The true "downward spiral"

Libertyworks published a great collection of graphs showing plummeting tax revenues for corporate and personal income taxes. Keynesians like to talk about a downward spiral of deflation - money supply drops due to financial crisis, which causes prices to fall; but prices fall faster than wages so companies go out of business, which destroys more capital, which in turn shrinks the money supply, etc. Keynes prescribes massive government deficit spending.

I'm astonished this has lasted 80 years. I pointed out in my last post that deficit spending borrows from the same pool of money that would otherwise be made available to businesses. This was a causal argument. I personally don't buy the sticky wages argument either - in a country with a high savings rate (something else the Fed suppresses, by the way, that would have saved our ass this time around), temporary loss of a job is not a catastrophe and there is plenty of investment cash to replace the jobs lost. That is all assuming that few people employ salary and benefits cuts and furloughs in bad times (again, something that is much more difficult when half of all workers are public employees).

Now, with these graphs, it is also becoming clear why we have a downward spiral at all. Government, in order to pay for its largesse both fiscally and politically, first goes after the most productive members of society first. In response, they stop taking risks, which leads to fewer jobs created, which leads to fewer tax revenues, which leads the government to hit the richest even harder, etc. We see this particular brand of insanity with an executive branch admonishing banks for not lending out one side of the mouth, then auctioning off record piles of debt to them out the other side.