Tom Sgouros: Whose Economy Is It, Anyway?
Monday, July 11, 2011
In discussions of taxes, you often hear people say stuff about how taxes take money from the economy. Rep. Nick Mattiello (D-Cranston), the House Majority Leader, spoke about this during the budget debate a couple of weeks ago, as did the Minority Leader Rep. Brian Newberry (R-North Smithfield, Burrillville) when he was lauding the conservative budget choices of the House leadership. The idea that a tax takes money "out" of the economy is a commonplace, but like so many commonplace ideas, it is completely wrong, and has led well-meaning people to do great damage to our state and our nation.
When you pay a dollar of tax to your state or your town, almost all of that dollar is spent on salaries for your neighbors, supplies from local businesses, medical services from local hospitals and doctors, and unemployment support for your friends. I estimate that around 90% of state revenue is spent within the borders of our little state. Some revenue goes out of state. Despite the tax advantage to residents, most of our bonds are held by big out-of-state insurance companies like AIG and Allstate, so debt service payments leave, as do most utility payments. About one in six pension payments go to addresses in other states. But all the rest is spent here. Your city or town also spends most of its money here.
Our governments are an integral part of our economy, like it or not. The important question isn't whether the governments should stay out of the economy -- they can't any more than you can -- but whether they're acting in our best interests.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTWhere are the money leaks?
There are lots of ways that money does leave our state's economy. Obviously when someone in Barrington steps over to Seekonk for a purchase, that's money leaving. But there are some bigger flows, too.
The Fed bought $600 billion in treasury securities over the past several months. This program, "quantitative easing II" or QE2, provided money to banks in exchange for those bonds, in the hope that they'd loan it out and stimulate the economy. But the available evidence suggests that this probably didn't happen. Curiously, over the same period, the assets of foreign banks (mostly European) rose by a bit more than $600 billion, according to Federal Reserve statistics. In other words, a great deal of the QE2 funds may have been loaned in other countries.
How surprising is this, really? Rhode Island's second-biggest bank is owned by the Royal Bank of Scotland, and its biggest has branches in Hong Kong, Shanghai, Bangalore, Mumbai, and more. A bank will make its loans where the return is best. Currently, that is not here.
Another big source of leaks are savers. A dollar saved is put in the bank, or used to buy securities of some kind. The stock and bond markets are out of state, and as we see, money in a big bank is likely to flow elsewhere, too. If what you want is local spending, encouraging savings isn't going to do it. The point belongs to Keynes: policies to encourage capital accumulation when demand is low constitute a recipe for slowing the economy, not stimulating it. If you want to stimulate the economy, hire more teachers and police officers, increase unemployment benefits, and pay for it by taxing funds that would otherwise be headed out of state. If you want to slow things down, fire people, cut expenses, build up bank reserves and watch the banks sit on the money and not loan it out.
Parallels to the 1930s
I often find myself talking to friends who deny the parallel between current days and the 1930s. We have 9% unemployment now, but there are lots of people doing ok. But that's the way it was then, too. Lingering memories of Walker Evans photos might lead you to believe that the 1930s were a pretty bleak time. And they were, for lots of America. But not for all.
During the 1930s, Harold Vanderbilt defended the Americas Cup in Newport three times, Narragansett's exclusive Dunes Club -- opened in 1929 -- grew, and high society in Providence flourished. A friend of mine who was around then has described to me the annual winter cotillions at the Biltmore, where hundreds of young society men and women would come to meet the dozen or so girls making their debut. During the rest of the year, the same ballroom saw scores of black-tie parties with dancing that carried on until breakfast was served. These were going strong all through that decade, despite the breadlines.
My own grandfather made it big in 1929, and by 1930 he had a house in Scarsdale and a gardener, maid, nanny, cook and chauffeur, and took his friends to Philadelphia in private railway cars to see the fights. That's the milieu my mother was born to, but they were just stories to me, as remote as tales of King Arthur and his knights. Having bet all his capital on a climbing market, he lost it all in the recession of 1938, caused by Franklin Roosevelt giving in to Republicans who insisted on trying to balance the budget, and so eliminated what little stimulus Roosevelt had managed to inject into the economy. The nation limped on until the stimulus of World War II drove us not only out of the recession but into a burst of economic growth unlike any ever seen before.
Today, we have leaders who have chosen to ignore the lessons of the 1930s. Rather than find ways to put demand into our economy, we're taking every opportunity to pull it out: laying off employees, cutting salaries, trimming pensions, eliminating benefits, all in favor of getting more money to rich people and corporations who will hold it or siphon it out of the state. We are engaged in the exact opposite of stimulus, so no one should be surprised when the result is the exact opposite of prosperity.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
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