In the last 40 years, mostly at Republican initiative, many US states and localities have dramatically increased sales taxes at the expense of property taxes. Only four states, Delaware, New Hampshire, Oregon and Montana, have no sales taxes; southern states generally charge the most. (Arizona tops out with a combined state and local rates up to 13.7%). Europe’s VAT, introduced by France in 1954, is a national tax. European Union “tax harmonization” rules require member countries to charge a minimum of 15%; most EU members charge over 20%. (Hungary wins with 27%.)

So far the US has resisted a national VAT, despite support from both right (businessman Steve Forbes) and left (economist Robert Frank). That may change with the expansion of sales taxes on internet sales.

The US Senate just passed the Marketplace Fairness Act, enabling state governments to make internet companies like Amazon collect sales taxes from their customers—just as local businesses have long done. Is this truly a victory for tax fairness? While Grover Norquist, the Heritage Foundation, and other extreme anti-tax ideologues continue to oppose the measure, many Republicans are waffling. Many good liberals positively jump with enthusiasm. New York Times business columnist Floyd Norris writes (5/13/13):

“It is nothing short of amazing to me that this proposal is controversial…What this would do is make tax compliance easier and provide badly needed revenue — from their own citizens — for struggling states and cities. It would also mean that local merchants — the ones who pay property taxes — would find it a little easier to be competitive with Internet merchants.”

Alas, Floyd Norris misses the big picture: Sales taxes are simply terrible taxes. As Europe’s gasping economy sinks into another recession, I think there’s good case that the VAT aggravates the damage of misguided austerity policies.

As most of us know, sales taxes are “regressive.” That is, when sales taxes are “passed on,” they fall harder on poorer customers than on richer ones. That’s why many states exempt food and medicine, as does New York, (except for restaurant food). But sales taxes are also “passed back” onto retailers and service providers. In fact, sales taxes are shared between customers and retailers in inverse proportion to their ability to shop or sell elsewhere.

It’s the “passed back” portion of sales taxes that do the most damage, because—unlike profit taxes—they take a bite from gross revenues before expenses. Moreover, a uniform tax rate does not mean uniform impact. (As Anatole France wrote, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”) Sales (and VAT) taxes fall hardest on small, labor-intensive retailers, with high volume and low profit margins.

Consider two New York City businesses: One is a furniture store; the other is a Sabrett’s hot dog cart. Assume for simplicity the “passed back” portion of the 8 ½ % sales tax is 5%. The furniture store invests $9000 a year in an inventory of sofas, which it sells for $10,000, earning a $1000 before-tax profit. 5% sales tax is $500, half of profit, and 5.5% of the $9000 investment. The hot dog cart invests $200 a day in buns, dogs and labor. It earns $210 a day, or $76,650 a year in sales and $3,650 in profit. A 5% sales tax collects $3,833, wiping out profit and amounting to 1916% of the $200 investment! Moreover since most of the cost of the cart is labor, the tax adds 5% to the 18% or so in payroll taxes! In short, sales taxes kill small businesses—precisely the kind which provide the most jobs per dollar invested. And by killing competition, sales taxes may drive prices up by more than the tax rate.

Sales taxes are also insidious—it’s always so tempting to politicians to raise them another quarter cent, and hope no one notices. Up to now, the threat of tax competition from neighboring states and localities has kept those politicians in check. That is, as long as customers can easily shop elsewhere, most of the tax will be “passed back” onto merchants—whose complaints will make politicians think twice about increases. The European VAT has crept so high precisely because shoppers can’t avoid it by crossing borders. (Tennis ball smuggling isn’t cost-effective).

In recent years, the rise of effectively untaxed internet sales has helped check increases of state and local sales taxes. If the Marketplace Fairness Act passes the House, it will release that check on sales taxes, and lubricate our way towards European-style VAT taxes! “Fairness” shouldn’t mean raising sales taxes on internet merchants, but reducing them on local businesses. For once, though for the wrong reason, Grover Norquist is right.

