Spending and Taxes Are the Gas and Brake Pedals of the Economy

This post is part of our forum on Michael Kinsley's October cover story exploring the legacy of the Baby Boomers and what they owe the country. Follow the debate here.

Yes, it's true, I work with editors, and when they tell me I'm too close to the line, I rewrite.

But let's get to the "key point" of Michael Kinsley's response to me: Why do we need taxes?   We need them, and use them, to control total effective demand. A car has an accelerator and a brake. Spending is the accelerator.  Taxes are the brake.  They're very useful, but the force of the accelerator has to be greater than the force of the brake, or the car will not move.

The reason there were private savings to be tapped after World War II was, actually, the size of the public deficits during the war. The two are opposite sides of the same accounting relationship.  And for exactly the same reason, the private savings rate has become sharply positive in the last two years -- up from 2.1 percent in 2007 to 5.9 percent of disposable income in 2009.  Same cause, same effect.
Can the Boomers Save America?
In the published version of my comment, I wrote of the "actual and proper function" of the estate tax.  Not "purpose."  Having detected the trap in the word "purpose," I avoided it.  Do I approve of this system?  Yes, as it happens, I think it works brilliantly, on the whole.

I'm glad to know that Mike does know the difference between a mean and a median.  But then, why did he exaggerate the mean family net worth for households with a head aged 65-74 (by a lot), and why did use the word "typical" to describe this exaggerated case?  There is no sense in which a typical American surviving spouse leaves a half million dollars behind, in the world in which we actually live.

The debate continues here.

Presented by

James Galbraith

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.  He holds the Lloyd M. Bentsen, Jr. Chair in Business/Government Relations at The University of Texas at Austin.

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