Monday, December 17, 2012

Miller on What to Keep Our Eye on as We Consider the Fiscal Cliff

My friend and colleague Tracy Miller has a lot of wisdom in his most recent blog post about the fiscal cliff. As Miller notes, while the media and the masses have generally focused how the fiscal cliff or some budget agreement cobbled together to avoid it will affect aggregate spending,
We should be much more concerned about how the fiscal cliff affects investment and entrepreneurship than how it affects aggregate spending. This is why allowing tax rates to rise, especially on the rich, will do more harm than good.
He is exactly right. One of the key drivers of prosperity is capital accumulation, because more and better capital goods help workers produce more. Increases in productivity drive increased real wages and incomes, allowing us to buy more goods at lower real prices. Higher taxes stymie economic progress because it reduces both the ability and incentive of private citizens to save and invest. Consequently, over time capital is consumed and we are placed on a lower income trajectory. Bad news for an economy struggling to find places where people can work productively.

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