“The millions of foreclosures since 2007 represent a massive upward redistribution of wealth. Millions of families have lost or are on the verge of losing their single largest asset, which has served as a source of security and access to credit. Neither they nor those who would normally be likely first-home buyers are able to buy.”

There’s an additional reason the Wall Street property grab will injure struggling homeowners: Single family homes make a truly lousy absentee investment. Many of us who have become accidental landlords—after moving or the death of a parent—have learned that management easily becomes a nightmare. The very nicest people can turn into “tenants from hell”—such as drug addicts. Then there’s the rent. “My check bounced? Are you sure? I promise I’ll get you another check as soon as my paycheck comes in.” Worse, there’s maintenance. “I know it’s three AM, but my toilet is plugged up and overflowing.—Have you tried using the plunger?—I shouldn’t have to; you’re the landlord!” Or, “The dishwasher sends bubbles foaming out onto the floor?—Did you use dishwasher detergent, or laundry detergent?” Or a call from a neighbor, “They’re having a party and throwing beer bottles out through the windows!”

Consequently, despite all the tax favors for real estate investment, single-family home rental has remained mostly a mom-and-pop operation. When properties are scattered, supervision becomes just too labor-intensive. Successful owners must be local, available 24-7, and willing to work hard and accept low rewards for their efforts.

So now these big real estate companies think they’re going to make megabucks scooping up and renting out tens of thousands of foreclosed houses. Ha! First of all, as long as the economy remains sour, rents will remain low. That’s because in hard times, people find it easiest to cut back on rent. They double up with friends; young or middle-aged adults move back in with parents. Second, the real estate companies are speculating on huge capital gains when the housing market recovers. Yet in the very act of bidding up home prices now, they’re making those gains less likely. Third, they will run aground on maintenance. Construction during the bubble years 2002 to 2008 was especially shoddy. Then, as the owners struggled and fell behind on the mortgage payments, they stopped making repairs. After the banks foreclosed, many of the homes were vandalized—empty homes make inviting targets. If the banks couldn’t manage the foreclosed properties, will the big real estate buyers do much better?

What will happen? The after-bubble will go bust. The real estate companies will eventually sell off their investments at a loss. By then many of the houses will be damaged beyond repair. More and more neighborhoods will become ghost towns.

What could prevent this disaster? Homeowners who bought or refinanced during the bubble period up to 2008 found themselves “underwater” after the crash, owing more on their mortgages than the value of their homes. The lost value is gone—or rather it wasn’t there in the first place. Many homeowners have defaulted and gone into foreclosure; many more will default in coming years. Banks could prevent these foreclosures by writing down mortgage principal to the new low market value. There’s even a Treasury and Housing Department Principal Reduction Alternative program to help homeowners get a write-down from banks; it’s not working because it’s voluntary. The big banks, though they have been willing to lower interest payments, understandably fear that mortgage principal write-downs will set a bad precedent. They’d rather foreclose and sell to the real estate companies. Congress could remove this obstacle by legislating a mandatory write-down program—strictly limited to those owner-occupants who purchased or refinanced during the bubble years before 2008. Otherwise the senseless destruction of lives and housing will continue.

The claim that new technology destroys jobs is at least as old as the industrial revolution; it’s always been met with the counterclaim that new technology creates jobs too. And after all, the growth of any modern economy depends on adopting ever more labor-saving technology. Is something different this time? If so, what? Here’s what McAfee says:

“About 30 years ago, wage growth for the average American worker started to taper off. And for the past 15 years, it’s actually been negative. About 12 years ago, job growth started to taper off as well. Of course, that took a huge dive during the great recession and has really not recovered at all.

And I look at these longer-term trends, and I think they’re part of a pattern, as are technologies. And especially our digital technologies just continue to get so much more powerful and to demonstrate all these new capabilities. That means that we tend to need human labor a little bit less, as the digital labor gets more and more powerful. That trend, I think, is only going to continue.”

