When I agreed to write The Economic Consequences of the Pandemic for Yale UP, with a target date of May 2021 the idea was that it would be a polemic against austerity along the lines of Keynes’ The Economic Consequences of Mr Churchill, and the The Economic Consequences of the Peace  . In view of the rapid resurgence of austerity politics after the Global Financial Crisis, about which Henry and I wrote here, it seemed like a safe bet that this would be a hot topic in 2021. Even when Joe Biden won the election, and then the voters of Georgia gave the Dems a wafer-thin Senate majority, it still seemed likely, that we would see, at best, a half-baked “compromise” along the lines of the Republican counter-proposal to the American Recovery Program.
But here we are, a couple of months later. Not only has the ARP passed with the only significant cutback being the exclusion of the $15 minimum wage rise, but the Administration is already talking about an additional $3 trillion in infrastructure expenditure. If that happens, it will be after I’m due to finish my manuscript, but well before the book comes out.
All of this is great news, but it means I need to produce a different book to the one I had planned and have already written a fair bit of.
I could continue in the vein of the oppositional polemic I had planned, and talk about the inadequacies of Biden’s program, but I don’t see any benefit in that.
What I now see as the big danger is not austerian limits on spending, but shying away from the need to raise taxes on the well-off . Roughly speaking that means those in the top 5 per cent of the income distribution, who account for around 25 per cent of all income, more than everyone below the median (estimates vary a lot, here’s one based on 2010 Census)
This needs to happen quite soon if it is to be in effect by the time employment returns to pre-pandemic levels. Before ARP, the Congressional Budget Office estimated that this wouldn’t happen until 2024. But with ARP and another round of stimulus, it’s reasonable to expect a recovery (at the aggregate level, though not for all places and sectors) by 2022. With that timing, the correct option is to include revenue measures as part of the infrastructure packages. That seems to be on the agenda, but will face serious resistance, as increased taxes always do.
The constraints of the pandemic, and the substantial public assistance provided to deal with have left many households flush with cash. That’s particularly true of high-income households who were able to work remotely, didn’t lose their jobs and benefited from rising asset prices. To raise substantial revenue, and avoid hitting capacity constraints, it’s necessary to tax away some of those gains, as well as reversing corporate tax cuts, the benefits of which ultimately flow to the same group.
Apart from the obvious resistance that always faces higher taxes, and the presumption of uniform opposition from the Republicans, the biggest obstacle may come from those influenced by what I’ve called the pop version of Modern Monetary Theory, which suggests that there is no benefit from taxing the well-off other than to make them not so well-off. Bearing in mind that we are talking about millions of people who regard themselves as middle-class
Correctly understood, the core of MMT (namely, the functional finance version of Keynesianism presented by Abba Lerner in the 1940s is entirely supportive of higher taxes once the expansion is well under way. The key to functional finance is that taxes should be used to ensure that aggregate demand is consistent with the productive capacity of the economy, neither too low nor too high. If we want a big increase in public expenditure, its necessary to prevent high-end private consumption and speculative investment from crowding out vital social needs.
fn1. The Economic Consequences of the Peace was not precisely about austerity, but about the same underlying thinking, that massive reparations could be extracted from Germany without worrying about the macroeconomic effects there and in the recipient countries.
fn2. I’m carefully avoiding the term “rich” here, which mostly seems to be applied to a tiny stratum typified by Bill Gates and Jeff Bezos.