Either Raise Taxes on Wealthy to Fund Recovery or Expect Years of 'Grinding Recession,' Argues Nobel Prize-Winning Economist

People participate in a "March on Billionaires" event on July 17, 2020 in New York City. (Photo: Spencer Platt/Getty Images)

Either Raise Taxes on Wealthy to Fund Recovery or Expect Years of 'Grinding Recession,' Argues Nobel Prize-Winning Economist

Failing to increase taxes on the rich to support recovery will lead to "cutbacks in basic services that will weaken our social fabric and harm our potential for years to come."

In an op-ed published on Thursday in the New York Times, Nobel Prize-winning economist Joseph Stiglitz and his Roosevelt Institute colleague Kitty Richards argue that rather than wait for Congress to provide financial aid to deal with the economic consequences of the coronavirus pandemic, state and local governments should increase taxes on "their wealthiest residents" to "bolster their local economies" and meet pressing needs or else Americans will be forced to suffer an "unacceptable alternative" characterized by socially-damaging austerity and a long-lasting recession.

Richards and Stiglitz make the case that "the economic impact of the pandemic is daunting, and it would be better for the federal government to step in." According to the pair of economists, the federal government--unencumbered by balanced budget rules hampering many states--"could solve the problem tomorrow by providing fiscal relief to states and localities, like the $1 trillion provided by the HEROES Act that passed the House in May" before languishing on Senate Majority Leader Mitch McConnell's (R-Ky.) desk.

Nevertheless, people across the U.S. are "living through a catastrophe" and need assistance right now, the economists write. They "cannot afford for their state and local leaders to abdicate responsibility."

So far, state and local governments enduring substantial revenue shortfalls due to diminished tax receipts have responded by "slashing spending and jobs, with 1.5 million public sector workers laid off by the end of June."

But, according to Richards and Stiglitz, "raising taxes on those who have not been hard hit by the recession" and using those funds generated through progressive taxation to support public services offers a more humane and economically sound approach.

Richards and Stiglitz draw attention to what they call "ripple effects," or the way that spending cuts reverberate throughout a community, causing damage to the broader economy, including an increased number of layoffs.

"When you fire a teacher, you harm her family and her. But you also harm the local grocery store where she shops, and all the other people and businesses she gives money to," the economists explained.

Richards and Stiglitz estimate that:

Each dollar of spending the state cuts leads to a drop of at least $1.50 in the gross domestic product, and there are reasons to believe that the drop is as much as $2.50. With state budget shortfalls forecast to approach $300 billion this fiscal year, a spending-cut-only approach to balancing state budgets will cause at least a $450 billion reduction in GDP--more than 2%.

On the other hand:

Tax increases, especially on high-income people who aren't living paycheck to paycheck, are much less economically damaging, costing the economy only around 35 cents for every dollar raised. States and localities that raise taxes on the rich to increase spending will create at least $1.15 of economic activity for every dollar raised, and most likely closer to $2.15 or more.

According to the economists, state and local spending never returned to pre-Great Recession levels following post-crisis cuts, causing irreparable harm to the economy and crucial services, including education.

They urge policymakers to not make the same mistake this time, especially since "education funding should be expanding" to "support smaller class sizes, building retrofits, and other innovations could make it possible for kids to attend classes in person rather than on the computer."

Because the coronavirus crisis is layered on top of--and has exacerbated--already existing inequalities, the economists note, the negative consequences of a failure to implement progressive taxation to fund economic relief will hit low-income Americans, and especially Black and Latino workers, hardest.

Richards and Stiglitz close with a warning--failing to increase taxes on the wealthy to support recovery will lead to "cutbacks in basic services that will weaken our social fabric and harm our potential for years to come, and a grinding recession that may last for years after the pandemic is brought under control."

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