Friday, July 13, 2012

One of the Main Functions of Government is to Consume Excess Production

One of the main functions of government is to consume excess production, hopefully in a socially constructive manner, and so maintain the price level. Keynes suggested this, as a solution to inadequacies of demand, but it must be done even in 'good' times, and adjusted, for bad. That is, government consumption must be increased during recession or depression.  Further, the government must redistribute even more as industries become more capital intensive.  To do this in perpetuity, government’s debt cannot get out of hand, but must be constrained as a percentage of GDP.  This means collect more taxes, and these must necessarily be collected from the rich.

First, the wealthy consume less as a percentage of their income than the rest of the population. They save more. On the other hand, since the government will spend all it collects in taxes, collecting more in taxes from the rich will be economically stimulatory.   That is, the economic multiplier on taxes on the wealthy is greater than one.    This implies a strongly progressive tax to stimulate the economy. 

Indeed, from the point of view of economic stimulus, there is no point in taking taxes from the poor, or even much of the working class, when their savings is very low.  Any money taken as taxes from the poor would have been spent anyway, and so would not provide net stimulus to the economy.  What is more, a certain rate of savings in the middle and lower classes should generally be seen as desirable, since it would act as an automatic stabilizer.  Money would be saved during good times, helping to slow down the economy, and dis-saved, or spent, during recession or depression, helping to stimulate the economy, thus helping to smooth economic fluctuations.      

Further, as the owners of capital, an increased share of market income will go to the wealthy as industries become more capital intensive.  More demand, that is money, will have to be redistributed to maintain the market, which otherwise would slowly contract as labor is increasingly forced out of the productive process. (The same thing happens in a country as production is off-shored. No country can afford to have a significant proportion of the goods it consumes to be imported, unless it has compensating exports.  Thus the need for balanced trade.  See:  Indeed, given the observation that one of the government’s functions is to consume excess production, and running a trade deficit effectively increases that excess,  much of a government’s deficit can be laid at the feet of that trade deficit.)

Now there is no market for labor forced out of the productive process. This is because, as unemployed, they do not represent a market for production.  Supply increases, due to increased capital expenditures, but ultimate demand does not, because there is no increase in the number of consumers, that is, labor. Demand increasingly becomes concentrated at the top. (Of course, the wealthy could spend this money on providing public goods and services to the rest of their community. They instead rail against government, and do not themselves provide the things the community needs.)   

On the contrary, the absence of a progressive tax is/will be depressive, and destabilizing, as wealth becomes more concentrated and inequality increases. One of the causes of this destabilization is that as wealth becomes more concentrated, the market for commodities and financial instruments becomes thinner, and subject to greater fluctuations, as fewer people have the greater concentrations of wealth to invest in the various markets. Meanwhile, the market for production, represented by the middle and working classes, gradually contracts in the absence of a progressive tax.  The government, for a time, may maintain this by running up debt.  But this is regarded by many as unsustainable.

Privatizing government functions is counterproductive, since profits in privatized industries cause an increase in the upward redistribution of income, which must be counteracted with an even greater progressivity of taxes to compensate.  Indeed, a certain amount of inefficiency in government spending is a virtue, as it allows wider dispersion of government expenditures. 

What is important is the efficiency with which government collects taxes from the wealthy, since the primary goal is the constant redistribution of demand throughout the economy.  If it is inefficient in collecting taxes from the wealthy, too much money will remain at the top, and it will be inefficient at redistributing this money to the base of the economic pyramid, where it is needed to stimulate demand.  In particular, the taxes on the wealthy should be increased during recessions and depressions, that is periods of inadequate demand and excess supply.  Of course, that suggests taxes on the wealthy be decreased during periods of inflation, when they are large, but they are now already inadequate.  We are talking about a tax rate centered about 65% or so, and adjusted from there, depending on circumstance:  Higher during bad economic times; lower during good economic times. 


  1. Hey lower case greg!

    Like your blog and this post very much. Could have written it myself (by that I mean I agree with it not that I could have necessarily come up with it)

    Ive noticed some comments you've made on other blogs I visit and it sometimes gives me pause because I have wondered before "Did I write that?" You so often say things that I might say myself or wish I had.

    Anyway, Ill be back

    Upper case Greg

  2. Hi greg. (Hi, Greg.)

    This is excellent: Indeed, from the point of view of economic stimulus, there is no point in taking taxes from the poor, or even much of the working class, when their savings is very low. Any money taken as taxes from the poor would have been spent anyway, and so would not provide net stimulus to the economy.

    I wonder if it has been taken into account in any of the studies that say the fiscal multiplier is less than one.