There are two things I know about economics:
- Making money move makes money multiply.
- Money has a tendency to accumulate in one place.
Point number one is a variation on you have to spend money to make money. The more any given dollar exchanges hands for goods or services, the more robust the economy is. This should strike everyone as completely non-controversial. Basically, if money is not exchanging hands, it might as well just be a paper weight.
Point number two is a variation on the rich get richer. All things being equal, money tends to float to the top and into the hands of a very few people where a majority of it stops exchanging hands. So what we get is a trillion dollar paper weight at the top of the economic pyramid. This one is probably a little controversial, but there is enough history to show this to be true unless steps are taken to prevent it.
What do these two points mean? Well, to me, it means that seeding the lower economic levels with money would lead to an marked increase of economic growth. The poorest of the poor need to spend money. They only don’t because they don’t have the money. All that extra money circulates back into the economy immediately causing goods to be purchased which causes more goods to be made which causes more jobs to be created which causes rich people to make more money. It’s the great economic circle of life.
So, what steps should we take?
Top on my list would be to treat all capital the same. Right now, we have this backwards system of taxation that taxes money made from working a job at higher rates than money made from stocks and dividends. Tax all capital equally and we create an economic playing field that is still woefully lopsided, but at least evens how everyone is taxed on that playing field. Removing just the capital gains and dividend preferences would also give the federal government about $38 billion per year in extra income. Next on my list would be raising the top income tax brackets back to the late 1940’s level. That would make the top tax rate somewhere above 80%. And before you go complaining that rates that high will hurt economic growth, average GDP growth during that time was over 15%. That isn’t to say that the high rate helped economic growth, because there is zero correlation between the top tax rate and economic growth, it’s more to show that it won’t hurt it.
And what do we do with all of this extra money? I’ve always liked the idea of a minimum income. Every non-dependent adult receives $1,000 or so a month from the government. Those that have a job would receive more, perhaps $1,500. This system both provides for those who can’t or won’t find a job and provides an incentive for people to have a job.
I believe this system will prime the economic pump and cause the economic circle to keep rolling. Booms may end up being less boomy, but busts would also become less busty.