How to Really Wreck the Economy

Robert Barro

Dr. Robert J. Barro's prescription for "How to Really Save the Economy" would save it for only 20% of the people, if that many. His standard for a good idea is: if it benefits persons with annual incomes exceeding 2 million dollars, then it's a good idea.


Where Dr. Barro's prescription breaks down is in the definition of what is an economy. If an economy is the thing that produces GDP, and if a growing GDP is a saved economy, then Dr. Barro's prescription may well grow the economy by increasing the incomes of the very wealthy. If the incomes of the wealthy increase fast enough, then the people with incomes less than $2 million can have their incomes stagnate or even decline a bit, because the GDP will still grow, and by this definition the economy will have been saved.


But if the definition of an economy is the engine of production and distribution by which all persons obtain the goods and services they need, then Dr. Barro's prescription is for "How to Really Wreck the Economy", because the poorer 80% of the people would not benefit from his prescription, and many of them would be worse off.


Dr. Barro is wrong or partially wrong on all six counts:

What Did Ben Bernanke Say? - Part Deux

Dr. Ben S. Bernanke (Image: FRS/Wikipedia)

Dr. Ben S. Bernanke, appointed byPresident George W. Bush to the Chair of the Federal Reserve System, spoke in Jackson Hole, Wyoming on Friday, August 26, 2011.

Dr. Bernanke studied the Great Depression extensively (Essays on the Great Depression). Among other insights, he found that the countries recovering most rapidly (Britain, Germany) were those that unlinked their currencies from the gold standard. Those that adhered to the gold standard (France, United States) didn't recover until they unlinked. Today, economists generally acknowledge that economist John Maynard Keynes got it right in urging soft money(abandoning the gold standard) and deficit spending by governments, thereby sustaining the population until economic vigor can return. Today, the world-wide hard money standard is the US dollar. Unlinking from hard money is equivalent to expanding the money supply, that is, QE, "quantitative easing", the current

What Did Ben Bernanke Say?

Dr. Ben S. Bernanke (Image: FRS/Wikipedia)

Dr. Ben S. Bernanke, appointed by President George W. Bush to the Chair of the Federal Reserve System, spoke in Jackson Hole, Wyoming on Friday, August 26, 2011.

When I suggested to a friend that she read the speech, she read a bit of it and said "English, please. What did he say?"

(For a highly condensed summary of the speech, see Part Deux.)

Her comment inspired this glossary of economic and financial terms Dr. Bernanke used in his speech. Almost without exception, these terms are loosely defined in this glossary, as used by Dr. Bernanke, and in general use.

Distribution of Income by Source in 2009

Investment income (mostly dividends and capital gains taxed at a rate of 15% , and interest), is 60% of the income of the wealthiest taxpayers, according to IRS data for 2009. Business income is about 20%. Salaries and wages are about 20%. Other sources of income are insignificant for the wealthiest as a group.

Salaries and wages, taxed at rates up to 33%, are over half the income of people with incomes less than $500,000 per year. Other important sources for these taxpayers are Social Security, pensions and annuities, and business income.

Source: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=134951,00.html

Favorable Taxation for the Wealthy in 2009

The United States Internal Revenue Service has released 2009 tax statistics for individuals. Persons with incomes greater than $10 million pay income tax at a lower rate (22%) than those earning between $500,000 and $10 million (24% to 26%). Also, those with incomes less than $5,000 pay a higher rate (5%) than those with incomes between $5,000 and $25,000. Patterns of taxation in 2009 were similar to 2008.

How Income Tax Rates Affect the Marginal Cost of Job Creation

An employer's marginal income tax rate influences his or her incentives for hiring new employees.

	Our Universe	Alternate Universe
Marginal Tax Rate of Joe's Employer	25%	75%
Joe Gets a Raise	5,000	5,000
Additional cost of Joe's raise to Employer after tax	3,750	1,250
New Employee Salary	50,000	50,000
New Employee Payroll taxes	15,000	15,000
New Employee Equipment & Real Estate	35,000	35,000
Total Pre-tax cost of New Employee for one year	100,000	100,000
Total After-tax cost of New Employee for one year	75,000	25,000

Lower Tax Rates Apply to Highest Incomes

US taxpayers with incomes greater than $10 million and corporations pay income tax at a lower rate than persons with incomes between $500,000 and $10 million.