ToxicAdam, I think this is what Empty Vessel is driving at:
Basically the federal government can borrow money more cheaply than the private economy. If federal deficits go up, but total debt of both private and public go down, then we are doing better.
Matt Yglesias also goes into taxes as well here:
http://www.slate.com/blogs/moneybox/2012/01/31/the_world_contains_multiple_gaps.html
Wall of text incoming.
This is very close to what I'm saying, but still a little off in terms of rationale. TA is couching his argument for a tax increase on the poor (and by that I am talking about the bottom 40%) in terms of avoiding austerity. But he fails to realize that raising taxes on the poor is a form of austerity itself. There is no difference between a government reducing the money it spends and a government increasing the taxes it collects.
Consider that a government will spend X amount of dollars in a year. We must decide (1) what amount X the government should spend and (2) who and what X should be spent on. The amount X for any given year ought to be determined based essentially on economic circumstances , i.e., whether aggregate demand ought to be increased (spend more) or decreased (spend less), and based upon how many public services we want, keeping in mind that having more public services will reduce the amount of private services available to us.
Likewise, a government will collect Y amount of dollars in a year. We must decide (1) what amount Y the government should collect and (2) from whom (or from what activities) Y should be collected. The amount Y for any given year ought to be determined based on economic circumstances, i.e., whether aggregate demand ought to be increased (collect less) or decreased (collect more), and other public policy purposes (e.g., activities we want to dissuade).
But beyond regulation of aggregate demand, X and Y have no relationship to each other. In other words, spending (X) is not at all constrained by tax revenue (Y). This is because the government creates money, so it need not collect it in order to spend it (beyond collecting it to regulate aggregate demand such that its spending does not cause price inflation).
Austerity, whether in the form of reducing government spending or increasing taxes, is the equivalent of reducing aggregate demand. Aggregate demand is not primarily driven by wealthy people, because there are so few of them. It is driven by the demand of ordinary people who spend their income. That is why the largest multiplier effects from government spending are from spending that has been directed at low income people (e.g., food stamps). Low income people have little choice but to spend the money given to them, so when the government gives them money, it gets circulated through the economy, goods are purchased, and demand increases. So in bad economic times, it is important not to raise taxes (or reduce spending) on lower income people (again, I'm talking about the bottom 40% or so here). And it is necessary not only to refrain from reducing spending (or raising taxes) but also to
increase spending, i.e., to run a deficit. And because we're still in bad economic times, it doesn't make sense to take more money from lower income people, because the economic prescription still calls for giving them
more.
Deficits are for bad economic times, surpluses are only for economic times that are so good that aggregate demand must be reduced because inflation is threatened.
The article you linked to talked about the costs of borrowing. The federal government doesn't really borrow money, it only pretends to do so. Because the federal government has the power to create money at will, it never needs to borrow it. The legal requirement that the government "borrow" in order to spend is a self-imposed constraint, but, even still, it isn't really borrowing anything. It is just running a national bank on the side in which people open accounts, deposit money (the cost of the bond), and later get repaid with interest.
I'm a fan of raising taxes on the wealthy for reasons having nothing to do with the deficit or increasing government revenue but because I think too much inequality damages not only the community fabric of society but also the economy. It is bad for the economy because when money is being hoarded at the top (and the government is not spending more on the bottom to balance it out), aggregate demand must fall, because the rest have less to spend. You get a great big recession (or depression) as a result. So I believe the government should be taxing wealthy people a lot more and also spending a lot more on the bottom 80%, even though the former is not required to do the latter. But given the economic circumstances, even I am in no hurry to raise taxes on the wealthy. It is currently far more important to increase government spending (X) and direct that spending towards the the lower and middle classes (bottom 80%). And the government does not need to borrow any money at all to do that.
