The 1 Percent’s Solution By PAUL KRUGMAN

[SimonF]

Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close — at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?smid=tw-share&_r=1

[Arius]

Krugman is actually using an erroneous analogy and a false dichotomy.  The Keynesian stimulus makes the rich richer through sweetheart government contracts.  Austerity makes the rich richer by increasing taxes on the poor.  Krugman believes he's arguing about rich people versus the welfare state.  He hasn't realized, the rich people run the welfare state to keep the poor from becoming rich.  Neither plan is good for the long-run health of the economy.

He is right though.  None of the advanced forms of austerity will do any good.  He's also wrong.  The Keynesian stimulus will just further fuel the wasteful nonsense which passes for business these days.

[SimonF]

Thanks. How does austerity increase taxes on the poor?

[Arius]

Well, let's look at Greece.  The full list of austerity measures is available here.

Here's a few measures which I find especially telling:

All tobacco, alcohol and fuel now subject to an additional 10 percent tax.

New withholding tax applies from May 1, 2010 on both private and public sector salaries (I can't read Greek, but there's a picture)

Workers classified in “heavy” industries or “dangerous professions” can retire at 60 (not 55), starting January 2011.

The primary difference between rich and poor (not as a rule, just as an observation) is how they earn a living, and what percentage of their income they spend on any given thing.  The poor (bottom quintile of income earners) tend to make the bulk of their living through wages and direct transfer payments (some kind of government cheese).  The rich (top quintile of income earners) tend to make the bulk of their income through dividends, interest, equity appreciation, or some other form of capital gains.

Let's start with an alcohol and tobacco tax increase.  Suppose you take a laborer and a hedge fund manager, both of whom smoke and drink in approximately equal quantities.  The laborer spends between 10% and 15%of his income on tobacco, the hedge fund manager spends less than 1%.  A 10% increase in the price of tobacco increases the percentage of laborer income which will go to tobacco to 16-ish%  The hedge fund manager might not even notice the increase, when measured as a percentage on income.  Thus, the total impact as a percentage of income, is substantially more for the laborer.  That's not to say either of them couldn't quit smoking or drinking, and all taxation is pretty crappy.  My point is that the impact of taxes on consumables is significantly more dramatic, in terms of income percentages, on the poor than on the rich.  In real terms, the poor person requires a larger degree of earning re-apportionment in response to the tax increase.

All withholding taxes are a type of regressive tax.  The bottom quintile usually has 100% of it's income exposed to withholding taxes.  The top quintile usually has little or no income exposed to withholding taxes.

Of course, retirement age (when the pension starts) is primarily a concern of wage earners.  I don't know about you, but I've never met a millionaire coal miner  Of course, the Greek list of dangerous jobs also includes TV reporter (don't ask me why).

If you go through the entire list of austerity measures, you may notice that there are no capital-gains hikes, financial transaction taxes, taxes on earned interest, or even taxes on real holdings.  Mind you, I'm not advocating any of those.  I'm just pointing out that there isn't a single tax increase which doesn't disproportionately effect wage earners.

Perhaps the theory of austerity isn't explicitly bias, but the application of austerity is.

[Livemike]

 

http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?smid=tw-share&_r=1

 

"What is true, however, is that the years since we turned to austerity "

Which years would that be?  There hasn't been a reduction in government spending in ANY of the countries that he mentions.  So he's clearly lying (again).