McAfee unwittingly drops a clue in this statement. What happened 30 years ago? The Reagan Revolution, that’s what. In the name of creating a “free market”, the Revolution created exactly the opposite. By cutting taxes on the rich and on corporations while raising payroll taxes, the Revolution tipped the policy balance in favor of the One Percent and against small business. By cutting regulation and anti-trust enforcement, the Revolution set off a wave of mergers and takeovers unparalleled since the era of robber barons. Mergers that would have seemed unthinkable even a decade ago—such as the new combination of US Air and American Airlines or Comcast and NBC (2009-11)—happen without more than a peep from the Justice Department. And in the crisis of 2008, the government not only bailed out the culprit banks, but officiated at a series of shotgun marriages—as between Wachovia and Wells Fargo; or Bank of America, Merrill Lynch and Countrywide—that left us with a handful of Even-Too-Bigger-to-Fail banks.

But what’s the Reagan revolution have to do with new labor-saving technology and employment? Quite simply, big corporations, especially big monopolistic corporations, tend to carry labor-saving technology too far. They automate too soon and too much. The reasons are pretty obvious once you think about it. First, the bigger an organization, the greater the management bottleneck, that is, the more difficult it becomes for top management to keep track of lower levels. There could be no better example than the story of how the risky trades of the “London Whale” blindsided Jamie Dimon and cost JP Morgan billions. So managers of big corporations understandably seek to replace fallible or potentially-dishonest employees with machines. Second, big corporations, awash in cash, can easily afford to automate. Third, there’s the “gee whiz” factor—the temptation to automate even if it’s not cost-effective, because the new technology is so cool and the CEO wants to appear to be “with it.”

As a consequence, large corporations hire far fewer employees per dollar of sales or assets than do small businesses—the true “job creators.” For example, according to 2007 Census data, comparing firms with under half a million in sales to those with over $100 million, the small firms averaged 15 employees per $100 million sales while the big ones averaged only three. The greater the share of the economy that large corporations control, the more their labor-saving propensities put the squeeze on workers.

So yes, new technology is indeed destroying jobs. But in focusing on technology rather than the corporations that install it, scientists like McAfee ignore the elephant in the room: the growing concentration of wealth and corporate power.

One such corner cut is coming to a neighborhood near me: it is a 30-inch high-pressure gas line passing under the Hudson into the West Village and heading north under Tenth Avenue before branching out. As detailed in Johnston’s book and a recent article, high-pressure gas, gasoline, or jet fuel line explosions kill or injure someone every week. In December 2010, a 30-inch gas line blew up a block in the San Francisco suburb of San Bruno, excavating a 4-story-deep trench, leveling 35 houses, killing 8 people and injuring 60 more. It took Pacific Gas and Electric over 90 minutes to shut off gas to the flames. That was a low-density single-family neighborhood.

Given this history, one would think New York City officials would at least require detailed safety studies before allowing the new 30-inch line. Nope! No special safety requirements for high density, no environmental impact, no inspection requirements. As recently reported in the Village Voice, federal regulations for the Hudson crossing are a joke, and once the gas gets into Manhattan, it’s all up to our friendly local gas, steam, and electric monopolist, Con Ed. Remember that horrendous 2007 steam explosion at 41^st and Lexington? But steam isn’t flammable. Now imagine a San Bruno-style eruption in Manhattan: high rise buildings ablaze, cars melting and gas tanks exploding in the radiant heat, power and water blown out, fire trucks unable to get close, and screams of trapped victims drowned in the roar of the towering blowtorch! Hurricane Sandy meet 9/11!

David Cay Johnston is a former New York Times investigative reporter on taxation and regulation, Pulitzer Prize winner, and now a Reuters columnist. The Fine Print is a sequel to his two earlier catalogs of corporate crime, Perfectly Legal (2003) and Free Lunch (2008).

