PROSPERITY:
Economic Policy | February 19, 2004
FAIRNESS
AND
WISDOM
IN
ECONOMIC
POLICY
A
Sample Column for Review
It
is politically correct to be a "fiscal conservative" -- it's nice to be nice, but it just doesn't pay the bills.
While that's often the case in managing the household budget,
deciding between "sensitivity" and "practicality" in the
economy at large usually amounts to a false choice: The fairest
economic policies are almost always the wisest economic
policies.
An
important fact of macroeconomic life is that approximately
two-thirds of the Gross Domestic Product consists of "personal
consumption expenditures": The economy is inherently demand-sided.
Expenditures by consumers must always be greater than those by
businesses -- a kid has to sell his lemonade for more than he
paid for the lemons, or else he'll have to take down his stand.
Sales pay for all expenses and profits for business and, thus,
ultimately generate all taxes for government.
Another
economic fact of life is that the higher your income, the more
of your income you tend to (typically choose to) save; the lower
your income, the more of your income you tend to (typically need
to) spend. The fact that the vast majority of households fall
into the latter category means that the middle class and the
poor conduct the lion's share of personal consumption
expenditures -- that previously mentioned majority of economic
activity.
Businesses
may pay back loans, with interest, for start-up and expansion
and may generate profits for themselves (and paychecks for their
workers and taxes for the government) if and only if they sell
more -- primarily to the middle-class and the poor -- than
they borrow -- primarily from the savings invested by the rich.
Thus,
anything that puts money into the hands of the middle class and
the poor will tend to stimulate business activity and, thus,
help workers and the government; anything that takes money out
of the hands of the middle class and the poor will tend to
stifle business activity and, thus, hurt workers and the
government.
The
"wisest" economic policies -- those that help the business
community the most -- are the "fairest" economic policies -- those that help the entire community the most.
In
particular, the wisest policies of taxation are the fairest
policies of taxation. The current Administration is "half
right": In order to stimulate the economy, we must get money
into the hands of "the people"; but you get "more bang for
the buck" by getting that money into the hands of the middle
class and the poor than into the hands of the wealthy.
Regardless of whether those who have more income and pay more
tax are more "deserving" of tax cuts than those who have
less income and pay less tax, tax cuts targeted to the top
brackets are far less effective at stimulating the economy than
those targeted to people in the middle and lower income levels.
The
best -- the fairest and wisest -- taxes are the most "progressive", taking a higher percentage of higher incomes;
the worst -- the most unfair and unwise -- taxes are the most "regressive", taking a higher percentage of lower incomes.
While progressive taxes tend to be more obvious (traditional
income, inheritance, and luxury taxes), regressive taxes tend to
be less obvious (traditional sales taxes, Social Security taxes,
and users fees). Notably, because the lower your income, the
more of your income you tend to give to charity, "volunteerism" and similar donations of time or money tend
to serve as regressive taxation (laudably selfless and often
essential, but generally less fair and, for the economy as a
whole, less wise than more progressive forms of support).
In
addition to progressive taxation, a union movement can be
healthy for the economy. Henry Ford -- a King of Capitalism, no
Comrade of Communism -- paid his workers enough to buy his
cars; and he encouraged his fellow employers to be likewise "generous" (far-sighted).
Moderate
inflation and moderate interest rates are healthy signs of a
growing economy: If demand for products, services, and capital
is greater than supply, it will drive up the prices for goods,
labor, and money itself. In a recession or depression, demand
and, thus, prices fall, as businesses fail.
"Greed
is good," perhaps, for short-term self-interest; but for
long-term national interest, "a rising tide lifts all boats":
Businesses -- and their employees, investors, and government -- need middle class and poor consumers to have sufficient money to
purchase the products and services for sale.
The
wisest policies are the fairest policies: As Americans, moreover
as members of the world economy, we ultimately prosper or fail
together.
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