On my joint Web site with James Kwak, he makes the case regarding why this would also be good politics for President Obama. No one who claims to be focused on fiscal responsibility should want these tax cuts, we have said previously in this space.

One minor quibble: Johnson is not entirely correct about fiscal responsibility. For a conservative focused on fiscal responsibility, the obvious alternative to allowing the Bush tax cuts to expire is dismantling Social Security, Medicare, and other entitlements. Johnson treats deficit reduction as a merely technocratic question (certainly, it sounds like one), but it is, in reality, also a question of values. Which kind of society do we want: one in which the profit motive reigns supreme, or one in which the state protects the weakest and most vulnerable?

At the same time, capitalism has an inherent tendency to undercut itself, unless corrected by Keynesian redistribution or some other means. As the percentage of wealth flowing to the top increases, workers find themselves unable to make mortgage payments, pay college tuition, purchase consumer goods, and so on. The result is a shortage of demand — a problem the rich can stave off temporarily through offering credit, but which ultimately leads to meltdown. Bad morals, in short, is bad economics.

(Graph via Ezra Klein.)

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4 Comments leave one →
  1. catullus permalink
    November 18, 2010 9:45 am

    “…job polarization in the United States looks set to continue…”

    Sad that this seems to be taken for granted. The adjectives one will use to describe future scenarios that result from this will be much more dire.

  2. innocentsmithjournal permalink*
    November 18, 2010 11:52 am

    Yeah. The astonishing thing is that we’re back to business-as-usual in Washington and on Wall Street. A little tinkering around the edges of capitalism is all that has resulted from the greatest economic downturn since the 30s.

    Note that I’ve thought a bit more about Johnson’s piece and added some commentary to the post.

  3. Holly permalink
    November 20, 2010 8:33 pm

    Am reading Winner-Take-All Politics by Hacker and Pierson who claim that the wealthy have organized to affect Washington policy to continue along the same economic direction for their own benefit. Have you read it?

  4. innocentsmithjournal permalink*
    November 21, 2010 2:48 pm

    No, I haven’t. But I will definitely check it out.

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