Why tax cuts might not rescue the economy
Tax cuts work when they stimulate consumption. President Bush's $150 billion tax cut didn't do this and any tax cuts that President Obama puts in place aren't likely to stimulate people to spend if they are worried about losing their jobs.
About a year ago, President George W. Bush asked for and got $150 billion in tax cuts to help stimulate the economy.
It doesn’t seem to have worked so well.
And still, a lot of folks across the political spectrum are pushing for more tax cuts to help kick-start the economy once again.
Tax cuts didn’t save us then and won’t save us now, for a couple of simple reasons.
First, some background. Recessions are caused by one thing and one thing only: a fall in aggregate demand. If the whole lot of us are spending less than before, the economy slides into recession.
Falling aggregate demand can be caused by any number of things – the bursting of an investment bubble, a sharp drop in government spending, or a turn in the business cycle. We seem to have hit two out of three at present.
Critics of President Obama’s plan to put a lot of money into infrastructure investments – roads, bridges, public facilities of all kinds – argue, with some justification, that it will take some time for that kind of investment to trickle down in the form of a healthy economy.
So they trumpet for tax cuts, because despite having lower taxes than any place except maybe Mexico and Somalia, taxes apparently are continuing to choke the lifeblood out of the American economy. (Never mind that the places with the lowest tax burdens tend to be the least nice places to live.)
Tax cuts can work. If taxes are too high, they will choke off economic activity. If demand is sagging, putting more money in people’s pockets may encourage them to go out and spend, spend, spend.
And there’s the catch.
You may recall W.’s plaintive pleas for all of us to spend our stimulus checks pronto. However, then as now, what most people say they’ll do with a small windfall like that is either save it or pay off debt.
That’s not bad for the economy; banks will have more money to lend if people either save or pay off debt, which would decrease the cost of credit and theoretically spur economic activity.
Theoretically, because that only works if consumers and businesses have the expectation of borrowing more money.
However, at some point, business isn’t borrowing because people aren’t buying so there’s no need to invest in new plants and equipment. (It’s for this very reason that business needs a tax cut least of all.) Meanwhile, consumers aren’t borrowing as much because they’re trying to cut expenses as they live in fear of losing their jobs.
So for a tax cut to work, it has to spur consumption, and the last one didn’t and this one probably won’t either.
The only people who likely will spend more would be the poorest of the poor, assuming they get anything from a tax cut. And they’re more likely to spend at discount stores such as Wal-Mart, which, at last count, gets 80 percent of its merchandise from China. That won’t do much to get American factories humming again.
So a tax cut isn’t any more likely to get the economy lumbering ahead than is infrastructure spending. And it carries the added cost of making the federal budget deficit grow even bigger, with little to show for it at the end but an ever-higher percentage of the budget consumed by interest on the debt.
The quickest way to juicing the economy might be buying up so-called toxic assets from financial institutions, but that rewards the idiots who made all those bad loans. In the brave new world of Obamerica, that’s a moral minefield we shouldn’t be dancing on if we don’t want this to happen again.
The new President will have to include some tax cuts in his economic package just to get enough Republican votes to get anything done. But as much as possible, Obama should stick to his guns and aim for an infrastructure package, not to fix the current economy, but to grease the wheels of prosperity down the road.
Only two things actually make the economy grow: population growth and gains in productivity. The former carries a lot of costs; the second is the only real fountain of prosperity.
Infrastructure spending – human and physical – boosts productivity by creating a better-educated, more creative work force.
This kind of investment aids productivity by reducing transportation costs. Bad roads and the like cost consumers and businesses time and money. Tragically, we’ve already seen what bad bridges can do.
Infrastructure spending can lower the impact of the economy on the environment, something the market by itself cannot do. If we could get sewage treatment for all the homes along Hood Canal, for example, we could probably get fish back in the Puget Sound again.
Tax cuts carry none of these benefits, all of the costs, and won’t fire up the economy any quicker.