Monopoly is the underlying theme of The Fine Print. We all know, sort of, what monopolists do all day. They charge their customers “what the traffic will bear”, that is, they raise prices until they lose in volume what they gain in prices. At the other end, if they can, they squeeze their suppliers and their workers. As part of the squeeze on both ends, they provide poor service and poor maintenance of facilities. “Natural monopolies” share a key characteristic: high fixed costs that make competition difficult or impossible. That’s the reason the public either owns or regulates “utilities” like water, power, gas, highways, railroads, sewers, waste disposal, subways and buses, cable, air routes and many others.

Johnston documents in detail the misbehavior of utilities and the laxity of their regulators. He includes another monopolist in my back yard, Time Warner Cable. Time Warner and its dancing partner, Comcast, have between them carved up most of the US. Time Warner—grrr! I just had to reboot the cable box for the fourth time this week. Internet crawls compared to Europe. Then there’s that PBS NewsHour sponsor, Warren Buffett’s railroad, BNSF, “the engine that connects us.” It connects to some hapless spur lines at gunpoint—your money or your business! Warren Buffet in fact pops up several times in the book. He owns quite a stable of monopolies; his public-spiritedness clearly doesn’t include reining them in!

If you want to get really mad, read this book. Meanwhile, I’ve learned there are already two slightly smaller high-pressure gas lines in Manhattan, including a 26-inch baby that runs along 75^th street three blocks north of me, and then angles across Central Park south of the boating lake to 71^st Street on the East Side. I had noticed the little yellow warning posts on my daily walks; now I know what lies beneath!

In my view, it is not the loss of middle class spending that holds back the economy; it is the loss of middle class investment. How so? Investment includes not only small business entrepreneurship, but also education. Middle class investment is crucial, because the middle class gets a much higher return on investment than the One Percent and big corporations. Not because the middle class is extra savvy. Rather, a shortage of capital—often borrowed on credit cards or as home mortgages—forces them to use what little they have more prudently. (To get a really high return on investment, be poor! A high school education can yield 40%!) Precisely because cash is tight, small businesses create far more jobs per dollar invested than do big firms, especially giant resource firms like Exxon-Mobil.

Stiglitz received the Swedish Bank “Nobel” Prize for showing how “asymmetric information” and “risk aversion” gum up capital markets, keeping capital from moving from where it’s abundant to where it’s scarce—a phenomenon economists call “capital market failure.” Consequently, return on investment varies inversely with wealth or firm size. The greater the inequality, the greater the failure. Today’s multinational corporations and banks get miserable returns. For example, in an article appropriately titled, “Dead Money” (11/01/12), The Economist reports how major corporations trim real investment—such as new technology—while piling up cash. Firms in the S&P 500 held about $900 billion in cash at the end of June, up 40% from 2008. The Economist dismisses the conservative claim that “meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment.” Why? All big multinational firms have been hoarding cash, not just US-based ones. It’s been a growing trend since the 1970’s, paralleling growing inequality. Meanwhile, JP Morgan’s ending 2012 balance sheet shows that out of $2,359 billion in assets, JP Morgan holds $922 billion in “Cash and Short-Term Investments”—over a third! (Half the “short-term investments” are “Trading Account Securities”—gambles in the international money markets.) As recently reported by Bloomberg, the TBTF banks would make no profits without some $83 billion in annual taxpayer subsidies.

The argument that spending instead of investment drives the economy leads to Paul Krugman’s “Keynesian” policy prescription: government should just spend big time to stimulate the economy, never mind on what or how financed. But if it’s investment that counts, then quality and financing matter. Government should spend on high return investment in schools, health care, urban infrastructure and other services that complement middle class investments and create middle class jobs. Money is wasted if spent on roads and bridges to nowhere, let alone on the military. (Research by Heidi Garrett Peltier at U Mass Amherst shows military spending creates very few jobs per dollar.) And as much as possible, funding should come from taxes on the rich and big corporations. Government borrowing—deficit finance—just gives the One Percent a nice safe place to park its cash.

In his new book, The Price of Inequality, Stiglitz seems to waver between the conventional Keynesian spending model, and the investment model sketched here. He should stick with the investment model. Unlike the spending model, the investment model immediately reveals how natural resource and capital monopoly obstructs recovery and growth. It also immediately points to the right policies, many of which Stiglitz details in his book.

