A Case of Consumption?
Recently Federal Reserve Chair Alan Greenspan continued his campaign to destroy every last shred of his personal credibility by endorsing the idea of shifting the United States taxation paradigm to a consumption-based, rather than income-based, system. With typically cryptic mumblings about broadening the tax base Greenspan seems to have abandoned all semblance of rationality. The argument, if such a term from the logician's toolkit may be employed here, is that forcing people to internalize the cost of consumption will encourage American's to boost their savings. In a vacuum, this may very well be a reasonable proposition. Regrettably, Mr. Greenspan does not have the luxury of overseeing a vacuum, he is supposed to be overseeing our economy. And within that context his idea may generously be described as irresponsible and unrealistic, if not actually reckless and dangerous.
The first problem with this proposal is that it shifts a tax burden onto the large segment of the population who are working poor. These people are working for a living, but make so little that their incomes are not currently taxed. Through discipline and persistence, both behaviors we are supposed to be rewarding, they manage to afford clothes for their kids, and occasional items such as televisions and radios. Mr. Greenspan's proposal would presumably mean that those at the bottom would be able to have even less adornment in their spare lives. Having personally seen slum housing in South Los Angeles, I can assure you that such a consequence is akin to kicking a sleeping puppy: cruel and unnecessary. At the other end of the spectrum, the ultra-rich are likely to shift more of their consumption overseas, doing some harm to our economy, and possible costing some of those working poor their jobs.
As to the rest of the country, there are far better ways to boost savings than making things more expensive through taxation. If encouraging saving by allowing the cost of goods to rise is good, wouldn't both ends of this equation be better served by taking steps that both increase salaries and compel saving directly? Raising the minimum wage, and at the same time taking steps to compel personal savings would have the far more desirable effect of transferring wealth to the bottom of the economy. If, as Greenspan seems to suggest, low prices for merchandise are bad for the economy, why not take steps so that the current Wal-Mart model no longer works? Allow prices to rise due to a higher cost of goods, as well as higher retail costs due to increased salaries, and have healthy inflation. A large part of our problem with personal saving is our endless consumption of cheap goods, accompanied by a decline in both real wages and economic security for most Americans. Tweaking this system to leave wages low and consumer goods cheap but disposable is far less sustainable than moving towards the European model of decently-paid workers owning fewer, but higher-quality, goods, and having increased economic security. Perhaps Mr. Greenspan did get one thing right: there is something fundamentally wrong with our economy, and we should be willing to try radical change. But shouldn't that change be for the good of the many, not just of the few?
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