DID BERNANKE JUST CALL FOR HIGHER TAXES? UNFORTUNATELY, YES
I wrote a pretty critical piece on Paul Volcker the other day for calling for higher taxes on the back of high budget deficits. Unfortunately, Ben Bernanke, speaking this evening, has done exactly the same thing. He said:
“To avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
Unlike Volcker, I have never been a big fan of Bernanke’s, but I will spare everyone the rant on his mistakes and how we don’t fund our deficits with taxes. This is more absurdity from our leadership. Tax increases would crush any sliver of a recovery we might be seeing. What we really need is more efficient spending (this is not the time for healthcare or paying banker salaries), lower taxes, and more regulation. Of course, none of this surprises me. I would be utterly shocked if we look back at Ben Bernanke in 10 years and describe him as anything other the second most destructive central banker in the history of the U.S. economy. We are repeating all the same mistakes of Japan and Greenspan only on a much larger scale.
What should REALLY be done is instead of stupidly raising Capital Gains taxes, they should be dropped to half of what they were (7.5% or 5%). You’d see a rush of money go into the market if that were the case. I simply don’t understand why a lower capital gains tax is consider a “tax break” for the rich. It takes like $2,000 to open a brokerage account these days and costs very little to execute (IB is $5,000 minimum, pay interest on anything over $10,000 and has execution fees of like $0.01 per share, $0.75 per options contract, etc. AND provides access to trade just about every product a retail investor could want).
Instead, we raise capital gains taxes, raise taxes on the rich, drain entitlement programs (remove benefits and extend the age which they can be claimed), create new more expensive boondoggle entitlement programs and pressure China to let the RMB appreciate. Meanwhile everyone is clapping because the president resigned a 20 year old treaty with less stringent requirements (and side breakout contracts)
I swear, it feels like we’re moving backwards…
I see you and other bloggers like Marshall Auerback and Edward Harrison make this claim often. You point out incredulously that people who should know better are, in your opinion, making absurd comments with relation to fiscal policy. Do you think he, the Fed chairman, genuinely does not understand the way the US government funds itself, or is he being deliberately misleading? If the latter, why?
Yes, I genuinely think the leaders of this country do not understand how our monetary system works. We are stuck in a textbook world where the gold standard mentality still rules. Bernanke is the ultimate academic. He is of the same gold standard ilk that Greenspan comes from.
I am not making this up when I say that we don’t fund our deficits via taxes and bond issuance. This is actually how the system works. It’s an important distinction because it changes the way one views monetary policy.
A better question is one for you:
Why do you think people have such unbridled faith in a government that can’t provide jobs for its people and nearly flew the economy into a ditch last year?
Your question is a good one, but my only response is that I do not know where this faith comes from. I lost mine long ago.
I was first exposed to the ideas of Modern Monetary Theory, as espoused by Warren Mosler, L. Randall Wray, et al, about a year ago. I think that they make a lot of sense and are quite logical. And you are right when you say that it completely changes the way you view monetary/fiscal policy. But given that I see these ideas being logical and making sense I can’t help but wonder how in the world our leaders have either not been exposed to them, don’t understand them, or dismiss them.
It comes down to the fact that they don’t get it or they do and are lying. Either way is setting up for a horrible resolution. If the Fed chairman, Treasury sec, President, congressional banking committees, etc don’t understand how the system works then God help us. If they do understand but are actively misleading the public with the debt/deficit/tax scare mongering then I want to know who benefits from that approach and how.
Maybe my lack of faith in them has started to lead me to believe that something nefarious is going on and its covered by active misleading/lying. Occam’s razor says they are just that ignorant.
It’s a good question. Most of the influential minds in government have been around for ages. They are entrenched in their gold standard or convertible currency based educations. They know no other way.
The tide is changing. Slowly but surely. Of course, I don’t think its the application of MMT that is important, but understanding the foundation of it (how monetary ops actually work). I disagree to a large extent with the theories behind its application. For instance, an economy can never be built on government spending. Real organic economic growth and innovation must come from the private sector. But that’s a whole other discussion….
Thanks for the comment George.
I am not making this up when I say that we don’t fund our deficits via taxes and bond issuance. This is actually how the system works. It’s an important distinction because it changes the way one views monetary policy.
Can you pass along a link to explore this further?
Thank You
Dallas,
Start here. Read it several times and then follow the links in the conclusion. Enjoy. If this stuff is new to you I recommend you take several days to let it soak in:
http://bilbo.economicoutlook.net/blog/?p=7864
Evidence from the last two business cycles defies the dogma that higher taxes stifle growth and lower taxes promote it. Bush Sr raised taxes a little, then Clinton raised them a lot, and many economists promised stagnation. Instead we got the longest (40 quarters) and strongest boom in American history, with enormous job creation and a moderate bubble at the end. Then Bush Jr cut taxes a lot, promising high growth. Instead we got modest growth, low corporate capital expenditure and low job creation. All that extra spending money went into huge bubbles in every asset.
What is the rationale now for giving high wealth people any more money to invest? We have excess capacity everywhere, way too much real estate, and asset prices are frothy already. Raising taxes on the middle class that spends the vast majority would be unwise, but raising them on the true investor class is probably helpful now. Under Clinton, it signaled a return to fiscal discipline that far more than compensated for the money taken from the wealthy. It probably would again.
I would argue that the Clinton tax hikes combined with the budget balancing helped induced the squeeze on consumers. In general I would agree with your overall assessment though.
Over the last 50 years there has been this huge transfer of wealth from the middle class to the upper class (primarily thru tax cuts for the rich). I would not be against seeing higher taxes for the rich and lower for the middle class. The Bernanke comments were vague so unfortunately, mine are equally vague….
It comes down to the fact that they don’t get it or they do and are lying.
Maybe some of both? First, economists have a big investment in not finding out the truth, because they would have to admit that they’ve been wrong big time, and, secondly, their jobs depend on saying what is expected of them. So perhaps it’s a mixture of willful ignorance and self-serving disingenuousness.
My eyes were opened by MMT, and now I can’t believe what I am hearing from the so-called experts and professors that are pontificating in the media and writing the major textbooks. It’s like Nixon’s closing the gold window on August 15, 1971, never happened, or they spelt through it.
I would be utterly shocked if we look back at Ben Bernanke in 10 years and describe him as anything other the second most destructive central banker in the history of the U.S. economy.
Don’t sell him short. He’s gunning for first.