Inflation has many causes, including increases in demand for products and services, shortages of raw materials and wage increases.
Our federal and state governments would benefit from additional income tax revenues generated from inflation.
Weak demand for labor and an economic slowdown in China and Europe has led to a decline in the value of commodities and reduced inflation. Some people have benefitted. Others have been hurt.
Inflation generally harms people living on fixed income and helps borrowers. However, in recent years the lack of inflation and high rate of unemployment has promoted the Fed’s QE programs which have reduced interest rates payable on bonds and savings.
Many public pensions and welfare benefits have COLA clauses. Insolvent cities and states are looking to avoid paying COLA increases on pension benefits. Employees whose salaries are not keeping pace with inflation, are seeing their spending power reduced by inflation. Because of the high levels of unemployment employees have limited bargaining power or job mobility.
The value of homes generally benefit from inflation because income rises and the cost of building a new home increases. In this post housing bubble where home prices are depressed, it will take years of inflation and a reversal of many factors depressing demand for homes before housing prices recover to a satisfactory level. The middle class is being decimated by reduced home values.
State revenues have been substantially reduced by the collapse of the housing market. Increased state revenues are vital to increased highway construction spending and the creation of good tax-paying jobs. They will benefit if housing inflation returns.
Bowles-Simpson is most likely, on balance, an austerity measure which will harm economic growth. It has some positive ideas like raising the age for starting to receive Medicare benefits and eliminating the Sequester and debt ceiling deadlines. It is not designed to stimulate the economy or create good tax paying jobs. It lowers tax rates and offsets the revenue losses by reducing deductions and government spending. It is designed to be slightly revenue positive for the US government and to reduce the ratio of the National Debt to the GDP over a ten year period. It includes so many drastic income tax and Medicare and other spending changes that, if it is enacted as vaguely proposed, attempts that have been made to evaluate future effects on the federal deficit, are likely to prove to be wrong by a large margin.
When I read summaries of the proposal, as revised in April 2013, I get the feeling that they have spent thousands of hours rearranging the deck chairs on the Titanic.
Paul Krugman shouldn’t feel it is necessary for him to keep proving that austerity measures are harmfull to the economy. Only the fools, including many conservative Republicans, disagree.
Austerity measures take many forms. The following are all austerity measures:
* the Sequester
* the American Taxpayer Relief Act of 2012
* reduced military and NASA spending
* reduced government employment
* reduced state government spending
The Obama administration which blames the Republicans for everything wrong in the economy, is responsible for the first four and the failure of its stimulus programs is in large part responsible for the fifth.
President Obama proposed the Sequester as a political trick to get the Republicans to extend all of his tax and spending programs until after the presidential election. It backfired on him when the Republicans refused to repeal it after the election and despite his demagoguery and gamesmanship by closing the White House to students and impeding air transportation the public blames him equally for the problems sequestration is causing.
It is promoting congressional gridlock.
The American Taxpayer Relief Act of 2012 raised taxes on the upper middle class in most large cities and is reducing their spending. Its two percent increase in withholding taxes was necessary to preserve the integrity of Social Security. Withholding taxes were reduced two years earllier to grow the economy and promote the president’s re-election. He should have sought a different stimulus at that time. Adding reduced deductions to the tax bill only further increased middle class taxes and will reduce their spending.
Reduced military and NASA spending was planned by the Obama administration independently of the Sequester. It has been enhanced by the Sequester. It has taken many forms and has already cost tens of thousands of jobs and left many returning veterans unemployed.
Postal worker layoffs, failing to find jobs for returning veterans who joined the unemployment rolls and excessively reducing government employee workdays to cause maximum inconvenience to the public to try to get them to blame the Republicans are further austerity measures. The Obama administration could have dealt with the Sequester’s two percent spending reduction in a less disruptive way. He turned down Republican offers to give him flexibility.
Reduced state government spending is being caused by requirements that states balance their budgets. The failure of the Obama administration stimulus programs to promote good tax paying jobs has limited the recovery in state revenues.
Furthermore, Obamacare is causing a response similar to an austerity measure. Businessess are holding back capital spending and hiring and looking for ways to avoid paying increased medial care costs. Many individuals fear loss of their jobs or their medical insurance and are afraid to spend.
Paul Krugman is clearly correct that stimulus spending and not austerity measures will return our country to prosperity. However, stimulus spending on food stamps, while it improves the lives of the recipients, merely grows the GDP without any meaningful multiplier effect and generates little tax revenue. Spending to build bridges and improve highways creates meaningful tax paying jobs and has a substantial multiplier effect which will grow the GDP and reduce the federal deficit.
Much too small a portion of the Obama stimulus spending has been spent on creating good taxpaying jobs. The majority of the jobs created generated negative federal income taxes. It is no surprise that we have slow growth and excessive deficits.
At today’s interest rates America’s corporations can raise billions of dollars from the sale of bonds and use the proceeds at favorable interest rate spreads to purchase state issued Jump Start America Bonds to finance major transportation construction projects.
To open the door for the sale of Jump Start America Bonds, Congress should modify our federal corporate income tax laws to permit the use of Jump start America Bonds, valued at par plus accrued interest, to be used, commencing five years after issuance, in payment of federal corporate income tax obligations. This will eliminate the interest rate risk on the sale of Jump Start America Bonds.