Tuesday 2 October 2012

What François Hollande knows, that we forgot

To hear the anglosphere rightwing talk, you'd think government debt is about to send us into the economic dustbin with Greece. What are the facts? 

Here's a plot, from Chapter 5 of the 2010 Economic Report of the President, of US public debt from 1920 through now, then projected for the next thirty years:

Current debt is near the average it's been for 90 years. 

Through that period, there've been two dramatic jumps in debt level, first from the Great Depression, then from World War II. 1980-1992 saw a third,  smaller debt rise created by the policies of Reagan and Bush the Elder.

Right now there's not a big federal debt problem in the US. That's reflected in current near-zero interest rates. 

The problem is entirely with what's projected to happen in the next 30 years. Unless that trend's undone, at some point investors would stop buying US federal paper.

What are the big causes of that projected rise? Bush the Younger's tax cuts for the rich, Bush the Younger's refusal to pay for his wars and his Medicare prescription drug program, and huge inefficiencies in US health care (it costs almost twice as much per capita as Canada's system, and gets worse results).

What are plausible solutions? Increase the retirement age. Reduce health care inefficiencies. Raise taxes. 

Retirement age is a complicated issue. So is Obamacare. Raising taxes, maybe not so much.

The rightwing says increasing taxes on the rich will slow down job growth. Is there evidence for that?  

The US Congressional Research Service has just studied the question. It found that "reduction in the top tax rates have had little association with saving, investment, or productivity growth."

And there's an argument from basic economics that gives the same conclusion. For the rich, marginal utility of income is low, so it's best to tax them at a rate that maximises revenue, 1/(1+labour supply elasticity for the rich). Labour supply elasticity for the rich is low, so that formula suggests about a 70% tax rate for the rich. 

During 20th century periods of greatest economic growth in the US, tax rates for the rich were near that, or higher. 

François Hollande has just announced such a tax rate for the rich in France, 75%. If the rightwing is correct, wealth and jobs will flee France, and Hollande's tax will cause a recession. If the rightwing is wrong, it won't. We'll know in a couple of years.

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