Monday, August 16, 2010

Let Them Buy Cake

Mark Zandi, chief economist at Moody's Analytics, writes in an opinion piece in the 15 August New York Times ("The Tax Cut We Can Afford") that since the top 3% of U.S. household income earners account for 25% of consumer spending, we should not spook them now by letting the Bush tax cuts expire.  We need them to keep spending to keep the economy going.

This is a surprising argument.  The traditional case for tax cuts for high income earners is that they will use their money to invest in productive activities-creating more jobs and more wealth to spread around (or trickle down).

But here Zandi asserts that we need the wealthy's spending to keep the consumer economy on the road to recovery.

It would seem that whatever they do with the money saved from taxes (spend it or invest it), we need the wealthy to be wealthy.  This would suggest that the dramatic tend in extreme concentration of wealth and income in the upper 1% and 5% of households (greater than any times since 1928) is healthy.

But is it really economically and socially healthy or sustainable to be so dependent on such a small (and fickle) class of people?  Bob Frank, for example, has written on the positional goods arms race that emerges from such situations of inequality and aspiration.  Making money is well and good--I wouldn't mind making more myself--but extreme inequality tears at the social fabric that gives the good life meaning.

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