Challenge to Krugman: public debt as welfare for the rich

Brad Delong has a nice set of charts here on the debt/GDP ratio.  Here’s one:

Now, remembering that your faithful correspondent has been an independent for a long, long time and finds the positions of the “liberals” and “conservatives” cartoonish obfuscations of the fact that there is now only one party in the United State of America, the Plutocrat Party, the fleecers of the general public, led by the Financial Oligarchs, etc., ad nauseam—keeping your humble correspondent’s total objectivity in mind, then I pose this question to Professor Krugman, the would-be biggest spender on the “liberal” side:

Without the miraculous equalization of the income distribution that occurred almost instantaneously during World War II (as shown in Emmanual Saez’ chart below)—apparently a tribal banding-together in the face of frighteningly evil enemies on two sides of the world—why the hell shouldn’t all the deficit spending you and other “liberals” propose go straight into the pockets of the same manipulative upper crust that has relieved the rest of America of so much of its wealth? 

In World War II, at the same time that debt/GDP was ballooning, income inequality was falling out of bed!  It’s incredible!

This is the problem with macroeconomists:  they treat the economy like a gasoline engine—either it’s running or it’s not, and if it’s not, you got to prime it to get the RPMs up.  Isn’t it just possible, though, that there’s a level of detail missing from the “bigger is better” school of deficit spending thinking, like who actually will get the money?  What if the engine is only running on two cylinders?

The reason we have a depression-like, deflationary “collapse of effective demand” now is because the income distribution has gotten more and more unequal, and the lower income classes have gone into debt and sent their wives to work to try to maintain relative position, and Wall Street has managed to fleece them with home equity loans that never should have been made (and then got themselves bailed out, etc., truly ad nauseum).  And so on, and so on.  (See this or this for more--ugh.)

So if the real problem is that America is rigidifying into a feudal class system—given all the President’s talk of “sharing the sacrifice,” why aren’t the “liberals” screaming their heads off for higher marginal tax rates on the rich?  It makes sense, doesn’t it?  Could it be because they are not really “Democrats,” but are actually Plutocrats? 

Wouldn’t raising marginal tax rates be a first step toward teaching the rich that they’re on the same team as everyone else (even though I don’t think they believe that or want to be on the same team).  There is precedent for marginal tax rates far higher than what we have today. 

It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.

Source:  New York Times

Will raising marginal tax rates make the rich feel good about sharing everyone else’s sacrifice?  Probably not. 

It is disturbing to think that only a war will bring people together. 

Americans have watched Wall Street and the rich take away a huge chunk of their net worth, while those same rich had their losses made whole.  When do we start handing out peerages?

So why should we believe that the dollars of a gigantic deficit-financed stimulus will go anywhere different than where the dollars go today?  We’re hitting on only one cylinder.  The system is rigged.  What’s your answer, Professor Krugman?

Let’s try to teach the rich and especially the super-rich how to share.  Let’s get rid of the obscene “hedge fund exemption” (that lowers the tax rates paid by the masters of the universe to lower percentages than their admins pay).

Let’s raise marginal tax rates, or scale the deficits back immediately.

Or both.

We have no real reason to believe the income distribution is going to change in America anytime soon.  Let’s provide livable workfare and health benefits for the unemployed and hope that somehow America finds its way back to being one people again.