False Answers to Recovery

The following post is a rehash of comments from the past - because it is relevant and timely. Concerning the argument over what will lead to economic recovery and growth and the return of job creation. The dispute is about taxes - though it's complicated by concerns over the debt and deficit and the need for more or less regulation. As I've noted before there is a correlation - and even a degree of causation - between lower taxes creating better conditions for growth. That is why in the early 1980s dropping marginal rates from 70% (or originally 89%) to low thirties or high twenties was significant. But fiddling around between 28 and 38 has no discernible impact - See Mankiw and Feldstein for clarification.

Additionally, naive Republicans like Palin and Bachmann like to call upon the Reagan growth as only about taxes - and they neglect the importance of Volcker breaking inflation and then dramatically dropping interest rates. That alone freed up tons of cash for economic growth. And with the expansion of credit card lending, the money infusion in the economy came on the demand - NOT supply side. Add to that the dramatic drop in oil prices following discoveries in the North Sea and Central America - which broke OPEC's hold - and lower gas prices also freed up tons of money on the DEMAND side. The economy is far more complex than simple tax rates - though lower is certainly better. And there is no reason not to broaden the base, flatten the rates, lower the corporate rate, and close the deductions - especially at the top level. Then, by means testing Social Security and Medicare and lifting the cap to at least $250K, the government and the economy will move toward solvency and fluidity.

Finally, you must keep in mind that the 2008 Crash and subsequent economic drag was not caused by tax issues. It simply wasn't. It was not caused by regulation. The current slump is not continuing because of a drag on tax issues - because there have been no changes - other than the cut taxes more. So, it's not about taxes - and anyone who thinks it is has been asleep for about the last decade - or perhaps a Hannity-induced coma. This economic problem is about cash on the demand side. Period. It was about lost wealth from a housing crash that imploded the lending industry. And that came from deregulation. This is not about taxes - it's about no cash. It's about loss of spending power from lost housing money and decreasing wages impacted by rising insurance rates.

Additionally, companies aren't hiring for one simple reason now - because they don't have to. Demand is not going up. They don't need workers - except for the skilled labor ones for which there are tens of thousands of vacancies. They are making money and increasing dividends and it's that simple. It didn't start with taxes (at lowest rates in 60 years) and it won't be solved by tax cuts - because they aren't the problem.

An overall review and reform of taxation is a great idea - and necessary. But blaming the current problems on taxes is simply foolish.