Although my son went to culinary school and trained as a pastry chef, he has been unable to find work paying more than nine or ten dollars an hour, and not full time either. Typically, when volume slows, his bosses send him home; he’s lucky to get 30 hours a week. Those bosses—small business owners of restaurant franchises—also struggle to survive. Hurricane Sandy flooded out my son’s last employer.

Conservatives claim that a minimum wage increase will cause job loss. Jared Bernstein disagrees. He cites studies showing that a modest increase in the minimum wage, one that only affects a few percent of workers, won’t increase unemployment rates. Minimum wages, he says, also set a standard when there’s a range of possible wages. I agree with Bernstein. However, speaking from my son’s experience, there may be a reason why most studies show little effect: employers often cheat by paying employees for fewer hours than they actually work. The nominal wage may go up, but the effective wage remains the same.

Payroll taxes aren’t so benign. That’s especially true for small businesses like my son’s employers, where staff payroll is the biggest cost. The minimum wage, nominally at least, only affects the division of revenue between employer and employee. Payroll taxes take a big bite out of the total revenue before it’s divided. In 2013, Social Security takes 12.4% for wages up to a $113,700 cap. There’s another 2.9% for Medicare, with no cap. Then there are tax nibbles for Federal and local unemployment and disability. The Affordable Care Act will add further costs. Regardless of the exact share as between boss and worker, payroll taxes encourage workers to drop out, and employers to hire fewer workers and squeeze them harder, or to automate, or simply to fail.

Besides taxes, other costs loom extra-large for low-wage workers. My son, who lives with his girlfriend and their child on Long Island, now commutes to a job in Manhattan. He pays $250 a month for a rail pass and walks fifteen blocks to the restaurant to save subway fare. That $250 alone comes to a quarter of his monthly gross of about $1000. Why does he do it? Why not hang out at home, taking odd jobs off the books? Why? My son takes great pride in his restaurant expertise, and greater pride in supporting his family and paying taxes like a good middle-class American. He doesn’t even spend the allowance I give him; he’s saving it up for his son.

The proposed federal minimum wage increase will at best benefit a small number of workers, and only until inflation wipes out the real value of the increase. If President Obama really wants to help the working poor, he should propose to mitigate payroll taxes. There are two obvious ways. First, lower the rates—making up the difference by extending the tax to all income beyond the $113,700 cap. Second increase the Earned Income Tax Credit for low wage workers. Both changes would make the tax system more progressive and less destructive.

The battery was manufactured by the Japanese government-subsidized GS Yuasa. Question: was there an illegal quid pro quo between Boeing and the also-subsidized Japan Airlines to buy the first run of Dreamliners in exchange for the battery contract? The deal raises another question too: how come Boeing sole-sourced the battery to GS Yuasa, instead of also contracting with better-known suppliers? And finally, given the long-known propensity of lithium-ion batteries to catch fire, how come the critical battery wasn’t more thoroughly tested?

As for DePuy Orthopaedics, acquired by Johnson & Johnson in 1998, it knowingly continued to sell the defective implant for years. By the time the implant was finally recalled in 2010, some 93,000 patients were at risk of crippling failures. Two years later, Johnson & Johnson is still defending the indefensible.

I first learned the connection between these stories not from the economics literature, but from a journalist, Barry C. Lynn. In two books, End of the Line (2006), and Cornered: the New Monopoly Capitalism and the Economics of Destruction (2010), and many journal articles, Lynn documents the recent rapid transformation of global corporations from integrated manufacturers to monopolistic distributors. As distributors, giant lead firms like Boeing and Johnson & Johnson either acquire subsidiaries to do their manufacturing, or better yet, contract out the work. Often rival firms depend on the same suppliers. As in the case of Boeing’s Dreamliner, they even contract out the design. This delegation of work increases short-term profits both by saving costs and by allowing the lead firms to focus on market control. But it results in a lack of supervision and eventual disasters like the battery and hip implant.

