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Posted by on Sep 20, 2013 in At TMV, Banks, Budget, Business, Economy, Finance, Politics | 2 comments

Occam’s Razor Economics — The Middle Class Solution

The middle class is being squeezed and downsized. Its spending power, the main engine of the economy, is being diminished. More and more of its members are falling into poverty.

The upper one percent of earners, meanwhile, are seeing their own incomes rise dramatically. It soaked up 19 percent of all new income last year, the highest percentage since 1928. The economic justification given for this is that their increasing wealth is supposed to provide capital for investment that creates jobs and animates the economy. Except it hasn’t. Too much goes instead into realms such as Wall Street churning (a.k.a. high frequency trading), and into derivatives that do nothing but promote high finance gaming.

The very large, growing and excessive income inequality in this country thus imperils the overall health of the U.S. economy. This isn’t a theory. It is the stuff of everyday living. It’s a Main Street reality.

How, then, can this imbalance be addressed in an appropriate manner? Many suggestions have been offered in this regard. None, however, seems based on Occam’s Razor — a philosophical concept that says, in essence, that the best solution to any problem is usually the least complicated and simplest one.

Here, then, is the Occam’s Razor approach to addressing excessive income inequality and remediating many of its bad effects: Change federal tax law. Increase the top income tax rate paid only by the rich and tax their unearned incomes at this same top rate as well. Then use ALL the additional tax revenue generated to lower tax rates on smaller incomes, with none siphoned off for other purposes.

This is actually a modest as well as a simple proposal. It would not increase overall income taxes one penny, merely shift the tax burden from one group to another — quite a normal thing with federal taxes that’s been done often over the years. It would also not affect existing wealth, just new wealth, the product of policies that promote excessive income inequality.

The consequences of this approach would nonetheless be dramatic and immediate. Spending by the vast middle class would juice up national spending power in ways that give a boost to the entire economy. Fewer Americans would fall from the middle class into poverty, reducing government’s own poverty spending.

What this bit of Occam’s Razor economics would NOT do is lessen job-creating investment by individuals and businesses. Quite the opposite. Capital naturally flows into realms with the greatest opportunities for profit. If there’s more profit potential providing goods and services that accommodate increased middle class spending power, than in high frequency trading and derivative gaming, that’s where the investment capital will gravitate.

In a country with a population of more than 300 million, a multi-trillion dollar economy, incredible economic diversity, all functioning in a fast changing world economy, there is no one, no single, cure for economic stagnation. There are, however, some simple, direct, immediate and easily understood examples of Occam’s Razor economics worthy of serious consideration.

Is the Occam’s Razor example described above politically impossible to implement today? Perhaps. But in the very near future, when the arcane, complex, and convoluted alternatives have been tried and failed, as they have to date, this approach might well get a very close look.

Michael Silverstein is a former senior editor with Bloomberg News. His latest book is The Devil’s Dictionary Of Wall Street

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Copyright 2013 The Moderate Voice
  • slamfu

    Mr. Silverstein, I am largely for what you propose, but I hope you can clarify something. One of your premises seems to be that lowering taxes on the lower income brackets is going to help, and I don’t think it does. I am fully on board with taxing the upper income brackets more, which includes myself for what that’s worth, and also agree that the 99% are the engine that powers the economy. When they have more money to spend, the economy does great. But as I see it the problem isn’t that they don’t have money to spend because of taxes, its that they don’t have money to spend because median income hasn’t grown and employment, especially good employment, is hard to find. And your solution doesn’t do anything to address that.

    I am in the middle of compiling a list of data from 1925 covering the following in order to prove a hypothesis I have:

    1) Tax rates
    2) Govt Spending
    3) GDP growth
    4) Median income
    5) Unemployment
    6) Dow Jones, S&P500, NASDAQ(in years where applicable)
    7) Deficit spending
    8) National Debt level
    9) Cap gains rates

    I’m not done putting everything together yet, as some of the data is harder to find than I expected, but there seems to be a VERY strong connection between govt spending and GDP growth and median wage increases, as a VERY strong connection between higher tax rates and lower deficits(duh), as well as a pretty clear connection between their opposites. But lowering the tax rates on the middle class does not seem to be particularly helpful, especially when you think about it.

    A guy makes $10k/year, pays 20% in taxes. Lowering his tax rate 10% saves him only $200/year. Also this doesn’t really help those without jobs that are on welfare and unemployment. Raising his pay 10% makes him $800 after taxes. Also tax receipts go up. Essentially we need to focus on higher income and employment rather than lower taxes. We recently lowered the payroll tax. No one really seemed to notice the lowering of a few percentage points, but they sure did rail against it when it was ending for some reason.

    Basically we’ve already been through this before after 1929. FDR nailed it. Raise taxes and govt spending till we are out of the mess. It worked then, it will work now. And oh yea, regulate the crap out of the financial sector. That one hasn’t come to pass yet, but it will after the next crisis.

    P.S. – Great article btw, we need more economic ones and fewer political and foreign policy ones. Not that those aren’t important, but they seem pretty thoroughly covered.

  • MICHAEL SILVERSTEIN, Wall Street Columnist

    Hi Slamfu

    Thanks for the “great article” comment.

    About this post generally. As I was careful to point out, this isn’t the one and only thing needed to solve all our economic problems. What it seeks to do, both economically and politically, is link what’s good for the middle class (the apple pie group that everyone claims to love), with a very simple notion that anyone can understand without having an MBA, in a way that is not currently being suggested (as far as I know) by anyone in power, and in a way with both right and left populist appeal (no tax hike here for the right, taking from the top and give to the middle for the left). I am a great believer in the KISS approach to problems whenever it seems appropriate.

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