There’s an important unappreciated point in the remark that economist Lawrence Summers made to Chris Anstey of Bloomberg yesterday. In the interview he encouraged Congress to enact tax increases:
Former Treasury Secretary Lawrence Summers said that Washington is forgoing a key tool in helping the Federal Reserve quell inflation, and urged that lawmakers look at raising taxes.
“Fiscal policy makes a big difference,†Summers said on Bloomberg Television’s “Wall Street Week†with David Westin. “Just the right thing to do is to raise taxes right now to take some of the demand out of the economy.â€
Summers said that any tax hikes shouldn’t go toward funding fresh outlays — in contrast to the package of tax hikes and expanded social investment that President Joe Biden has sought from Congress for more than a year now.
“This is not the time for anything that’s going to be a big new spending program,†said Summers, a Harvard University professor and paid contributor to Bloomberg Television. He also rejected “stimulative†measures such as continuing the moratorium on student debt.
That is a classic Keynesian prescription and it illustrates neatly why Lord Keynes (and MMT-ers) may have been technically correct but are politically wrong. Politically, t’s a lot easier to give handouts than it is to raise taxes. That is why the focus of all true “stimulus” packages should be on investment rather than on consumption. And simply renaming consumption investment is sophistry not a change of state.
A moratorium on student debt payment or, worse, a debt jubilee is consumption not investment. Paying for the healthcare of the non-working elderly is consumption not investment. Even worse is paying more for the same amount of care when healthcare prices rise in response to increased demand, just as one would expect.
Paying for highways or bridges to nowhere is consumption not investment. Paying for the maintenance of existing and well-used roads and bridges may well be investment but very little federal highway spending takes that form. Most is used for new construction and I question whether most new highway construction these days is actually investment.
Another key point is that the effect of taxation which is not immediately spent is to withdraw money from the private sector. That money might have been spent on personal consumption or it might have been invested. Taxing “the rich”, while a good political slogan, is a risky strategy. When you tax “the rich” are you reducing personal consumption (and hence reducing the likelihood of inflation) or are you reducing investment?
Taking demand out the economy by boosting taxes leads to increased consumer prices which leads to increased grumbling.
This is similar to the problem the MMT promoters face. They claim that if there is ever a debt or solvency crisis, then the government can just raise taxes. Of course, the problem is that, from a political angle, raising taxes during a crisis is always going to be one of the least-popular actions and, therefore, will be avoided for as long as possible.
And I’m not sure what Summers means by “raise taxes right now.” Federal taxes are done on an annual basis – unless you’re going to raise taxes -and- raise withholding and quarterly payments, it won’t actually do anything.
I believe the Federal Government can raise payroll and capital gains tax mid-year without too many complications.
In truth, inflation is going to still be high in Jan 2023 so a tax hike that takes effect could still be effective.
The biggest impediment to a tax hike to fight inflation is the likelihood there is or will be a recession.
“Paying for the maintenance of existing and well-used roads and bridges may well be investment but very little federal highway spending takes that form.”
No doubt true. A couple tidbits. Until late last year we owned an equipment rental company that provided safety and related equipment to road and trench digging. Plates, barricades, signage etc. A rule of thumb is that $1 of infrastructure spending results in $3 of economic activity when all is said and done. Imagine if the so-called Infrastructure Bill actually was repair and maintenance instead of the 10-15% estimate, with the balance being pork. Is it any wonder our infrastructure is crumbling? And that doesn’t even consider the strategic issue of the grid.
Investment quiz: To generate $1 in revenue this company requires $1 in capital spending. Zero cash flow. How does an investment like this work?