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The Link Between Taxes and Trust

January 28, 2011

Economist Paul Krugman’s commentary today is instructive and cautionary as it shows the flawed thinking by Republicans that having a low tax base is a good thing. Here is an excerpt from Their Own Private Europe:

Let’s talk about what really happened in Ireland and Britain.

On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation. In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.

So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.

The lesson of the Irish debacle, then, is very nearly the opposite of what Mr. Ryan would have us believe. It doesn’t say “cut spending now, or bad things will happen”; it says that balanced budgets won’t protect you from crisis if you don’t effectively regulate your banks — a point made in the newly released report of the Financial Crisis Inquiry Commission, which concludes that “30 years of deregulation and reliance on self-regulation” helped create our own catastrophe. Have I mentioned that Republicans are doing everything they can to undermine financial reform?

What happened in Ireland is exactly what happened in California, Illinois, Florida, Nevada and other states that had huge housing booms, a flood of risky sub-prime mortgages and consequent meltdown, ballooning debt and now the highest unemployment, therefore there is now a severe tax revenue problem. How many times do I have to state that our country is set up on tax revenues. That’s the money taken out of paychecks and business profits to support education, defense, national parks, run the government, Medicare, Social Security, etc. Less taxes is a bad thing. It weakens government. But, Republicans want to privatize everything, pay less taxes, and say that is a good thing. Their rhetoric is: big government is a bad thing — less government is a good thing. Bull! They want less PUBLIC ownership, less PUBLIC benefits, less PUBLIC governing and more private ownership in the hands of the wealthy elite. Do you trust these people when they are pushing for less regulations? Pushing for rolling back the EPA? Pushing to privatize Social Security and linking it to stock market or bond market? Pushing for their own interests at the expense of the public’s interests and public’s safety? Come on!

When government is not spending our tax dollars, they are constricting the economy. To get out of the mess we are in we must spend our way out. That will happen in a variety of ways. The temporary Social Security payroll reduction will allow a few hundred million to flow back into the economy through spending it. Various programs like the QE2 Federal Reserve buying of bonds will help float the stock market through June 2011. Tax incentives spur investment.

Now if we cut Social Security benefits, the 54 million recipients will not spend that money in the greater economy. When people have less, they spend less. When you spend less, there is less cash flow. Less cash flow hampers the economy, any economy. It is just like your own household budget. Less money always translates into less spending for your household. There is micro-economies and macro-economies. Either are dependent on the oil that greases the wheels — cashflow. To oil the wheels of government — roads paved, water systems maintained, firemen and women paid, cops on the beat, etc., you need money and that comes from taxes. We put our trust in government to serve the PUBLIC’S interests through taxes. We give to them, they make sure the various roles of government are taken care of….

so you see…. harsh spending cuts, led to huge job losses, have failed to restore confidence… is a flawed approach. You need more spending, leading to more jobs and more what? Confidence, and confidence is rooted in trust. So, the link between taxes and trust is jobs and confidence and the only way to get there is by spending the PUBLIC’s money.

Just an afterthought: When sub-prime defaults first started happening, Credit Default Swaps should have kicked in to cover the defaulted loans, BUT there simply was not enough capital reserves to cover the defaults. That was largely due to the fact that alot of that money had been paid out in bonuses to the financial houses who were trading credit default swaps like baseball cards in the global market and reaping huge bonuses and hefty commissions on each deal! That is why I recommend seeing, Inside Job.

Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed Page and continues as professor of Economics and International Affairs at Princeton University. Mr. Krugman received his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. He has taught at Yale, MIT and Stanford. At MIT he became the Ford International Professor of Economics. In 2008, the American economist Paul R. Krugman won the Nobel economics prize on Monday for his analysis of trade patterns and location of economic activity.

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