How the International Economy Absorbs Tax Cuts

[While proof reading the galleys for my new book, I came across this page about the Clinton administration. It pretty much sums up the economic reasons why tax cuts for the rich don’t stimulate the economy. As globalization has intensified in the last 25 years, what was true in 1992 is even more true in 2017.]

“This meeting with Greenspan {in December of 1992} gave Clinton’s conservative economic advisors much greater credibility with the president. In the White House, the shorthand for the Greenspan argument came to be the statement that the Clinton administration should “increase its credibility with Wall Street.” As Robert Rubin told one reporter, “The threshold issue had to be the deficit, and how quickly you gain credibility with markets, since ultimately it’s market interest rates that drive the economy.”

…In response, {Secretary of Labor Robert} Reich and other human capital-oriented advisors pointed out that, in the new global financial markets, savings could be invested anywhere in the world. They might be invested where wages are low or they could be invested where wages and productivity are high. They also could be invested in speculative ventures like derivatives, real estate, or currency swaps. Reich told the president that the Reagan era demonstrated that there is no guarantee that increasing the wealth of the rich will lead to productive investments in the United States. “Trickle-down economics” in the Reagan era had enriched a small part of the population at the expense of the great majority.

Reich had recently written a groundbreaking book, The Work of Nations, about the new international economy. He led a faction in the administration that understood that the old Keynesian methods of priming the economic pump did not work because stimulus can “leak” out of the domestic economy – either through purchases of more imports or through wealthy individuals and corporations investing in other countries. These advisors advocated for a stimulus program that put money directly into efforts to increase the skills of American workers through job training programs, increased funding for community colleges, aid to K-12 education, and low interest student loans. Increasing people’s skills would allow them to prosper in the new, competitive, worldwide labor market. They also reminded the president that he had campaigned during the 1992 presidential election on the promise of just this sort of stimulus program.

In the end, Clinton went with the arguments of his economic team when creating his FY 1994 budget (October 1993 through September 1994). In a little over two months, he had come to believe that high interest rates were more of a problem for the middle class than job training or access to higher education…”

Here is a relatively recent post on Robert Reich’s blog that briefly outlines how he sees these issues today.

One thought on “How the International Economy Absorbs Tax Cuts”

  1. What you fail to understand is that these various “tax cuts” have worked exactly as intended, make the rich richer (I sound like a broken CD) and well, you know what happens to the rest of us.
    Eric

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