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Don’t leave demand out of the equation

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Scott Jagow: The checks are half-way in the mail. The House voted overwhelmingly yesterday to rush tax rebate checks to most Americans. Now, the Senate gets a hold of the stimulus package. Some Senators think it’s a bad idea. Others want to expand it.

Commentator Robert Reich says beyond the rebates to taxpayers, there’s an even bigger problem with this plan.

Robert Reich: Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery. These deductions are normally spread out over several years. The idea is to get businesses to invest in more machinery, which will stimulate the economy.

But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002, and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.

This tax break exemplifies the illogic of what’s called supply-side economics. The thinking goes: If you reduce the cost of investing, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes, and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home-equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich — which means they already have most of what they want. Instead, the rich invest their earnings wherever around the world they can get the highest return.

Now add all this together and there’s just not enough consumer demand out there to keep the American economy going. We’re finally feeling the whirlwind of widening inequality and ever more concentrated wealth.

Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.

Jagow: Commentator Robert Reich was Labor Secretary under President Clinton. His latest book is called “Supercapitalism.”

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