The return of the famous “spillover effect”

The government lowers taxes on the rich with the argument that it will boost investment. It is a relationship that has not been verified anywhere in the world.

That the success or failure of the country’s economic policy can be summed up in the deficit, surplus, or balance of the State budget, that is, the result of public accounting, is completely false. A country that has a balanced budget is not a country where citizens have a better life than one where there is a deficit. In fact, in general it is the opposite.

In France, for example, the State budget deficit in 2024 will be 5 percent or perhaps more; in the U.S. it will be 4 percent, and in Argentina it should be zero percent according to Milei. No one intends that this will improve the economic situation of the Argentines or that it will deteriorate the economic situation of the French.

Public accounting measures the expenses and revenues of the State, no more and no less. Those who pretend that there is an economic bonanza when the State’s expenditures are equal to its revenues, are mistaken.

Television hosts, radio announcers, or newspaper scribes employed by the hegemonic media and orthodox economists have instilled in Argentines that the balance of the State budget is a primary issue. However, not only is it not, but, on the contrary, it is very often a negative indicator in terms of the wellbeing of the population.

The budgetary balance of the State can be achieved by increasing taxes on the richest or by reducing their expenses, as it is currently the case, which punishes the neediest sectors. Raising taxes on the richest does not cause any significant economic problems for the whole. Orthodox economists say that taxes reduce private investment, but in reality, the country currently suffers from the double penalty: the big profiteers flee their income, so there is no investment and no taxes are collected.

Spillover effect

In no country in the world have economic studies made it possible to observe or demonstrate that there is a positive correlation between the decrease in taxes paid by the richest and the increase in investment. In the face of such evidence, neoliberals claim that limiting taxes causes the “trickle-down effect,” that is, that the enrichment of a few causes an improvement in the situation of the neediest. However, the “spillover effect” does not exist.

What all economists know is that the decrease in public spending causes, as can be observed today, a fall in economic activity and a decrease in the wealth created. In the long term, it has been observed in the countries of the capitalist center that the reduction of taxes on the richest and the limitation of public spending have a positive correlation with a fall in the growth rate of wealth and the growth of unemployment and poverty. This is called “secular stagnation.”

The decrease in public spending initiated by Milei caused an economic crisis in Argentina. This situation was foreseeable and was described in these columns. The decrease in production and the increase in poverty and unemployment, as well as the situation of helplessness of retirees, was foreseeable and known to Milei and Caputo.

Economists know that this crisis situation is the product of what Keynes called a “planned recession” and it is what causes concern in the IMF, since if the wealth created in the country decreases, so do the possibilities of being able to repay the debt that Macri and Caputo contracted with the organization.

This explains the hasty visits of senior officials of the organization. No one believes that its deputy managing director, Gita Gopinath, is worried about the misery in the slums, or about the retirees. Nor does anyone think that the visit of the IMF’s director for the Western Hemisphere, the Chilean Valdéz, who was an administrator of the hedge fund, Frontal Trust, and who had to resign from the position of Minister of Economy of Chile because he supported the project of a mega open-pit mine of a North American company, in contradiction with Bachelet’s policy, is concerned about people in street situations.

Planned recession

The decrease in public spending and the obsessive search for budgetary balance, as the IMF admits, causes an exponential decrease in the wealth created. This is not a theory invented by heterodox economists, but is the result of calculations made by the IMF’s own teams.

Since the disaster of the Greek crisis and in the different programs of “budgetary consolidation”, more commonly called fiscal adjustment, it is admitted that when public spending is reduced by 100 pesos, the impact is a decrease of between 200 and 300 pesos of GDP.

The data already available today show that the paralysis of public works, caused by the State itself, translated, for the moment, into the loss in round numbers of 100 thousand jobs, which could reach 200 thousand in June if this policy persists.

Emphasizing public accounting instead of describing the mechanisms of the economy that produce wealth and employment implies the refusal of opinion makers to expose the conditions of the functioning of the economy. If they did, economists and journalists from the hegemonic media would have to describe the role of consumption, and the need for the majority of workers, whether passive, retired or active, to have incomes that constitute global demand in general and consumption in particular, which implies a fairer distribution of income.

This implies countercyclical economic action by the State, with an incentive to investment that rewards job creation, and a policy that protects industry, as well as regulation that maximizes economic growth. This also applies to investment, because it is clear that no one invests or creates jobs if there is no demand for the products they want to produce.

The economic mechanism of growth, as can be seen, has nothing to do with a sum of the State’s revenues minus the sum of its expenditures measured by public accounts, which is only the result of what has been done in the past. The result of the past cannot be a goal for the future.

Published in Cash May 5, 2024

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