Alan Greenspan, the former chair of the Federal Reserve Board, believed that the key to increasing a nation’s wealth is investment. Every dollar that was collected in taxes on rich people and corporations and spent on unemployment compensation, food stamps and free health care was, in his view, one less dollar available for investment. So he favored lower taxes on the rich and less spending on the poor. We now know how this worked out.
American corporations are stuffed with cash, and the Federal Reserve System has pumped trillions more in cash into the big banks through its “quantitative easing” program. But the U.S. economy, and to some extent the world economy is stalled, because of the lack of buying power of the American middle class. That buying power was sustained in earlier eras by rising earnings, and then by rising participation in the work force and rising debt. But all of these have run their course. No rational business will increase production unless there is a good market for the product.
Click on Alan Greenspan’s ‘The Map and the Territory’ review by Robert Solow for a more in-depth discussion of this issue.
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Hat tips to occasional links & commentary for the cartoon and to Joshua Chacon for the link to the Solow article.
Tags: Alan Greenspan, Reaganomics, Robert Solow, Supply-side economics, Taxes, Upper bracket tax cuts
Phil Ebersole's Blog 
January 17, 2014 at 1:02 pm |
Thank you Phil. I especially like Solow’s response to Greenspan’s, emphasis on a free market economy that we’re taught in economics 101, “…the outcome of a system of free competitive markets is (under certain conditions) “efficient”…” which means that, “…no rearrangement can make one participant better off without making some other participant worst…” and that, “…initial endowments…” matter and, “…these differences in starting points will be reflected in their marginal products and thus in their market-determined incomes…”, of course, when businesses are flushed with money that isn’t moving, the lower end of the marginal contribution does not move much either, all the more reason for a more equitable response from the government…For others the solution would be a self-reliant, Clintonesque, 3rd way solution where people to pull out a payday loan (or a micro finance loan with an entrepreneurial coach) so they can set up a Pretzel stand and eventually get rich and drink lemon verbana tea with Elon Musk and slouch on an adirondack chair somewhere in the Hamptons.
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January 17, 2014 at 1:21 pm |
Tax treatment that favors not repatriating earnings and building cash balances in foreign banks and currencies exacerbate this problem, too. Companies aren’t investing in the U. S. at a pace sufficient to stimulate demand. This discussion is complicated, but you’ve got the gist of the sources and outcomes. If you want to inject money into the economy, give it to poor people. They’ll spend every penny of it. If you give it to rich people, only some will be spent, or if you buy bonds from or issue loans to financial institutions, only some will be lent or spent. What a shame that Greenspan was such a powerful figure for so long.
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January 19, 2014 at 6:01 pm |
Investment is the sum of private and public investment. If private investment is inadequate, public investment is in order. It is best to invest in things that increase our productive capacity: transportation, communication, and education. But it is reasonable to ask that such investments be shown to be effective.
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