I guess it’s a battle between the demand side and the investment (or supply) side.
The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money-market funds, commercial paper, venture capital, private equity, real estate partnerships — all that saving is channeled into business investment. And whether that capital goes into new start-ups or small businesses or large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.
But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment.
Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.
Now, there are some Democrats who understand this. Senators Evan Bayh and Joe Lieberman, among others, support an extension of the upper-end tax cuts precisely to increase investment incentives that will create jobs. Bayh and Lieberman often refer to the John Kennedy tax cuts that lowered marginal rates across-the-board for successful earners and businesses. They correctly worry about small-business job creation in this process. And they have moved from the demand-side of today’s Democratic party over to the supply-side of the John Kennedy era.
Bayh and Lieberman have the story exactly right. And Treasury man Geithner has it fundamentally wrong.
Geithner tries to make a deficit-reduction argument, saying that extending tax cuts for the wealthy will cost $700 billion over the next ten years. But the real debate in advance of the Erskine Bowles deficit commission, which will restructure budget and tax reform, is about a one-year extension of the Bush tax cuts. That’s priced at $30 billion by the White House, about the same as the new bill to aid state and local governments. Which policy would help growth more?
My answer is to keep the incentives for investment. Or, find spending cuts immediately to cover both options. That would restore even more confidence.
We might also be surprised when the growth-and-revenue-increasing benefits of lower investment tax rates pay for those tax cuts in the future — just as they have in the past.