2010: A Laffer Free Zone

One of my friends - a horrendously cheeky, incredibly intelligent woman with slightly reprehensible politics - recently made a post on today's situation and the Laffer Curve. Her argument is twofold: 1) The best way to cut the deficit is growth and 2) One of the best ways to encourage growth is to cut taxes, particularly on the wealthy. I completely agree with the first point, but I couldn't disagree more with the second.

The key point which needs to be understood here is that income inequality is the core cause of the financial crisis we face. Others have covered this in far more detail, but the case is quite simple (though I'll simplify it even more to avoid anything more than one paragraph). Incomes for the bulk of society have been held down due to political changes which occurred in the late 70s/1980s which led to the defanging of labour as a economic and political force. The economy grew (though not as quickly as before), but the vast majority of benefits accrued to the very wealthiest in society. The problem is, though, that one man's employee is everyone else's consumer. The massive amounts of wealth which were now being created for the very top had to be redirected to consumer credit to allow the standard of living to increase. This wasn't a grand conspiracy, but it is important to note that the credit which fuelled the recent consumer/housing 'boom' would have been unnecessary if this money had entered the market through wages instead of loans. Today, though, consumers are overburdened with debt - they can't borrow anymore, they're having trouble paying back what they have borrowed. That right there is the financial crisis we're experiencing.

So, cutting taxes for the wealthy would just accentuate the existing inequalities of income which fed our crisis. Furthermore, however, they will do little for our society as it is. We are not facing a situation where there is not enough money to be invested - we are facing a situation where there is so much money to be invested that a cycle of speculative booms has become a chronic issue. The wealthy in Britain are sitting on massive piles of cash, cash which they are reluctant (sensibly) to invest in the UK, so, instead they deposit it abroad. The corollary of our credit drought is Brazil's hot money crisis.

In cutting taxes for the wealthy, we don't just accentuate our social inequalities and economic troubles, we also speed up the spread of our completely unsustainable model of economic growth. Brazil, for example, is seeing banks raking the money in at the cost of 20% credit growth. This is not sustainable and it is unhealthy for the world economy to be creating more locales where a credit crisis is inevitable.

The major economic challenge of our time is to tame the beast of capital, not to offer up greater and greater sacrifices to its oily, bloodstained maw.