July 19, 2010

The article below was published by CNBC:

Ordinary Americans are the Engines of the Economy, Not the Superrich

 

On CNBC’s “The Call” today, I appeared with Ben Ferguson to discuss the wisdom of extending the Bush tax cuts. Like President Obama and the Democrats, I believe in continuing the Bush and Obama tax cuts on the 98% of Americans who earn under a quarter of a million dollars. I think ordinary Americans need the money, along with Government infrastructure spending, to spur us out of the Bush/Wall Street Recession. Ben, in contrast, supports the Republican plan of borrowing $678 billion from the Chinese and your social security taxes to extend massive income tax breaks to the super-wealthy.

 

Ben argues that America must go deep into debt to give rich people oodles of cash because it will spur economic growth. But I argue it’s the 98% of Americans that received Obama’s middle-class tax cut — giving us the lowest tax burden since 1950 (thank you, President Obama!) — that are the engines of the economy.

 

Who’s right? As a matter of logic, economics, and history, is it the superrich or the other 98% of us that make the American economy grow?

 

Let’s start with logic first. Let’s say you’re part of that superrich and you own a factory that makes cars. There is demand for 10,000 cars and you make $100 million a year. Under the Republican plan, the Government borrows money so you make $200 million a year, but there’s still only demand for 10,000 cars. Will you hire more people because you’re richer? Nope. You already have enough workers to make the cars. Will you pay your employees more? Nope. They’re already making 10,000 cars at the salaries you pay them. Will you increase your personal consumption? Well, you already own two yachts and four cars and a $20 million house. Maybe you’ll add gold faucets to your toilet, but that won’t help the economy very much. You’ll stock the money away and hoard the cash, just as businesses are doing now.

 

Now let’s discuss a Democratic plan with the same amount of money: say we divide the $100 million and give $10,000 each to 10,000 people in the American middle class. Will they spend it? As Sarah Palin might say, “You betcha!” They might use it on rent; they might use it on groceries; and they might just use it to buy a second car so that the wife doesn’t have to drop the husband off at his job every day before she drives to hers.

 

Cut to the businessman. He still only makes $100 million a year, but given the Democratic plan’s stimulating the need for cars, now he has demand for 15,000 cars. An increase of 50%. He needs to hire more people pronto. Oh and he needs more car-making equipment. Oh and he probably needs to increase the salaries of his workers to make up for the increased demand ’cause they’re working overtime. And those workers and those car-part people, flush with money, will go out and buy groceries and new cars too. Which increases demand to 18,000 cars. Gotta hire more people pronto. And those people now have the cash to buy toys and better clothes for their kids too. Toy and clothing manufacturers rev it up. Retail store workers get hired to deal with the increased demand. And before you know it, the economy is humming along like nobody’s business.

 

But wait. Doesn’t the business owner need money to pay his employees and new car parts? He does. But he has it. As Larry Kudlow pointed out on the show today, businesses are flush with more cash than they’ve had in decades. And if they didn’t have it, they’d borrow it. Interest rates are close to zero, the lowest they’ve been in decades, and any decent entrepreneur will borrow money at these low rates to make a substantial profit.

 

Have I convinced you yet? Don’t just take my word for it. Look in any economics textbook for the “multiplier effect.” You’ll see that a dollar spent on poor or middle class people can add seven or eight dollars to an economy, while a dollar spent on the superrich might add only pennies. The reason is clear: if you’re struggling to buy toys for your kids or a car for your spouse and you get some extra cash, you’ll use it. But if you already have the seven yachts inherited from Great Grandfather, Earl of York (without any estate tax if he died in 2010 under Republican policies!), the extra cash will be pretty meaningless to ya.

 

Don’t like logic or economics? Try history. Bush spent eight years squeezing the middle class and giving their hard-earned money to America’s well-heeled millionaires. And we ended up eight years later with half a million fewer jobs than we had when the Supreme Court annointed Bush President in 2000. Under Clinton, we spent eight years at the same tax levels Obama wants for the supperrich. (Obama wants significantly lower levels for the other 98% of us). What happened? The rich got richer under Clinton. But the middle class got richer too! Even the poor were better off. Millions of jobs were created. And we had the best economy America’s ever seen.

 

Stimulus works. Under the Obama stimulus package, we went from losing 700,000 jobs a month to staying even and even creating some jobs. We would have had an even bigger stimulus to the economy if the Republicans hadn’t voted to cut down Obama’s middle-class tax cuts and aid to the States. But it’s not enough to do tax cuts. They have to be targeted effectively in order to stimulate the economy. And if we care about job growth and a roaring economy, that stimulus has to be focused on the 98% of us who need the money and will spend it, rather that the 2% who don’t need the money and won’t spend it (because all their needs and wants are already met).