A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by The Honorable Richard A. Posner

Author:The Honorable Richard A. Posner
Language: eng
Format: mobi
ISBN: 9780674060395
Publisher: Harvard University Press
Published: 2011-05-31T00:00:00+00:00

The tax rebates that Congress approved in February 2008 were a damp squib so far as stimulating increased consumption was concerned. The tax cut in the stimulus package is only two-thirds greater. The difference in size is too small to make a big difference, or perhaps any difference. Taxpayers may save an even higher percentage of this tax cut than of the rebate because there is greater economic anxiety now.

The part of the tax cut that is saved will increase the amount of capital available for lending unless the savings take ultra-safe forms—but they may. And individuals do not lend to business; they lend to banks or other financial intermediaries that do the actual lending, and the intermediaries may decide to invest additional money they receive from individuals in government securities in order to reduce the amount of leverage, and therefore risk, in their capital structure. Moreover, any effect of a tax cut or rebate in increasing lending to the private sector may be offset by the government's increased borrowing to finance the tax cut.

A federal tax cut will do nothing to alleviate the acute financial problems of the states. They have seen their tax revenues drop sharply, yet they cannot create money, or engage in deficit spending without borrowing at high interest rates. If federal tax rates were reduced, states could raise their tax rates without increasing the net tax burden of their citizens. But that would be a time-consuming adjustment even if the political opposition to raising taxes during a depression could be overcome. It would be ironic if instead of federal money being spent on improving infrastructure, federal taxes were cut, state taxes raised, and the new state tax moneys used to finance many of the infrastructure projects that federal moneys would otherwise finance. All that would have been gained would have been delay in responding to the economic crisis— quite serious delay with respect to those state projects, interrupted because of state fiscal problems, that could resume on short notice if federal moneys were available but must otherwise wait for state legislatures to vote higher taxes.

The transfer-payments component of the proposed stimulus is also questionable, though politically irresistible. The goal of a deficit-spending program aimed at combating a depression is to restore demand to its pre-depression level, not to expand it beyond that level. If instead of demand rising as a consequence of the program from X - Y to X (the pre-depression level), it rises from X - Y to X + Z, there will be inflation because demand will exceed supply. Programs to transfer wealth are very difficult to abolish because interest groups form about them. That is why there is a danger of excess demand after the depression ends. But perhaps we can't afford to look ahead that far. The transferpayments component of the stimulus package is superior to tax cuts because it puts money in the hands of more people who are too poor to save much and who will therefore spend

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