29 Oct '15     home | previous

Republican Debate and the Economy

Last night Republican candidates for president "debated" the economy. Needed by some of us listening to the debate was an understanding of what has been happening in the US regarding wealth and choices we face as a nation.

First, nation-states like the US (which have their own currency) don't go broke the way a business or a family can. It prints money. What happens is, the value of its money declines. It takes more money to buy things. The internet tells us that $2.79 in 1980 was equivalent to $1.05 in 2010.

Across the decades, keeping your money hidden at home or gathering little interest in a bank has been a losing proposition. Therefore people hold and buy wealth in the form of property, gold or whatever they think will retain or increase in value. Wages earned buys less as the years go by.

People with higher incomes accumulate wealth at a faster rate than those just managing to get by. Wealth distribution widens. Before the administration of Franklin Roosevelt (1933-45), wealth differences grew substantially. Then came Roosevelt's progressive income tax (taxation as old as the Roman Republic and begun in the US in 1862 by President Lincoln).

How wealth if to be divided is at the heart of political debates. It's a question about employee pay rates, a question about a minimum wage and who is to be taxed how much. Last night the Republicans said little if anything about a wealth distribution problem. Many Republicans dislike progressive taxation. (The candidates Ted Cruz, Rand Paul, Ben Carson and Rick Santorum favor a flat tax.) Republicans believe that taxation destroys incentive, and it does if it is excessive. Democrats tend to be more in favor of minimum wage laws and the economy stimulated by government initiatives. Last night there were complaints about the interest that must be paid by taxpayers on the federal government's debt. Liberals tend to be less concerned. Soon in Canada the Liberal Party's Justin Trudeau will replace the more conservative Prime Minister Stephen Harper. Expected from Trudeau is less concern with the debt in favor or stimulating the economy, and this is where many expect a new Democratic administration would take the US. The Republicans in contrast talk about the national debt. Last night the Republican presidential candidates talked about addressing the debt with a new tax code and eliminating tax loop holes, something that we hear also from Democrats. There was the complaint that increasing taxes on our most wealthy one percent would hardly put a dent in the national debt. Donald Trump said he would be effective in reducing corporate taxes and "bringing money back" from overseas.

One set of economic questions that the future president faces is: How much to spend on the military? How much to spend on entitlements such as social security and health care? How much to spend on infra-structure and how much to spend paying down the debt? Another question is how much to tax. Nobody last night suggested the Value Added Tax (VAT, a tax on consumption common in Europe and Latin America. As a nation we are devoted to junk, and unfortunately there is no junk-spending/tax index. There is an index on tax revenues in relation to what the nation produces in goods and services: GDP. As I've been saying recently, US tax revenues in 2014 were 17.4 percent of GDP. The tiny nation of Singapore, with its successful economy and low welfare and defense spending, has revenues that are 15.2 percent of its 2014 GDP. Germany has revenues that are 44.0 percent of its 2014 GDP and the Germans seem to be enjoying themselves, their prosperity and their security. But from Republicans we hear dislike of modeling ourselves on the Europeans.

It appears that if a Republican administration follows the Obama administration, the gap between our most wealthy one percent and the rest of us will continue to grow.

Copyright © 2016 by Frank E. Smitha. All rights reserved.