Yesterday I argued that the Economic Social Contract in the US is broken, if it ever really existed in the last forty years. But that doesn’t mean that it can’t be repaired. In fact, it must be repaired if we are to avoid another catastrophe in which tens of millions lose their livelihoods and are brought to (the brink of) ruin. How can and should government seek to do so?
There are five levers that government has in its toolbox that can have an effect on economic stability in times good and bad: taxation, the money supply, interest rates, trade policy, and regulation. To achieve real stability – and a real economic social contract – all five have to be in sync with one another.
The two levers that have the most direct economic impact on people’s lives are taxation and the money supply, and they are interlinked. In America, as opposed to Europe, resentment to taxation is in the national DNA. We even fought a war about it (a minor fracas from 1775 to 1783). This has become ideological rather than rational. Worse, it has become a primary means of moving power from labor to capital.
Writing in the Great Depression, John Maynard Keynes advocated government spending to re-stimulate the economy during bad times. However, there was also a flip side to his argument: that, in good times, the state should build up a reserve, a rainy day fund, in order to be able to spend in bad times. That side of the argument has been blatantly ignored for decades, with good times being seen as an ideal time to ‘return to the people’ their money in the form of tax cuts. This has meant that every time we face an economic downturn, government has had to borrow to fund its spending – and more recently, deficits have become an embedded part of government itself. Compounding this, most tax cuts have benefited capital and the wealthy, while spending on social stability has become the favorite place to cut expenditure, being labeled ‘entitlements’.
There is an answer to this: taxation should be stabilized as well as being made (at the very least) capital-labor neutral. Government should be expected to run a deficit-free budget over an agreed timescale – say, 10 years. That will mean running surpluses in good years to counterbalance deficits in bad ones. The tax code should be simplified into three simple levels, applicable across the board and without the possibility of deductions or loopholes. At the same time, the minimum wage should be raised to a modern poverty-avoidance level and indexed to the rate of inflation.
All of this would gradually increase the number of people who actually pay taxes, inflate government’s revenue pool and reduce spending on social programs such as SNAP. Simultaneously, government should take a hard look at sacred expenditure cows, most especially defense spending.
Once this has been put into place, government will be able to reassess social security – the more people are economically secure, the less they will need to rely on federal social programs. And those social programs should in turn be structured to safeguard income security rather than react to endemic social and economic problems.
More of that tomorrow.