The “new monopoly capitalists” don’t just fail to supervise. They adopt a deliberate business strategy of “rationalization”: simplifying product lines by eliminating variety, cutting R&D, and suppressing research by buying up patents and freezing them. As Matt Stoller recently reported, “Lazy Corporate Monopolies Are Why America Can’t Have Nice Things.”

The new monopolists squeeze suppliers and play off governments against each other to obtain tax and regulatory concessions. Josh Eidelson at the Nation reports that before the disastrous garment factory fire in Bangladesh, Walmart apparently forced its suppliers to cut corners on safety. The New York Times ran a recent series on how Amazon and others manipulate local governments in the US. Reuters reports “Japan eased safety standards ahead of Boeing 787 rollout.”

Of course the new monopolists also do what the old ones did: raise prices in captive markets. In his new book, The Fine Print, David Cay Johnston reports how AT&T has sneakily raised prices over the years by adding little “fees” to our phone bills.

Today, giant international monopolists dominate every corner of commerce: Boeing and Lockheed in aviation, or JBS Swift and Cargill in meatpacking, or Johnson & Johnson and Beckton-Dickinson in medical supplies, or Exxon-Mobil and BP in oil, or Deutsche Bank, Barclays and JP Morgan in banking. All by itself there’s the Italian firm Luxottica, which controls the entire world eyeglass business from manufacturing to retail outlets.

I call Barry Lynn “prophetic” because in his 2006 book, End of the Line, he predicted that the rationalizing and contracting out strategies of the giant monopolists would lead inevitably to collapses of key industries, and greater and greater dependence on government support. His prediction came true with the 2008 collapse and bailout of the banking industry. (See Matt Taibbi’s “Secrets and Lies of the Bailout.”) In the pharmaceutical industry we’re already seeing periodic shortages of key vaccines and medications, as squeezed suppliers go out of business. The lithium-ion battery and hip implant stories bode ill for the aerospace and medical supply industries. Who’s next?

I study the “classical” economists, starting with Adam Smith. Inequality loomed large in their world. They divided society into three broad classes: First, the landlords: the original One Percent, the Downton Abbey crowd, the “great proprietors” of vast estates. Then the capitalists: the merchants and manufacturers. Last: the workers. The classical economists asked, what determines the distribution of income between these classes? But around the end of the 19^th Century, the “neoclassical” paradigm swept in. Gone were the three social classes with dramatically different wealth and income. There were only consumers—from old Aunt Esther on Social Security to Donald Trump; producers—from Harry’s Shoes to General Motors; and government. Business cycles were best left to play themselves out.

During the Great Depression, to his credit, Keynes bucked his colleagues by claiming that government spending could revive a depressed economy. But, caught in the neoclassical paradigm, he got the mechanism wrong. Keynes argued, as does Krugman today, that the problem is a lack of consumer demand. Consumers want to save instead of spend. Lacking demand, businesses won’t invest. So there’s a “savings glut” or “liquidity trap”—billions in cash sloshing around seeking in vain for investment opportunities. The solution: government should borrow some of that loose cash and spend it, no matter on what: war, high-speed rail, fixing potholes, or education. Deficits be damned.

In my view, we don’t have a “liquidity trap”; we have an “inequality trap”. What’s that? An “inequality trap” happens in a downturn, when the One Percent, big corporations and banks hoard cash, starving small businesses for capital. The greater the inequality and deeper the downturn, the tighter the trap.

The multinationals are indeed awash in cash. In an article appropriately titled, “Dead Money” (11/01/12), The Economist reports how major corporations trim real investment—such as new technology—while piling up cash. For example, firms in the S&P 500 held about $900 billion in cash at the end of June, up 40% from 2008. The Economist dismisses the conservative claim that “meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment.” Why? All big multinational firms have been hoarding cash, not just US-based ones; it’s been a growing trend since the 1970’s.

