Personal Consumption by Income Quintile
In response to my request for suggestions on lowering prices a regular commented proposed
Raise taxes, cut government spending, and raise interest rates.
The question remains how? I’ve already made my remarks on interest rates which I believe the Fed governors are moving in the wrong direction.
The pie chart at the top of the page illustrates the personal consumption expenditures by income quintile. As you can see the topmost quintile is responsible for a disproportional amount of that. “The rich” are responsible for nearly half of all retail sales. Taxing their income means they will buy and invest less.. Since our economy is overly dependent on consumption (more than any but the poorest countries), it will have the perverse effects of increasing unemployment and reducing production.
Furthermore, “the rich” already pay a higher proportion of their income in taxes than those in lower quintiles. There is also the risk that there is some degree of effective taxation that will impel the ultra-rich to leave the United States, possibly taking their companies with them.
If taxes are increased on corporate income it will have much the same effects.
The Trump Administration’s “Department of Government Efficiency” experiment has illustrated how difficult it is to cut spending. By some accounts despite all the hoopla and agonizing (depending on your political beliefs) the actual results that DOGE produced were pretty limited—a spit in the ocean compared to what’s needed.
The reality of the federal government is that most of the federal budget is devoted to interest on the debt, Social Security retirement benefits, defense spending, and healthcare spending.
Defaulting on our loans (not paying interest on the debt) will have serious adverse consequences so that’s off the table. We are in the process of increasing our defense spending rather than decreasing it. The effect of trimming SSRI will be disastrous to those dependent on it and they vote. That’s off the table, too.
That leaves healthcare.
The ACA was always seen as a first step. There are a number of things we could do to at least further decrease the rate of increase like we have already done and get it below general GDP growth. However, I think things will have to first get worse. Health care just isn’t an issue for the GOP. They are willing to cut Medicaid spending. Lots of those are brown people and poor people who arent using their bootstraps properly. However, the GOP wont go after old people, they actually vote, so they wont really go after the third of Medicaid that goes to old people or Medicare. Private health insurance costs grow faster than public and they never address private insurers.
That leaves the Dems. While they did, apparently, focus enough on costs in the ACA that we have had an extended period of slowdown in spending, their focus has always been on expansion of access. The actual health care policy and health care economists on the left focus very much on costs but policy is generated by politicians so I am skeptical much of that gets through.
As an aside, as I understand listening to the proposals with Japan and Korea Trump is going to be making all of the final decisions on what Japan and Korea will be allowed to build in the US. If Trump is going to have this much control of our economy, pretty much unopposed since we have no effective means to limit him, why doesnt he just order everyone to cut prices?
Steve
Aside from the Fed’s commitment to a minimal inflation rate, the biggest impediment to reducing prices is manufacturing productivity. Actually, China has been the main world actor holding down, even reducing, prices. China is the main reason (with Walmart) the American working class can afford to clothe itself, despite falling real incomes. The main, if not only, route to falling prices is free trade with China.
Historically, once a country loses its industrial competitiveness, its goes into permanent economic decline. That is what is happening to the US.
“That leaves healthcare.”
Agree 100%. The incentives in healthcare are completely broken. Our current laws have caused these perverse incentives. The ACA has terrible incentives. The key task is to reduce the overall cost of healthcare, not just government spending on it. There is so much waste in it.
One small piece of this is the cost of prescriptions. Americans pay for the new drug development with high prices while most of the world freeloads off of us. There is a simple solutions: eliminate the prohibition on reimportation of prescription drugs. The law currently prevents this. Give me the freedom to order a prescription from Canada, Germany or the UK. Prescription prices will quickly equalize. Bernie Sanders and I don’t agree on much, but this is one of them.
I agree doing those three things would be enormously difficult and painful; likely politically suicidal.
Isn’t this why since the 1980’s until 2020 or so the mainstream view was its better to avoid high inflation then trying to reverse it once it happens.
The wealthy do pay in most of the taxes but who else can do that? You mention the fact that if taxed any more they feel free to leave for another country.
So why not just keep borrowing and leave at collapse? A sound financial plan for the top 10%.
I support a national sales tax on all sales, if they fly to Europe for groceries then they just do.
Congress can always make a rebate for food or medicine if they want. But our streets are crowded with $80,000. cars.
Three hundred thousand dollar houses spread out across farmland. I’m thinking that 5% on top wouldn’t really slow it down.
This is a reason I’ve come around to supporting a progressive VAT tax. People would hate it – at least initially, and it’s a political non-starter and also unconstitutional, but I think it would be better and more efficient in a lot of ways. You might then be able to eliminate the income tax for most people except the wealthy, or at least greatly simplify it.
The national taxpayers union and the Tax Foundation estimate the private sector spends about $500 billion annually on tax compliance. That is just crazy.
For healthcare, there’s no way to reduce costs without lowering salary and pay in the medical industry. But there is still some lower-hanging fruit that could bring some more efficiency and set the stage for other reforms. One is complicated and fragmented code and payment systems/rules. Ideally there ought to be one standard.