Michael Hudson: America’s Deceptive 2012 Fiscal Cliff, Part IV– Why Financial and Tax Reform Should
Michael Hudson: America’s Deceptive 2012 Fiscal Cliff, Part IV– Why Financial and Tax Reform Should Go Together
http://www.nakedcapitalism.com/2013/01/michael-hudson-americas-deceptive-2012-fiscal-cliff-part-iv-why-financial-and-tax-reform-should-go-together.html
Taxes pay for the cost of government by withdrawing income from the parties being taxed. From Adam Smith through John Stuart Mill to the Progressive Era, general agreement emerged that the most appropriate taxes should not fall on labor, capital or on sales of basic consumer needs. Such taxes raise the break-even cost of employing labor. In today’s world, FICA wage withholding for Social Security raises the price that employers must pay their work force to maintain living standards and buy the products they produce.
However, these economists singled out one kind of tax that does not increase prices: taxes on the land’s rental value, natural resource rents and monopoly rents. These payments for rent-extraction rights are not a return to “factors of production,” but are privatized levy reflecting privileges that have no ongoing cost of production. They are rentier rake-offs.
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The bank lobby suggests that the economy borrow its way out of debt. Their proposal to “stabilize” the financial system is for the government to bail do for the banks what it has not been willing to do for recipients of Social Security and Medicare, or for states and localities no longer receiving revenue sharing, or for homeowners in negative equity suffering from exploding interest rates even while bank borrowing costs from the Fed have plunged. The government is to supply nearly free credit to the banks, to lend debtors enough – at the widest interest-rate markups in recent memory – to keep paying the debts that were run up before 2008.
The problem is that this set of policies will further destabilize the economy rather than alleviating today’s debt deflation. What makes this a quandary is that the proposed moves to cure this instability will only make things worse. The Fed’s prime directive is to keep interest rates low – to revive lending not to finance new business investment to produce more, but simply to inflate the asset prices that back the bank loans that constitute bank reserves.
However, if the Fed keeps interest rates low, there is no way that corporate, state and local pension plans can make the 8+% returns needed to pay their scheduled pensions. But if the Fed lets interest rates rise, this will reduce the capitalization rate at which banks lend against current rental income and profits. That will lower prices for real estate, corporate stocks and bonds, pushing the banks even deeper into negative equity. So if the economy is saved, the banks cannot be. This is why the Obama Administration has chosen to save the banks, not the economy.
Either way, the financial system cannot continue along its present path. Only debt write-offs will “free” markets to resume spending on goods and services. And only a shift of taxes onto rent-yielding property, finance and monopolies will save financialized prices from being loaded down with interest charges as banks lend to raise the economic overhead rather than for production and employment.
The solution for Social Security, Medicare and Medicaid is to de-financialize them, treating them like government programs for military spending, beachfront rebuilding and bank subsidies, paid out of current tax revenue and new government money creation, which is what central banks are supposed to facilitate, after all.
(more at link)
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