Sunday, November 17, 2013

Restoring the 1950s Economy as a Solution to the Financial Crisis

The economy needs demand and investment to produce goods and services. Demand and investment come from the same source, income. If more income is saved, there is less available to create demand and vice versa.

At this time savings need to be reduced to increase demand. The usual means to do this would be to lower interest rates. But rates are already near zero, and this hasn't caused savers to start spending. So what is the mechanism to do this? Tax the savers, and reduce the taxes on spenders, to zero if necessary. If need be, let the government issue the funds to provide the infrastructure, free health care, education, and retirement benefits to the spenders, so more of their income can go to spending.

This is essentially what was done in the decades immediately after WWII, when the highest marginal tax rates were near 100% and the government was spending on roads, education, the GI Bill, and Social Security and Medicare had been implemented.

Instead, what we have done since the 1980's is reduce the highest marginal tax rates and taxes on capital gains, allow offshore tax havens, privatize education, let our infrastructure deteriorate, bust unions, and deregulate business to allow almost all of the rewards of productivity to go to savers. And, now the austerity advocates are on a path to destroy Social Security and Medicare.

Isn't it clear that we have to restore the balance between spending and saving that existed the fifties and sixties?

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