SAVING IS NOT A SOLUTION
By Dierk Hirschel

[This article published in: Frankfurter Rundschau 6/17/2010 is translated from the German on the Internet, http://www.fr-online.de. Dierk Hirschel is an economics expert of the German verdi union.]

Europe is saving to its destruction. Firstly, Angela Merkel tried to ree4ducate Greeks, Spaniards and Portuguese into Swabian housewives. Now she plays the iron austerity commissar. With the weighty austerity package of 80 billion, the German chancellor shows our European neighbors how to really save. Chancellor of the Reich Brunning would be proud of his student.

The savings orgy should help heavily indebted states regain the trust of the financial markets. In a play from the madhouse, states must run into debts to bailout their money-houses. Now investment bankers and hedge fund managers dictate the price for fresh capital to their rescuers. Whoever does not rigorously save either pays usurious interests or receives no money.

The capital markets repeatedly force the real economy to its knees. The savings-rage threatens to strangle the tender growth. The economic recovery is a bit shaky. Without economic assistance, the Euro-club would still be in the intensive care unit. A new collapse threatens if Merkel, Sarkozy, Berlesconi and Co. now cut wages, personnel, investments and social transfers.

WASHED OUT OF DEBTS

What happens if savings is not a solution? The states of the Euro zone can only be washed out of debts. For that, they must robustly invest in education, health care, the environment and the infrastructure. In the short-term, these future investments could be debt-financed. In the medium term, higher taxes are necessary.

Distribution side-effects are sought. Economic inequality in Euro-land has dramatically increased. Top earners in Germany today pay only 27 percent effective income tax. In the past it was 44 percent. The property tax was completely abolished in 1997.

Higher taxes on mammoth incomes and assets make economic sense. When the rich pay more taxes, they will not consume and invest one cent less. Only their savings rate will fall. This will only impair the casino.

THE PROPERTIED MUST PAY

The propertied must pay taxes again. Their massive economic power led to their separate taxation. Annual revenues of around 20 billion Euros will be gained if assets over 500,000 Euro are taxed at one percent.

Automatic incomes are also bequeathed. Every year around 200 billion Euro move from generation to generation. Only every seventh citizen profits from this. An inheritance tax reform must correct the rating procedures and not privilege the company’s assets. Ten billion Euros could flow annually into the state treasuries.

Interest profits should be burdened with the personal income tax rate and not with a 25-percent compensation tax. A higher tax rate, a higher corporation tax and a financial transactions tax also belong to the box of tools of a revenue-side consolidation strategy.

The danger that higher taxes will drive the timid deer from the country does not exist. The international tax-cutting race has changed into a tax-raising race. Our European neighbors raise their taxes in the financial crisis. The economically harmful and socially terrible austerity policy is not without alternatives. Whoever raises the distribution question refuses to save the future to death.

From Wikipedia:
The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity.[2] The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increases in savings may be harmful to an economy.[3] Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy.

http://en.wikipedia.org/wiki/Paradox_of_thrift

http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-thrift-for-real/

The Cato Journal, a right-libertarian journal published "The Paradox of Thrift: RIP" in 1996 arguing that the paradox did not exist.

http://www.cato.org/pubs/journal/cj16n1-7.html

It's a funny essay, because it argues that Keynes was overly impressed with models, rather than dealing with reality. They said the same about the "quants" whose ideas helped fuel the housing bubble and stock market bubbles. Enthusaism for models, applied to real-world economics, seemed to cause out-of-control capitalism to nearly collapse.

And, in the aftermath of the crash, we're getting empirical evidence that the Paradox of Thrift really seems to exist.