The big banks are also awash in cash. For example, JP Morgan’s September 2012 balance sheet shows that out of $2,321 billion in assets, JP Morgan holds $887 billion in “Cash and Short-Term Investments”—over a third! (The “short-term investments” are gambles in the international money markets, but that’s a different story.)

To the One Percent, the cash bath may look like Krugman’s liquidity trap: a lack of investments yielding the high returns they enjoyed before the 2008 crash. But try telling small businesses there’s not enough demand and too much cash! They face drastic “credit rationing” by the banks. The banks are of course super-cautious these days, which is why they pile up cash. But in addition, the collapse in home values has reduced small business owners’ collateral for loans. And following the failure of many small banks and the consolidation of giant banks into megabanks, far fewer banks can or will lend to small businesses.

Today’s depression is a small business depression. Don’t forget, small businesses are the nation’s employers, providing far more jobs per dollar of assets or sales. According to Census data, in 2008, the 99.7% of US firms with fewer than 500 workers accounted for 49.4% of US employees. In 2007, comparing firms with under half a million in sales to those with over $100 million, the small firms averaged 15 employees per $100 million sales while the big ones averaged only three.

I respect and admire Paul Krugman for fighting the good fight. I just wish he would question the inequality-free neoclassical paradigm. An “inequality trap” requires different measures from a “liquidity trap.” It requires raising taxes on the One Percent and the big corporations—instead of borrowing from them and running up the deficit. It requires protecting ordinary workers and small businesses from the impact of payroll taxes like Social Security, for example by greatly increasing the earned income credit. In the short run, it requires avoiding capital-intensive spending like military or high-speed rail. Instead it requires extra spending to maintain education, health care, unemployment insurance and other urgent public services. In the long run, it requires enforcing anti-trust legislation and breaking up the big banks.

The logic of spending runs loosely as follows: I spend $1 at the grocery store. The grocer spends $.80 of that at the gas station. The gas station owner spends $.80 of that at the barber, and so on. By the logic of an infinite series, my one dollar in spending has generated an additional $4 dollars in spending; or the “multiplier” is 4. And with that additional spending comes another $4 in production. However if I leave that dollar in the bank, and the bank doesn’t lend it to someone else to spend, then government must spend it to keep the economic machine running. Sounds plausible, doesn’t it?

But there’s a weak link: the assumption that spending automatically leads to production and jobs.

Consider a small businesswoman. She manufactures wooden jig-saw puzzles. Every month she decides how many puzzles to make, and hence how many hours to schedule for her employees. What does she consider? First, she estimates her next month’s sales from sales last month and previous months. That is, she plans how much to produce based on consumer spending. But then she considers how much cash she has available to pay for plywood and workers’ wages. Small businesses often operate on lines of credit, borrowing each month for payroll and materials, paying back loans with cash following sales. If—as happens in a recession—banks reduce credit and customers delay paying, our puzzle-maker cuts back planned production and lays off workers.

Now consider a large profitable conglomerate, an aggregation of dozens of businesses and thousands of products. Such an enterprise faces no shortage of cash in a recession (see my last post on cash-hoarding multinationals). But management turns cautious. It shuts down less profitable business lines and lays off workers, even when there’s still substantial demand. Likewise big banks turn cautious, denying credit even to steady customers like our puzzle-maker.

In short, when a recession makes cash tight for small business, and confidence low for large business, consumer spending does not translate into production and jobs.

Can government spending nonetheless create production and jobs to replace those lost in a recession? That depends first on the type of spending. Military spending is the worst. First it creates very few jobs per dollar spent; second, it creates limited (or negative) benefits. Contrast that with urban services: street and sewer repair, garbage collection, schools, police, fire, welfare and health provision—all of which create many jobs per dollar spent.  Add in Federal safety-net spending–notably Social Security, Medicare, Medicaid, and unemployment insurance. Without these services operating invisibly in the background, neither the puzzle-maker, nor the conglomerate, nor their customers would survive. Here’s where government should spend more during a recession, not cut back. (This does not justify highways and bridges to nowhere, which don’t rate much above military spending.)

