The Stiglitz Budget Plan

http://bigthink.com/ideas/25547
The Stiglitz Budget Plan
Robert de Neufville
December 16, 2010

With the Senate voting 81-19 on an $858 billion deal to extend all the Bush tax cuts—as well as extend unemployment benefits and reduce the payroll tax—it’s hard to take seriously the idea that anyone in Congress cares about reducing the deficit. That we shouldn’t worry about cutting the deficit may actually be the one thing both parties can agree on. In short term, as I have argued, this deal may make sense as a way to stimulate the economy. But at the same time, as I have also argued, we shouldn’t pretend that we cutting taxes is a way to reduce the deficit.

Nevertheless, Joseph Stiglitz argues that there should be a way to cut the deficit that would stimulate the economy. Stiglitz, who won the Nobel Prize in economics in 2001, writes that the trick would be to address several key economic inefficiencies. The first is that the defense budget has ballooned, so that we are spending an enormous amount overseas—where it doesn’t do anything for our economy—and on weapons with little use. The second is that we give subsidies to a wide range of businesses, which makes the market less efficient and is often in violation of our treaty obligations. The third is that we invest too little in the public goods like the infrastructure necessary for our economy to function. And the last inefficiency is that an increasingly large share—more than 20%—of our national income goes to the top 1% of earners, which means less money goes to the middle class—the real engine of economic growth.

So, Stiglitz says, the trick to reducing the deficit in a way that benefits the economy is simple:

• cut wasteful military spending, in part by no longer funding wars in Iraq and Afghanistan

• eliminate corporate subsidies, particularly to the banking, agricultural, and pharmaceutical sectors

• spend money on high-return public investments, increasing long-term economic growth

• increase the capital gains tax, which effectively allows the rich to pay a lower tax rate than the middle class

• raise taxes slightly on the rich—who can afford to pay more in taxes—effectively transferring more money back to the middle class

Cutting the defense budget, eliminating corporate subsidies, and raising taxes for the rich are all contractionary taken by themselves, but by spending the money instead on higher-return investments and eliminating market inefficiencies, we can actually save money and stimulate economic growth at the same time. “A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands,” Stiglitz says. “It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.”

The problem with this plan? As Stiglitz himself says, it’s simply not going to happen. The plan works entirely at the expense of wealthy, corporate interests. If you doubt their influence, consider that over the last two years the Republican Party has really fought for just one policy: the extension of Bush tax cuts on income over $250,000. And while extending those tax cuts angered some Democrats, the tax cut deal still passed the Senate with a solid majority of both parties. But if Stiglitz’ plan is a fantasy, it should show us just how much it costs us to cater to the interests of big corporations and the very rich.