Bidenomics Is as American as Apple Pie
By Paul Krugman
My comments in italics. Henry Ford's notion that he had to build cars that his employees could afford is key to a vibrant economy. Rich people manufacturing for rich people just will not produce a great economy. While trains may work for Europe and Japan, the car has been essential to America. So I am glad that Biden is investing in repairing roads and bridges.
Piketty's work which is referenced here has convinced me that we have to go back to progressive taxation to avoid having all the money in the hands of the rich; it is essential that as much as possible be in hands of the middle class, and that we bring as many of the poor into the middle class as possible.
The Biden team is making a point of wrapping its economic initiatives firmly in the flag. First came the American Rescue Plan; now we have the American Jobs Plan paid for by the Made in America Tax Plan.
Bidenomics consists, roughly speaking, of large-scale public investment paid for with highly progressive taxation. And both of these things are as American as apple pie.
one way to think about the Biden program is that it’s an attempt to bring back the Dwight stuff — that is, in fiscal terms it would represent a partial return to the Eisenhower era, when we had much higher government investment as a share of gross domestic product than we do now, and also much higher tax rates on both high-income individuals and corporations.
The era of big government investment and high taxes on the rich coincided, not incidentally, with the U.S. economy’s greatest generation — the postwar decades of rapidly rising living standards.
After reading Piketty I had mainly associated Democrats and FDR with progressive taxation and public works projects. Krugman reminds us that Ike continued some of those policies. I associate Bernie not Biden with FDR. But I could see Biden as another Ike.
But the story of public investment and progressive taxation in America goes back much further than the ’50s.
We’ve relied on government infrastructure investment to jump-start economic growth ever since the construction of the Erie Canal between 1818 and 1825
Land grants were used to promote railway construction and higher education. Teddy Roosevelt built the Panama Canal. F.D.R. brought electricity to rural areas. Eisenhower built the highway network.
The following is a very interesting analysis of how everything fits together
Actually, given extremely low borrowing costs it’s not obvious that we would even need a tax hike if infrastructure spending were the end of the story. But we will need more revenue to pay for the whole Biden program, which everyone expects will eventually include another round of spending targeted on families. So it makes sense to tie tax hikes to the jobs plan; polling suggests that paying for public investment with taxes on corporations and the rich increases support for an infrastructure plan, and that something along the lines of the Biden proposals will command very high public approval.
Another important point is the following by Piketty that America basically invented progressive taxation and because of it built the middle class more than Europe.
Republicans will no doubt denounce the idea of taxing the rich as un-American class warfare. In reality, however, such taxation is another long tradition in this country. As Thomas Piketty, the inequality scholar, likes to put it, America basically invented progressive taxation.
Piketty on the U.S.: The birthplace of freedom and progressive taxation
Krugman also argues that Biden may have the policies about bringing jobs back home while Trump had only rhetoric
What about Trump’s assertion that raising corporate taxes is a form of sinister globalism? The claim here is that reversing some of the 2017 tax cut would drive investment and jobs overseas, a claim that might have some credibility if that cut had in fact induced multinational corporations to bring investment and jobs back home. But it didn’t.
In practice, the Trump corporate tax cut amounted to a giveaway to shareholders, with no visible benefits to the broader economy. And since we’re talking globalism, it’s worth pointing out that foreigners own about 40 percent of U.S. stocks.
The last point was very interesting.
Thanks, Jack
ReplyDeleteTrump's trade war and tax cuts for the corporations and wealthy did little to help the workers in the manufacturing, coal, and farm sectors.
Note also that many of the foreigners who own American stock are Chinese. Also - globalization has lifted tens of millions of people out of poverty during the last 40 or so years. The newly middle class citizens of the formerly poor countries are now also consumers - of American exports to their countries.
It's not a one way street. The international economies are tightly linked these days.
"globalization has lifted tens of millions of people out of poverty during the last 40 or so years" my understanding is that most of the improvement has occurred from lifting people who are extremely poor to being not as poor (that is probably the best thing that could happen), but that getting many people into the solid middle class has been rare -except for China! On the other hand the middle class has tended to be shrinking here and in other advanced economies through losses both to people becoming more wealthy and also less wealthy. People in the USA are now as likely to lose wealth as to gain wealth in comparison to their parents.
DeleteYou probably keep up on this more than I do.
