Sunday, August 29, 2004

Dealing with "Middle-Class Squeeze"

Arnold Kling writes about "Understanding 'Middle-Class Squeeze'" at Tech Central Station. He debunks the notion of "middle-class squeeze" and concludes with these observations:
[P]oliticians who take on middle-class [a] public policy [issue] may be causing harm. Sending out a message that government is the solution may serve to weaken the cause-effect connections that people need to make in order to solve what are fundamentally personal problems. The damage caused by exacerbating the cause-effect disconnect that weakens personal willpower may far exceed the benefits of whatever actual remedy the government is able to deliver.
Well, let's suppose that politicians are unable to resist dealing with "middle-class squeeze" -- just as many of the middle class are unable to resist McMansions and fattening foods. What to do?

To the extent that there is such a thing as middle-class squeeze, it reflects a lack of fiscal discipline, which means that the middle class (on the whole) is spending more and saving less. If that's the case, a public-policy solution would be to (1) increase taxes on consumption (perhaps by levying a national sales tax, including a sales tax on homes), (2) eliminate income tax deductions for property taxes and mortgage interest (for starters), and (3) reduce taxes that discourage saving (perhaps by eliminating all taxes on capital gains and interest).

That combination of actions -- which could easily be made revenue-neutral -- would have the effect of raising investment, thereby increasing productivity and real incomes. At the same time, by encouraging Americans to save at a higher rate, Americans would become less dependent on Social Security as a source of retirement income, which is another way of dealing with the coming "crisis" in Social Security.