INEQUALITY | Best Addressed by Spending, Not Tax Policy

Ed Kleinbard, USC

Prof. Edward Kleinbard of USC has a new book, We Are Better Than This: How Government Should Spend Our Money.

It starts with OECD data and prior studies to compare national data on inequality. His summary is that the U.S. record is “Dismal”.

He then demonstrates how government can enhance what Adam Smith called "the happiness of society" – via  investments and social insurance.

He favors extending the system now under assault from the current majority leadership in Congress.

He thinks that efforts to make the Federal income tax more progressive ("Soak the Rich") are futile.

Here are Kleinbard's main points:

• Seeing inequality as a tax issue leads to "misframing our policy debates". 
• The positive returns to government investment in human capital, in infrastructure and in pure science are "enormous" and social insurance addresses the "inescapable role of brute luck in our outcomes".
• Spending wisely grows the economic pie. 
• Preoccupation with the progressive income tax is self-limiting and self-defeating, because very high top marginal rates incur real efficiency costs.
• Political wars that ensue from very high top rates exhaust public energy and attention.
• Better to focus on the progressively of the overall Federal budget, taxation and spending. 

Bottom Line: Not particularly progressive tax systems can fund very progressive overall fiscal systems. To address income inequality, a larger revenue base is more important than the progressivity of the tax structure. His main thesis is outlined in an October 2014 op-ed in The New York Times. Prof. Kleinbard has also published an essay on the "real" Adam Smith values in Commonweal Magazine.

The Elephant in the Treasury - Why the Palladium Coin Was Rejected

The elephant in the room at the Treasury and Fed is the fear of being accused of "monetizing the debt". When the country is at the "zero bound" where interest rates on Federal debt are being constrained by Federal Open Market Committee policy to approach near-zero percent, then the difference between debt and money approaches near-zero.

So why the Treasury and Fed concern about a palladium coin valued at $1 trillion? It would solve the big problem of the debt ceiling. Paul Krugman has pointed out in his column in the print edition of the NY Times on Friday, January 11, that the Congress failing to authorize the debt ceiling forces the Executive Branch to withhold authorized payments, which blurs the roles of the Executive and Legislative branches.

Raising the debt ceiling wouldn't grant the president any new powers... [and] if the debt ceiling isn't raised, the president will be forced to break the law; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

The palladium coin would also not appear to require Congressional approval - although the law does seem to require a "marketing plan" for the coin to be submitted to the Congress and a $25 palladium coin issue went through the Congressional legislative process in 2009-2010 as I have previously noted.

Here are some objections:
1. Separation of fiscal and monetary policy is an article of institutional and theoretical faith than no one wants to interfere with. For the Treasury to issue a trillion-dollar coin to deposit at the Treasury would open up all kinds of questions about this separation.
2. The zero-bound situation is temporary and everyone would like to escape from this difficult world as soon as possible. Former Fed Governor Larry Meyers said in December 2008 that at the zero bound the FOMC has nothing much to do and they should all take a very long vacation.  I am sure, however, he was not expecting the vacation to last until 2013.
3. A system with Federal Reserve independence is more resilient than one where the Fed and Treasury are combined. It's the 100th anniversary of the creation of the Fed, which was created to maintain orderly financial markets (the Fed was a remedy for the Bankers Panics of 1907-1908) and to preserve the value of the dollar. The fear that a head of state might tamper with the money supply to finance a war or excessive consumption is well founded. A monetary authority protecting the value of the people's money is a widely emulated institution.

So, however annoyed we may be about GOP misuse of the debt ceiling as a bargaining chip for something else, and thereby interfering with the conduct of government, the Treasury and Fed are right in opposing something that would blur the distinction between them.

However, some other plan better be ready to thwart a debt-ceiling blackmail.