It's a favorite childhood game. Take three items, look for a pattern and identify the one that doesn't fit. Let's play,
If you've read the news recently, you may have come across the following three items:
■ Reports that big companies are borrowing large amounts of money cheaply but are not hiring new workers.
■ Reports that banks are able to get money cheaply from the Federal Reserve but are not lending it to small businesses.
■ Arguments that a failure to extend Bush-era tax cuts for the highest income brackets would be a disaster for the economy.
Cue the music. Which of these things is not like the other? Which of these things just doesn't belong?
My answer: extending tax cuts for the wealthy.
How do the first two fit together? Low aggregate demand. Many people are out of work or forced to work part time — at least 26 million and growing. This means people are being forced to reduce their consumption as they adjust to having less money to spend.
Because so few people are buying, big businesses see little reason to increase their work forces and produce more. They are borrowing money not to expand but just to lower the interest payments on their existing debt, much as a homeowner might choose to refinance when mortgage rates are low.
Likewise, banks are nervous. Many were caught up in the financial crisis that led to the recession and have become much more risk averse when lending to small businesses.
They are also waiting for clear signs that demand is picking up before they will begin lending again.
So why don't tax cuts for the wealthy belong? Won't tax cuts create jobs?
The current debate is not about creating new tax cuts. Even if we extend the Bush-era tax cuts, no one will get additional income. So, extending these won't generate more demand, investment or jobs.
Will allowing the tax cuts to expire cost the economy jobs? Most arguments against ending the cuts proceed along one or both of two lines: supply or demand.
The supply argument goes something like this: Wealthy people invest a lot. These investments provide money for businesses to expand, which in turn provides jobs. So increasing taxes on the wealthy will cost the economy jobs.
The problem with this argument is revealed by our first two items. Businesses are already borrowing large amounts of money, but they aren't expanding — and they won't until demand increases again.
So even if allowing the tax cuts to expire were to decrease investment by the wealthy, it is unlikely this would to lead to further job losses.
But what about demand? After all, doesn't consumption by the wealthy make up something like 25 percent of consumer spending in the U.S.? So won't raising taxes on the wealthy decrease their consumption and make the problem even worse?
It is almost certainly correct that allowing taxes on the wealthy to rise will decrease their spending. Does that mean aggregate demand would decrease? No.
Money collected as taxes does not simply disappear; it is spent on something. So, whether a tax increase on the wealthy will lead to an increase or a decrease in total demand depends on how that money is used.
If, for example, the money is used to supplement the incomes of the unemployed or the working poor, overall spending would almost certainly increase.
Why? People who are living on the edge will spend almost of all of that money, while people whose immediate needs are already met would save a significant part of it.
Our economy is trapped in a loop. Businesses will not hire more workers until people have more money to spend, but people won't have more money to spend until they are put back to work.
As politically unpopular as this idea has become, we need carefully targeted government spending to create jobs and help break the cycle.
Allowing tax breaks for the highest-income classes has not and will not solve this problem. Letting those tax breaks expire will not worsen the problem. Rather, it will provide the resources to allow the government to spend money without saddling future generations with significantly more debt.
Don't be confused by false connections and partial arguments. There are serious problems with our economy, but extending tax cuts for the wealthy doesn't belong.
Nathan Sivers Boyce, a Berea native, is associate professor of economics at Willamette University in Portland, Ore.