What happens to those between the very wealthy and those less so? When I total all taxes (fed, state, consumption etc) I pay out annually I pay enough to support a family of four for one year in a modest economic environment (around $55,000) yet I only earn $120,000.

I know Oprah Winfrey and the rest of Obama’s top 5%ers who financed his campaign are not going to spread their wealth to me and neither will the lower 40 who pay no income tax at all do not have the money to spread around be coming to help me after all my earnings have been seized by the taxman so what happens to the middle person who is already burdened?

As for infrastructure, how come states don’t use their Toll Fees they collected over the decades to pay for the upkeep of bridges and roads?

Personally, I think the problem is that we spend too much money on buying votes.

The problem with Japan’s numerous stimulus packages wasn’t that they were too large, but that they were too small. They were much smaller (about one third the size) than advertised (it was all politics). The largest one was in late 1995 and was actually only 1.6% of GDP. But GDP growth increased by 0.7% in 1996. Japan made the mistake of going fiscally austere the following year and the GDP consequently declined for two years in a row after that. The US made a similar mistake in 1937-1938.

Japan’s infrastructure stimulus wasn’t very stimulating for many of the reasons detailed here. Even before Japan increased infrastructure spending it was about 6.5% of GDP, the highest of any advanced country. They were already well known for public works boondoggles thanks to their exceptionally strong construction lobby. Increasing those expenditures only exacerbated the problem. The U.S. on the other hand has one of the lowest rates of spending on public works among advanced countries: about 3.3% of GDP. Rather than a reputation for overspending on public works we have one just about the most decrepit infrastructures in the advanced world. Additional expenditures on infrastructure might be a good thing and prevent any more disasters like the bridge collapse in Minneapolis or the steam pipe explosion in downtown New York. I wouldn’t mind getting a taste of the kind of broadband speed that are taken for granted in Japan and South Korea these days either.

As for marginal tax rates, I would say that by themselves they are irrelevant, as the size of the deficit matters more in a deflationary liquidity crisis. The Great Depression is one of those incidents where people’s memories are a little bit fuzzy. True, during the contraction from 1929 to 1933 under Hoover, when GDP fell an average of 7-8% annually, there was a big hike in the top marginal personal income tax rate from 24% to 63% and a more modest increase in the top marginal corporate tax rate from 11% to 14% by 1932. But capital gains tax rates were maintained at a record low rate of 12.5% throughout the contraction. And yes, taxes were also raised under Roosevelt. But during the period 1934-1937 the GDP managed to grow at a blistering pace of 10-11% annually. This was despite the fact that the top marginal income tax rate was raised to 78%, the top marginal corporate income tax rate was raised to 15%, and the top marginal capital gains tax rate was raised to 39% by 1936. In short taxes were lower during the contraction than during the recovery. It was irrelevant because there was a shortage of aggregate demand during the contraction, not a shortage of investment. Even if current top marginal tax rates were to be raised modestly, I don’t think it would do any harm, given the size of the proposed fiscal stimulus. And it might serve as a way of transferring income from the very wealthy to those less so in order to boost aggregate demand. The biggest tax policy mistake was the when the U.S. started to collect the payroll tax for Social Security which contributed to the recession of 1938. Japan’s biggest tax policy mistake was in boosting the consumption tax from 3 to 5 percent in 1997. Both taxes were regressive and killed aggregate demand.

And the previous two asset bubbles in the United States were not caused by an excessively loose monetary policy. All of the data concerning the labor market and inflation indicates that the monetary policy under Greenspan was not too loose at all. (For example, real unit labor compensation per unit of production has been in steep decline since the late 1990’s, indicating an extremely slack labor market.) These same people who just a year ago adored Greenspan are now vilifying him now for all the wrong reasons. The problem was really a lack of regulation, and Greenspan contributed to that. (And in hindsight, it’s outrageous that anyone could get a 125% option ARM loan. What on earth were people thinking?)

Otherwise, I agree that we could use a little “creative destruction.” As long as there is sufficient fiscal and monetary stimulus from the government the economy will survive a few corporate bankruptcies. Failure should generally not be rewarded.

Despite all the gloom, try and have a Merry Christmas.

We are indeed doomed to repeat. The government bailed out Chrysler 30 years ago only to see the firm return to building boring, gas guzzling cars. What do we do? Give them loans again.