Taxes already are progressive in the US. They always are progressive, whether Democrats or Republicans are in office. I guess what Krugman is talking about is raising the income tax rates of the top tiers. In Eisenhower's day, they went up to 90%+, if I'm not mistaken. I don't doubt that someone like Krugman thinks that's a good idea, but capital and capitalists are much more mobile now than they were in the 1950s. I think we would see a massive flight of wealth and the wealthy if Democrats tried to raise taxes too much.
ReplyDeleteThere also is a lot of traction in some Democratic circles to impose a wealth tax to supplement income taxes. This would be the sort of wealth redistribution which seems to get Krugman fired up. I think it's possible that he's disguising the wolf of wealth tax under the sheep's clothing of progressive taxation. I think a wealth tax would cause a massive flight of those with deep pockets.
The points about Trump's policies are interesting. Traditionally, a tax cut would have been a Republican policy, but a trade war wouldn't have been. Trade protectionism probably falls into the category of "bipartisan populism". Members of both parties always want to protect favored industries in their districts or states. It's probably true that, during my adult lifetime (I basically entered adulthood when Reagan was elected the first time), Democrats have been somewhat more in favor of protectionism than Republicans, because union workers tend to favor protectionist policies. But the Reagan era for the Republican Party ended in 2016.
My view is as follows: Republicans, under the influence of Trump, are likely to continue to embrace bad, protectionist policies. Meanwhile Democrats, with their technocratic tradition of Clinton, Obama and now Biden, are somewhat more likely to be globalists. I see this as yet another symptom of the continuing realignment of the parties, with the working class (now, apparently, including Blacks and Hispanics) drifting into the GOP, and the educated classes becoming the dominant bloc in the Democratic Party.
Protectionism, like inflation, is bad but popular economic policy. I tend to have a lot of faith in the collective judgment of the American people; but I don't when it comes to economics. Economics is too unintuitive. It requires training. We have a Federal Reserve in the US which essentially is accountable to nobody; it functions as a sort of benign, technocratic dictatorship. It has saved our bacon, probably numerous times, in the last 50 years. One of the great and unappreciated dangers of the Trump years was his proposal to nominate unqualified Fed governors with crackpot theories; luckily, sane heads prevailed in the Senate.
There is some fear in conservative precincts that what you're calling "Bidenomics" will be inflationary: it would pump money into an economy which seems to be well on the road to recovery without the need for stimulus. But inflation isn't easy to control - or predict. Nobody knows with certainty what will happen if Biden continues to pass multi-trillion dollar spending initiatives.
"...capital and capitalists are much more mobile now than they were in the 1950s. I think we would see a massive flight of wealth and the wealthy if Democrats tried to raise taxes too much." I think you are correct there, Jim. I also think though that the Democrats are aware of that danger.
DeleteAbout stimulus money, the economy is in recovery for some people, not so much for others. I hope the stimulus can be directed in a preferential way toward those who need it most. And if it can be directed towards infrastructure, goodness knows that has been neglected and is in bad shape. And maybe infrastructure can generate some jobs which don't require a college degree.
Trump enacted a massive tax cut at a time when the economy was booming and unemployment near record lows. This type of stimulus is normally saved for recession periods, not booms. Most of the tax savings went to the rich and corporations. The stated reason was that corporations would invest to the spandex production and hire more people, but actually it mostly went to stock buybacks and dividend increases, and to fatten up corporate cash reserves. It launched a short term mini- boom, which burned out quickly. A number of economists referred to it as a sugar high. It skyrocketed the deficit. Didn't save for the rainy day.
DeleteWell, the rainy day turned out to be a global monsoon. Running up huge deficits to keep counties everywhere afloat. In the US, it meant trivializing the lives of the elderly and vulnerable ( so much for being pro- life.)
Will there be inflation? Anybody's guess. One thing I learned early on in economics- forecasts are a guessing game, always. Before Covid the economic gurus were fretting about deflation. Now it's inflation. It's really pretty much of a coin toss.
Thank God for an independent Federal Reserve!
But Jim, you are right The Fed has saved our economy many times. Working with other central bankers, they have saved the international economy more than once and n the last 50 years. . Trump's nominees ranged from bad to potentially disastrous.
sigh. Expanding not spandex. Lol!
DeleteAnne, I am intrigued by your theory of boosting spandex production :-). Won't you (ahem) *expand* on it?
Delete