How does the financial social safety net come into play and how does it affect intergenerational tax burdens?
There are two principal issues in managing the safety net. One is detecting and avoiding insolvency – by forcing loss-making to recapitalize institutions before they become insolvent. The second is to develop and execute a reasonable program for resolving insolvencies that are not detected in time. Within this second set of concerns is the problem of crisis management. Crisis management generates income transfers from low-income to high-income taxpayers as well as some nasty intergenerational effects. What saddens me is the government’s claim that the U.S. has done a great job in resolving its financial problems. The safety net has been expanded substantially and huge uncertainty exists about what the tax structure is going to be going forward. Safety-net growth subsidizes loans to overly risky activities at the expense of safe and sure investments and on the other side of the market expanding the safety net fosters a reluctance by business and households to invest in safe and sure pro
