More "Taxing" Cowen Defecit Carping

(And I also posted here.)

In yet another column by a self-styled economic pundit about how our spending in this country is allegedly the biggest threat we face, Tyler Cowen told us the following in the New York Times last Sunday (using the deficit as an excuse to regurgitate right-wing talking points…late getting to it I know, but a few things have gotten stacked up, as it were)…

Consider the tax burden on high earners once the Bush administration’s tax cuts expire next year. Add up the federal, state, city and sales taxes for a lawyer in New York City who earns $300,000 a year. Depending on the circumstances, this individual could be facing marginal tax rates in the range of 60 percent. Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases.

You can tell how disingenuous Cowen’s argument is in that he lumps all of these taxes together for a “high earner,” but doesn’t present a similar scenario for someone of considerably lesser income (my suspicion is that, were Cowen to do that for someone making less than $100K and add in a percentage for payroll taxes, where people of this income level endure the biggest bite from their paychecks, that 60 percent figure he cites for his hypothetical NYC lawyer – hmmm, I’m thinking Harold Ford, Jr. here, hardly a typical case – wouldn’t seem so oppressive).

Besides, as noted here…

When one looks at the highest tax rates on the wealthy throughout the past century, one discovers that the tax rate was above 60 percent from 1932 to 1980 and reached a peak of 90 percent in the Eisenhower (Republican) Presidency! It was only 40 percent or lower since 1988, even being 50 percent in the Reagan years. The only time it was in the mid 20s was in the Coolidge-Hoover years in the 1920s.

So, in other words, the only times it was really low was when poverty grew, the middle class shrunk, and corporate corruption and greed and materialism prevailed, the 1920s and the years since 1988. Is that not enough evidence of the need to raise the rate to try to address the horrible inequities that have developed in the last generation? Realize in the two periods just mentioned, the result of the low tax policy on the elite was the coming of the Great Depression in the 1930s and the coming of what is now called by many the Great Recession that we are suffering right now.

Cowen continues…

Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. Current residents might feel more secure in a larger welfare state, but over time the loss of commerce and innovation takes a toll.

Ugh…so blame those “living off the public teat” immigrants in their “welfare state” for this country’s lack of investment in basic infrastructure, right Cowen?

In response, I give you the following from Fareed Zakaria (a guy who is hardly a liberal, I might add), in a Newsweek column from last November…

With the end of the Cold War, Americans stopped worrying about the Soviet threat and, as a result, R&D funding for applied science plummeted, dropping 40 percent in the 1990s. It has picked up since then, but the government's share of overall R&D spending remains near its all-time low. And while corporations still spend on R&D, they do not fund the kind of basic research that leads to breakthroughs.

America's decline is most evident in the one realm of high technology where the U.S. government has, until recently, seemed most uninterested: energy. The three most important areas where current technology could yield big results are solar, wind, and battery production (the latter because the energy has to be stored somewhere). According to the investment bank Lazard Frères, the world's largest wind-turbine manufacturer (by revenue) is a U.S. company: General Electric. But the other nine companies among the top 10 are scattered around the world, including Germany (Nordex), Denmark (Vestas), India (Suzlon), and Spain (Acciona).

…

American culture is open and innovative. But it was powerfully shaped and enhanced by a series of government policies. Silicon Valley did not arise in a vacuum. It grew in the 1950s in a state that had created the world's best public-education system (from kindergarten through Ph.D. programs), a superb infrastructure, and a business-friendly environment that attracted defense and engineering industries. Today California builds prisons, but not college campuses. In 1976 it spent 18 percent of its budget on education; that figure now is about 10 percent. The state is permanently bankrupt, saved only by massive, continual borrowing. Are these the foundations for future scientific achievement?

To be fair, Zakaria also mentions tax rates as Cowen does, but Zakaria isn’t nearly as dismissive on the matter of government investment (and speaking of tax rates, I thought this was interesting).

In addition, Cowen tells us the following about how other countries have weathered our current financial storm supposedly by spending cuts by themselves…

The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.

Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. The Liberal Party, headed by Jean Chrétien as prime minister and Paul Martin as finance minister, led most of this shift. Prompted by the financial debacle in Mexico, Canadian leaders had the courage and the foresight to make those spending cuts before a fiscal crisis was upon them. In his book “In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint,” Timothy Lewis describes Canada’s move from fiscal irresponsibility to a balanced budget — a history that helps explain why the country has managed the current global recession relatively well.

In response, I give you the following from Paul Krugman about how Canada has managed the current economic meltdown…

Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

So it’s not as simple as our neighbors to the north merely tightening their belts and finding their way clear in a manner that we have not, eh?

Cowen’s bio tells us that he is a professor of economics at George Mason University. Good for him. However, that doesn’t mean he isn’t capable of concocting some utter dreck, plainly on display here, in an area of thought and discourse where he is allegedly an expert.