The Depression in the Financial Markets – The Solution is Wage Inflation via Tax Policy

My annual political post...

From the very beginning, I was against the Bush tax cuts. Back then, I refused to enter the fray of politics as a pastor, so I kept my mouth shut except around the dinner table. The reason I was against the Bush tax cuts is that I do not believe in the ideology of supply side economics in the information age. There is too much access to market data, and, therefore, businesses do not invest in growth without strong demand data. Due to the access to data, the 21st century is a demand driven economic world. What is needed today is a balanced approach which supports business and also supports the consumer. Immediately, we need a pendulum swing toward support for the consumer. The crisis we are in today is 100% the result of a lack of money in the hands of the consumer caused by relative wage deflation. Let me explain.

In our current financial crisis, the problem is that the financial markets are getting tight. Insurance and mortgage companies like AIG are having trouble getting credit to make and insure loans. The result is we have a bottleneck in the financial system. The cause of this bottleneck is because AIG and others cannot put up enough collateral for the loans they need. Why all of a sudden are the big financial institutions unable to put up enough collateral? It is because the only real paper of value that they hold is “mortgage backed securities”. It ain’t called real estate for nothing. As we all are so very aware, people are defaulting on mortgages. Therefore, mortgage backed securities are not great collateral. It all comes down to the housing market.

Well, who pays mortgages? Well, people do. The middle class pays mortgages, and the only way to slow down the bleeding in the housing market is to increase the cash in the hands of the middle class. Currently, the middle class is experiencing the big squeeze. In simple terms, us middle class folk will rent before we will starve. We will default on our mortgage and rent before we will stave our children. Thus, the middle class home owner numbers are shrinking, and the lower middle class renters numbers are exploding. This is the big American economic nightmare. The answer to this housing/mortgage problem is not a stimulus plan. The money is not in the coffers of the government. Excluding the sub-prime side of the mortgage crisis, the problem is wealth inequality and relative wage deflation.

The actual big money that is needed to bail the system out is in the hands of employers in the form of business profits. Sorry sports fans but the real root cause of this problem is two-fold. First, it is an ideological drive to support supply side economic policy (i.e. republicanism) and its big policy application, the Bush tax cuts. The fact is the trickle-down didn’t trickle down in the global economy of the 21st Century. Greed got the best of us this time.

The answer is simple – tax policy. What must happen is the government must make a tax policy which gives tax credits to businesses for wage increases. If a company shows an increase in wages to employees, then they get a tax credit. Otherwise, they get a big fat tax increase on profit. This problem we are in is a serious housing crisis that only employers can solve and employers will only solve this problem by raising wages when the government forces their hand. The only question is how hard the government should push.

The bottom line is it all comes down to demand and, specifically, demand for MORTGAGES. The only way to drive demand for mortgages is to increase the wages of the middle class. The only people who can increase the wages of the middle class are employers and the only way this can happen is TAX POLICY.