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Can anyone defend in this day and age that a social democratic programme must favour more taxes and spending and introduce normative rigidities into the economy?
Note: "New Way" (Nueva Vía) is not the third way, but the name of the internal "current" within the PSOE which propelled Zapatero to the party leadership in 2000.
We erred. In good times we allowed social spending, and especially the taxes on the wealthy to remain low. We did this for social peace. Why go after more money from the wealthy, no matter how lightly taxes they are, if we can do well with what we have. Now that times are bad these agreements, especially along with further reductions as insisted on by economists and politicians who are apologists for the wealthy, will crush the lower income portion of our nation.
Worse, these policies will not end our economic problems. They will only make them worse. The problems are not due to the actions of those who are being asked to bear greater burdens. The problems are due to the actions of the very wealthy, and politicians, ourselves included, who went along with what the very wealthy wanted.
Our most basic problem is paying down the large debts that the wealthy and the government have run up. Cutting government spending in this economic situation WILL REDUCE economic activity and, thus, our ability to pay our debts. The economic activity of our country is the result of all of the spending throughout our country. When times are hard and people have too much debt they cut back spending. But the bottom 80% of the earners are unable to cut much. Those who can make big cuts in their spending are the very wealthy, and they do make these cuts. That is a large part of why the economy drops.
Why do the wealthy stop spending? Because they made a mess of the economy. Created, with the help of the banks and the government, a large run up in property prices, took loans and built retirement villas on the coasts, which villas cannot now be sold for a price that will pay the loan, etc. etc. They kept the profits when the bubble was expanding. Now they want your social benefits to pay for the costs when the bubble has collapsed.
So we will raise taxes on the highest earners. This will start with including all income in the payments for social benefits. That now includes only the base salary. Now bonuses and all other income will be taxed at the same rate as basic income. This will enable us to maintain benefits to the unemployed during these hard times and that will keep times from becoming harder. We will also phase out all exemptions and double the rate for all incomes over one million euros/year.
In addition we will impose a 1% tax on the gross earnings of all corporations doing business in Spain in return for the privilege of enjoying the benefits of being a corporation and we will impose a transaction fee of 0.1% on all financial transactions, with an exemption for the first 100,000 Euros/year. Etc. Etc.
"It is not necessary to have hope in order to persevere."
The second problem is that much of the wealth of the past boom was, in fact, counterfeit. Now the counterfeiters are demanding that their counterfeit money be made real out of your pension and salary.
(In principle, the two can be addressed separately, but I rather like the idea of insinuating that wealth disparity is due to counterfeiting by the wealthy - mostly because it's normally true.)
Friends come and go. Enemies accumulate.
Productivity growth is a deflationary pressure. To counteract that pressure you need an expansive monetary policy. Otherwise, servicing debt becomes increasingly difficult, a crisis ensues and growth is halted.
Not only have we allowed people to counterfeit money we have based our economic development on people counterfeiting money.
The way I see it, any credit (including bilateral trade credit, overdrafts, and so on) adds to the monetary mass. Clearing houses and banks can act as underwriters for trade credit, and they can issue their own credit. Then the monetary authorities merge with banking supervision because they have a dual role as underwriters of bank credit and directors of monetary policy.
So, the State provides a deposit guarantee to the private banks in exchange for outsourcing to them the underwriting of trade credit and the creation of money as credit. The monetary authorities are supposed to keep track of the monetary mass created in this way, and curtail credit creation through their banking supervisory role if they see the monetary mass grow too much. If the monetary mass shrinks, the monetary authorities can inject money into the economy, by lowering interest rates or by buying bonds (issued by the State treasury or private firms) with newly created money.
Private banking for profit has an incentive to create as much credit as possible, as this results in higher personal income for the private bankers. This means that normally the central bank has to worry more about curtailing excessive private credit creation than about injecting money into the economy. But note that the conflict of interest inherent in private banking, where private bankers have an incentive to create as much credit as possible, whether the borrowers are creditworthy or not, in order to skim a fraction as personal profit, coupled with the identity of credit and money and the State guarantee of bank credit implicit in the explicit deposit guarantee, makes excessive private banking credit creation a form of counterfeiting.
By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
Not so in the banking system.
There are two problems:
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