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Comments:
Posted Wed, Jan 28, 1:34 p.m. inappropriate
Your motives are questionable at best: a member of the state employees union--the very union obstructing the balancing of the state budget--lecturing about business taxes, and the general tax burden. I'll be much happier with the state tax burden when those overly generous contracts--negotiated in bad faith by unions and pandering politicians--come in line with fiscal realities; particularly those revolving around health and retirement benefits. Just like the private sector, government will have to reorganize, and your income and benefits will have to come in line with the tax-base.
Posted Wed, Jan 28, 1:46 p.m. inappropriate
My bad: wrong union. I stand by my point: public employee unions, in general, are a burden on the economy. They fundamentally increase costs and define down the quality of services. They will have to be rooted out; I expect it will be painful.
Posted Wed, Jan 28, 5:23 p.m. inappropriate
Wow that ten bucks a week extra in payroll tax deductions i should go buy a new car.What a joke big government and big unions never created a job and never will.
Posted Wed, Jan 28, 8:57 p.m. inappropriate
Barack Obama is now officially the president of the United States. And he must now start working out the change that he has promised to us. He has already come up of economic stimulus plan. The general focus of this plan is to target job-producing projects that can be underway quickly, to do just about whatever it takes to get the economy moving, and restore confidence in the nation’s economic future. However, this plan has already received some negatives remarks even from his fellow Democrats. Recently from the House Democrats, they released their answer to Obama's original stimulus plan, which he unveiled last week. Their plan costs $825 billion, a bit more than the $800 billion that was originally estimated. The new plan cuts out the tax credit for businesses that make new hires. The tax cut for individuals is included though, but it's only a little bit extra in each paycheck, so a lot of Americans will probably still need a payday loan if they run into a financial emergency. Republicans, of course, are calling for more tax cuts, especially for businesses, and less spending. The Republican Study Committee released its own plan that reflects these ideals. The House is saying it hopes to have the bill finished by mid-February. To read more about the details of the House Democrats' bill, visit your payday loan source.
Posted Thu, Jan 29, 8:34 a.m. inappropriate
Tax cuts. You know what I did with my last rebate check? I cashed it and wrote a check to the government on that account to pay my next quarter's estimated taxes with. No "stimulus" there except to the post office, which was paid to deliver the check from the government and the one back to the government... Woo hoo.
Posted Fri, Jan 30, 12:33 p.m. inappropriate
You guys crack me up.
Unions force employers to manage by something other than whim and favoritism.
Unions do not degrade the quality of service; bad management degrades the quality of service.
Do you work for free? Would you prefer to work for minimum wage? What is it that's so special about your job that you shouldn't be paid much, much less? Unions force private firms in particular to share the wealth. Do you want to work for Wal-Mart as anything other than an executive? Your logic leads there.
In societies where public employees are poorly paid, you get poor, uninspired service and corruption. That's better exactly how? You all should visit Mexico -- low taxes, low public salaries and all the fun and bullets you can stand.
Seriously, you need a strong private sector to keep the power of the state in check, but you need a strong state to keep the market in check (or did you miss what's happened in the credit markets of late?) But you're typical Americans -- you want all of the benefits of government, for free. That ain't happening.
Posted Mon, Feb 2, 9:18 p.m. inappropriate
I would support unions lowering wages if Boeings, Chase etc etc would do the same. Why should gov employees not be paid a fair wage. What ever that is. I actually think we should all work part time and spend more time at home with kids, reading, walking etc etc and quit working so much. Some where (oh ya the hunter gatherer article) men used to only work 10 hours a week and then spend the rest of the time BS'n. I have known for years that it was somewhere around 4 hours a day for primitive man and I actually aim for that and I can make a modest living at that. So don't send me any tax cuts and if something is needed like streets or down and out folks and we don't have enough money either drive on rutty roads or raise my tax's as I prefer to pay for what I get and i get a lot in my life. How come you folks don't?