By Barry Bluestone | Boston.com | November 16, 2012
As we approach the “fiscal cliff” President Obama is adamant about raising tax rates on high income families to help reduce the deficit. House Speaker John Boehner now says Republicans are willing to consider some form of higher tax revenue as part of the solution – but only “under the right conditions.” Lower tax rates for all families, both rich and poor, is one one of them. If the Republicans were to reconsider this position, the President and the Congress could pull off a pretty neat trick – simultaneously reducing the deficit and stimulating the economy.
How could this possibly work?
Right now, the main reason why economic growth is so sluggish is a lack of consumer spending. If we want to increase demand for goods and services, we need to put money in the hands of spenders, not savers. Savers are good for investment, but savings are not our current problem. Businesses are sitting on the sidelines with something like $2 trillion in cash which they could use for investment. They are not investing because in the current economy they fear there is not enough consumer demand to purchase the output this investment would produce.
Right now the nation needs consumers. So who consumes and who saves? This is well-known. In general, savers are rich people. A family in the top 1% of all earners (those with incomes in excess of $569,000) spends only about 49 cents out of every additional dollar while those in the top 5% spend 63 cents out of every dollar. The rest goes into savings accounts, the stock market, and hedge funds – which in the short run create virtually no jobs. Read More