Why we need revenue increases

I hate to say it, but I told you so!

The Associated Press reported today something I alluded to a few weeks ago. The supercommittee is experiencing the same gridlocks that kept President Barack Obama and House Speaker John Boehner from reaching a compromise in the debt ceiling deal.

To summarize AP's report, the Democrats of the supercommittee won't pass a deal unless there are revenue increases on the table. Or, tax increases if you will. Republicans won't pass anything that has tax increases.

So, here we go again.

I'm pleased with this development for a few reasons:

First, I was right, which is always awesome.

Secondly, it shows that Democrats are standing by their desire to offset cuts with revenue increases. This may increase our taxes (students, public employees and the rich) but it is something that must be done to maintain our social programs.

Revenue increases must also be established to help the government reinvest back into the economy during a period of small growth and borderline recession.

You see, there was this guy named John Maynard Keynes.

Keynes developed the macroeconomic theory of Keynesian economics (of which I am fan). Keynes said that private sector was a good thing, but it could lead to inefficient market issues that would require the public sector (government) to step in and regulate the private sector or to stimulate the economy by pushing money into the hands of businesses or the people.

Now, I'm summarizing a bit here since Keynes theory could be studied for years and years -- and I'm not expert anyway -- but stay with me.

In today's "too big to fail" era of banks and corporations, the influence these entities wield is similar to the power John D. Rockefeller brandished in the late 1800's and early 1900's before his railroad abuses and monopolies were broken up by Ida Tarbell.

This power gives the banks and massive corporations like Wal-Mart and General Electric the ability to really influence the economy through politics and Wall St.

The most recent example of an abuse of this power was the 2008 financial collapse that was caused by banks lending money to at-risk borrowers (people that probably couldn't pay the loan back, but were told by the bank they could). The banks, which wield more capitalistic power than any private entity in the United States, kept creating these loans and creating these loans. Then, they would sell the loans to other banks for a decent profit, but promised the other banks the loans would pay off in the long run.

To add insult to injury, individual investors and big banks took out credit default swaps (which are bets that something will default or fail) at low interest. These swaps acted like insurance and if the bond of mortgages (at this point, hundreds of millions of dollars of at-risk home loans had been bundled together to be a more enticing purchase for the banks) were to fail and not be paid back by the borrower, the investor or bank would be able to collect a fee.

The only thing the swap purchaser had to do was pay a premium based on the size of the bond. These swap investors made BILLIONS of dollars when the housing market collapsed, which forced the banks to face collapse as well because the revenue they were generating on these loans was never paid back by the borrowers, according to multiple reports by NPR Planet Money and as detailed in Michael Lewis's book, The Big Short.

What happened if the banks were to have failed? Honestly, I don't know. Logic tells me the intricate borrowing patterns exhibited by the United States government, banks and consumers would have collapsed. Banks would have to drain their assets to pay back the credit default swaps and to pay for the at-risk loans they made with consumers. This would have forced the banking system to collapse. Consumers would have to pay absurd interest rates to borrow any money, and at worst, there may have been withdrawal rushes that were similar to the ones that happened in The Great Depression. The stock market would have crashed further it did and investors would have stopped buying into the U.S. economy.

Essentially, I vacuum  effect on the financial stability of the U.S. market would have destroyed the lives of typical consumers and Wall St. investors.

But, the U.S. government stepped in.

The bailout pushed government money back into the private sector and helped keep the banks from completely collapsing. It avoided a crisis, but it's difficult to determine if the banks learned their lesson from the experience. It's also hard to gauge the effect this bailout had on typical consumers.

I believe this proves that Keynes's theory has its merits. And the only way to continue reinvesting back into the economy during our financial crisis is to let the government play a role. Increasing revenues will give the government access to more funds to create work projects for unemployed citizens. It will help us build new roads and schools. It will let the government invest money back into education.

We haven't seen any hardcore numbers on tax increases, but it can't be more than $10 to $15 dollars paycheck. Isn't that worth helping get the economy back on its feet?

We can't rely on the corporations to do it themselves because if they can keep operating at record profits without having to create new jobs, what is there incentive to create those jobs?

Once the government has provided adequate stimulation to the economy and people are back to work and generating a salary, then the government can back off and let the market do its thing. Then they can lower taxes and look at ways to cut spending during a time of growth.



If you agree with this, what do you think the government should be investing in? There are issues that investment into education has not produced a increase in learning compared to dollars spent.