High-paid workers and the Coronavirus relief

There is a good alternative to helicopter money, one that could be tried by governments in a time of pandemic: a fiscal policy based in high progressive income taxes, that is, a policy in which the rich but also the high-paid people would be subject to much higher tax rates (at least as long as the crisis lasted).

Let me explain what I mean, by telling you a story inspired by Enrico Moretti, a Professor of Economics at the University of California, Berkeley.

In his book, The New Geography of Jobs, Enrico stresses the role of well-paid jobs in terms of local employment and wealth creation.

In his own words, there is an “almost magical side of job creation” associated with high-tech jobs. “Attracting a scientist or a software engineer to a city triggers a multiplier effect, increasing employment and salaries for those who provide local services. In essence, from the point of view of a city, a high-tech job is more than just a job”.

Enrico gives the examples of several cities in Silicon Valley, or Seattle, where the clustering of software and innovation companies and high-paid jobs have created prosperous local communities, highly dependent, directly or indirectly, on the high salaries of engineers, software people, and scientists.

Yet according to Enrico’s research, “for each job in the innovation sectors, in a city, five additional jobs are created outside the innovation sector, in that community, both in skilled and unskilled occupations: lawyers, teachers, nurses, doctors, baristas, personal trainers, taxi drivers and so on.”

Obviously, the webs of jobs and revenues are much wider. All the jobs mentioned by Enrico – the high paid, and the local jobs – are also directly or indirectly connected to the employment and salaries of millions of other people in Asia, through the supply chains of American companies.  The global economy is connecting people all over the world. What’s at stake is more than just local jobs.

But Enrico is right: the salaries of the people working in the American innovation clusters – and also other salaries of high-paid people in other sectors – have a high impact on local jobs and revenues.

On the other hand, there is a problem now, with the coronavirus crisis. 

Think about it: with stay-at-home measures and the shut-down of many local activities, high-paid people are not spending their salaries as before. And that’s dramatic for the people that were depending on them.

What to do, then? How to solve the problem?

In the US, the package approved in Congress includes a payment of up to $1,200 to US taxpayers, and it’s a way of solving the problem for a few weeks.

But it will not be enough.

The rates of unemployment and lay-off are soaring. Morgan Stanley researchers are forecasting that the US economy may shrink by 30 percent in the second quarter of this year and that the unemployment rate may jump to 13 percent or so…

And that’s where Enrico Moretti’s story enters again.

It’s important to restore the previous financial circuits connecting people with high revenues to local people in need of Coronavirus relief.  

And that’s “easy” to achieve. It’s just a question of forcing the people that aren’t spending a large part of their salaries to “spend” them again. Fiscal policies can do it. Higher tax rates over high-paid people… is a way of getting the money necessary to help those struck by the pandemic.

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