May 02, 2017
The Congressional Progressive Caucus released its annual budget today (full plan here). If past patterns hold, it will likely be ignored by the media. Of course, the budget is not about to be adopted by Congress and signed by the president, but as a path forward it certainly is no less realistic than the various budgets put forward in past years by now Speaker Paul Ryan. These budgets effectively called for the elimination of the whole federal government except the military, Medicare, Medicaid, and Social Security. Nonetheless, the Ryan budgets were taken seriously in Washington policy circles and even earned him a “Fiscy” award from a coalition of Peter Peterson-funded groups.
The budget outlines a progressive agenda for the next decade. Put simply, it cuts what the Republicans want to expand (i.e. military spending) and increases what the Republicans want to cut, such as funding for universal pre-kindergarten, Social Security, and health care spending. There is much there and I encourage people to read the EPI summary to which I linked. I will pick two items that I want to highlight.
First, the budget proposes $2 trillion in additional spending on infrastructure and other public investments over the next decade. While this sounds like a huge amount of money, it is a bit less than one percent of GDP and it just gets spending in these areas roughly in line with long-term averages. It is worth noting that they propose to spend the money the old fashion way, through direct spending, not tax gaming like Donald Trump and the Republicans.
This is the way that we built the interstate highway system and the way we built subway systems in New York and Boston that are moving millions of people daily more than a century later. This is not a knock on the private sector. These and other infrastructure projects almost always rely for private contractors for the bulk of the work. But with upfront funding, we can see clearly where the money is going.
Also, we don’t have to turn everything into a toll bridge so that investors can recover their cost. This may work but be inefficient with roads and bridges, it won’t work for rebuilding Flint’s water system. (Sure, we could privatize the water system too, but that hasn’t worked out very well in the past.) If the point is to get the public investment in place, we’re better off with the old-fashioned system, but if the point is to make Donald Trump’s family and friends richer, the tax credit system is the way to go.
The other item worth highlighting is the financial transactions tax (FTT), which is used to cover some of the additional expenditures called for in the budget. The budget assumes that a FTT would raise $1.8 trillion over the course of the decade or roughly 0.9 percent of GDP. This is a great way to raise money for the government for two reasons.
First, according to most research, the cost of the tax to 401(k) holders, pension funds, and other ordinary investors would be fully offset by a reduction in trading costs. Research iondicates that demand fr trading of financial assets like stock is relatively elastic. This means that if we increase the cost of trading with a FTT, trading volumes will fall by an even larger amount.
This means if the FTT doubles the cost of an individual trade, then trading volume will fall by more than 50 percent. We will pay twice as much on each trade, but since we will be trading less than half as much, on net our trading costs will be unchanged or even fall somewhat.
Trading on net is a wash. (I can win by selling my stock at a very high price, but then the buyer has lost because she has overpaid for the stock.) This means that when we slash our trading volume, the only people who are hurt are the folks in the financial industry who were collecting all the fees. So, if an FTT is raising $180 billion a year in revenue, this is $180 billion out of the pockets of the financial industry.
This is the other reason why an FTT is so great. The financial sector is where we find the hedge fund folks, the private equity partners, and the Wall Street bankers, all of whom rank among the richest people in the country. This is a way to directly reduce their income, thereby reducing income inequality, but making the economy more efficient. We are eliminating wasteful trading that has no economic purpose. (If that seems hard to imagine, the tax would be raising trading costs back to their 1990s levels, a period when we already had very large and deep financial markets.)
So an FTT is great for the economy and great for reducing income inequality. Unfortunately, it is bad for some very powerful people, so don’t expect action in Congress any time soon.
Addendum
It may be obvious, but I should have pointed out that the elimination of many of the economy’s most highly paid jobs in the financial sector will put downward pressure on high-end wages more generally. By having fewer opportunities to earn hundreds or thousands or millions a year in the financial sector, there will be more supply of workers in the high end parts of medicine, law, and other professions. This will mean lower pay for these high-end workers as well, reducing costs and prices, and thereby raising real wages for the rest of us.
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