Saturday, June 04, 2011

A principle for deficit reduction

As I am preparing for a panel on the US budget I will be participating in on Thursday in Madison, a principle occurs to me.  Given that over the past 30 years the economy has disproportionately benefitted high income people far more than low income people, and holders of capital more than earners of wages, any deficit reduction proposal should be, on net, progressive, after considering both changes to the tax code and expenditures.  This is not easy to do analytically, and could still involve some sacrifice from most people, but it should at least be a point of departure.


Ralph Musgrave said...

Also, since the poor spend a larger proportion of any increased income than the rich, any transfer of income (after tax) from rich to poor will increase aggregate demand, and thus cut unemployment.

That is not an ideal way of raising AD because it confuses two issues: 1, the question as to what the optimum degree of inequality is, and 2, how best to raise AD all other things (including inequality) being equal.

However we live in a highly imperfect world: a world where powerful interest groups impose irrational policies. In this environment it is a waste of time advocating 100% rational policies. One has to advocate policies that are marginally less lunatic that those in operation.

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