The effectiveness of government spending also depends on how it’s financed. Local government services raise property values; when property owners pay property taxes, they pay for benefits received. However excessive borrowing undermines benefits of government spending. I’ve dealt with this at length in Deficit Hawk, Progressive Style, Parts I and II.

It’s a harmful myth that spending drives the economy. It makes us think we can rev up the economy by any old government spending, financed any old way. In reality, we need productive, job-creating, service-providing government, supported by progressive taxes.

In an article appropriately titled, “Dead Money” (11/01/12), The Economist reports how major corporations trim real investment—such as new technology—while piling up cash. For example, according to Thompson Reuters, firms in the S&P 500 held about $900 billion in cash at the end of June, up 40% from 2008. The Economist dismisses the conservative claim that “meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment.” Why? For two reasons: first, all big multinational firms have been hoarding cash, not just US-based ones. Second, research cited by The Economist shows a growing trend in cash-hoarding since the 1970’s.

Small businesses are the nation’s employers. According to Census data, in 2008, the 99.7% of US firms with fewer than 500 workers accounted for 49.4% of US employees. By contrast, the 0.017% of firms with over 10,000 workers accounted for 27.3% of US employees. In 2007, comparing firms with under half a million in sales to those with over $100 million, the small firms averaged 15 employees per $100 million sales while the big ones averaged only three.

Yet today a desperate shortage of cash cripples small firms’ ability to grow and increases their risk of failure. Why so? Unlike big firms, small firms mostly operate on borrowed money. They routinely borrow to meet payroll or buy materials, repaying the loans when they collect from customers. This is the structure of businesses supplying the auto industry; failure of GM and Chrysler would have destroyed thousands of small suppliers.  During the bubble years, banks readily loaned to small businesses. But come the 2008 crisis, banks slammed the doors, refusing to roll over old loans or issue new ones, even to customers with perfect credit records.  Small businesses laid off employees, or simply folded.

Textbook economics says that banks move funds from savers—like the cash-hoarding dragons—to investors like small firms. But today, that doesn’t happen. Due to bad investments in mortgage-backed securities, banks have less money to lend. Their optimism has turned to gloom. The collapse in home values has reduced collateral small business owners can offer for loans. Finally, big banks mostly lend to big firms while little banks lend to little ones; the failure of many small banks and the consolidation of giant banks into megabanks has left fewer banks willing or able to lend to small business. With the banks not functioning, the dragons’ cash stays parked in safe government securities.

At this point a simple person might ask, can’t we just transfer some of the dragons’ spare billions to needy small businesses? Yes we can, through the tax system.

Step one: restore the taxes on corporate profits and end giveaways. Over the last 30 years, the tax system has increasingly favored the dragons and the 1% who own them. Due to accumulated loopholes, big firms like General Electric pay little or no tax on profits. Moreover, as documented by the New York Times  (12/2/2012), such firms increasingly succeed in bullying local governments into giving them tax concessions and subsidies, some $80 billion a year.

Step two: Protect small firms and low wage workers from the real job killer taxes: Social Security, Medicare, and soon, Obamacare. FDR made a devil’s bargain in financing Social Security with a highly regressive tax on the lower end of the wage scale. Lyndon Johnson added Medicare to the bargain. As part of the Reagan tax “reforms”, Alan Greenspan compounded the damage by jacking up Social Security rates in order to cut rates on high incomes. As for Obamacare, based on Romneycare, don’t forget it was originally designed by the Heritage Foundation!  A recent Tax Policy Center report estimates the regressive tax burden on low and moderate-income households may exceed 50%–a burden shared with their small business employers.

So capturing the dragons’ gold, a heroic task in itself, won’t do it. Even as we struggle to preserve social programs, we must reform the funding. Tax credits for low wage workers and small businesses would help, as would extending the Social Security tax to all income while lowering the rates. As for Medicare and Obamacare—imagine a single-payer health care system, Medicare for all, funded by dragon taxes!