Does Bush think it's monopoly money?

I readily confess that economics is not my strong suit, so perhaps one of you can show me how this makes a lick of sense, beause I am utterly baffled.

First of all, I’d like to state that I was very much against George’s tax cut. Still am. Everything I read, heard and understood told me it was insane. Not least is the fact that he pulled the same stunt in Texas, and now Texas is floundering and trying to figure out how to pay its bills. Having left that mess behind him, he proceeds to make the same one for the nation.

I find it even more irrational and irritating since it was based on projected surpluses it is pretty clear will never materialize.

You are probably wondering where the hell I’m going with this… sorry: http://www.msnbc.com/news/627028.asp

Well, maybe there’s just a big hole in my brain where economics oughta go, but how is this much different than signing the contract to buy a much bigger house, a new car and a boat, and then lobbying your boss to lower your salary?

All patient and helpful explanations appreciated in advance.

stoid

Nothing really to contribute here, since I do actually agree with what you’re saying, but I did want to welcome back the real Stoid. :wink:

I kinda missed these Bush bashing threads. It’s good to have you back to normal. :slight_smile:

Are you suggesting that a better way to fuel a recovery is by raising taxes?

If not, why not?

Now I don’t think it’s fair to call this a “bush bashing”. “Bashing” implies to me a sort of mindless hate-fest, based on thin evidence. I think my OP was a pretty restrained expression of dissent and dismay, along with a calm and sincere request for someone to clarify why my understanding may be flawed, not really a “bashing”.

Panz, I’m not suggesting anything but what I said…that the plan he just came up with makes no sense at all to me. To my eye, it looks completely ass-backwards.

stoid

I know, Stoid. It was well reasoned. And as I said, I agree with your sentiments.

But the title…c’mon, are you really telling me that it wasn’t a jibe at Dubya?

Anyway, let’s not argue about this. We’ll have plenty to argue about in the future. :wink:

Testimony from a Texan here. First, Bush’s Texas tax cut was largely illusionary. Property taxes (no state income tax down here, if you recall) were reduced by a tiny amount for some people, and not at all for most. The Legislature had no problem balancing the budget this year. Trust me, redistricting was much more of a problem than the budget was.

And if you’ll think waaaaayyyy back to 1993, you might recall that a certain president tried to get Congress to approve all sorts of spending measures to get the economy rolling again. Now Bush wants to get Congress to approve all sorts of tax-rollback measures to get the economy moving again. Aside from the fact that it’s one heck of a lot easier politically to kill an econonmy-inspired spending increase than it is to kill an economy-inspired tax cut, the idea of putting more spending money in people’s pockets is damn near identical.

Well, you may be surprised to find that I kind of agree with you on this one, Stoid.

However, your analogy is off. This doesn’t have much to do with household finances, and such comparisons are usually pretty faulty.

Both Democrats and Republicans think that the economy needs some form of stimulus. Both agree that the prime problem is consumer spending - when people are feeling uncomfortable, they quite rationally hunker down a bit. When you aren’t sure what the world is going to be like in a year, you will have a natural reaction to maybe not go out and buy a new car and commit yourself to a 3-year payment. So the terrorist attacks have collapsed consumer spending, which causes a glut of manufactured goods, which causes manufacturers to have to lay off people until they can get inventories low.

So that’s the situation. The two main questions are, should the government do something about that, and if so, how?

I’ll leave the first question right now, because pretty much everyone on both sides of the aisle in Washington has agreed that the government should do something. The Democrats argue that since the problem is consumer spending being down, we should give money back to consumers so they can spend it. So they support one-time tax rebates, aimed at lower income people who will spend the money. They would argue that if you give money to the rich, they’ll just put it in the bank. They already have lots of money, so if they aren’t spending it the problem isn’t that they need more. Poor people typically live paycheck to paycheck, and would probably spend any money they received.

This argument has a lot of merit, if you want to give the economy a short-term boost.

Some Democrats argue that the government should try to kick-start the economy through spending. Lots of public works, health care spending, etc. Basically, the same old laundry list of Democratic pet programs, wrapped in a new package called ‘emergency stimulus’.

This argument is a load of crap. They simply have not made any sort of case that increasing the size of government right now will have any short-term effects. Even new public works projects take a long time to get through the design and engineering phase, so large-scale employment increases wouldn’t happen until the ‘crisis’ is over. This is just pure opportunism, trying to use a crisis to pass measures that can’t pass without it.

On the Republican side, you have two camps as well. The first is interested in taking the current tax cut and accelerating it. This has some merit. The other Republican camp is doing the same thing the second Democrat camp is - trotting out all the same old Republican pet policies, such as capital gains tax cuts, business tax cuts, and other ‘supply side’ programs, and wrapping them in a new package called ‘emergency stimulus’.

This argument is also a load of crap. I happen to believe that some of these policies are a good idea, but I don’t know a single economist who thinks that they would have any kind of short-term effect. This is the political opportunism of the Republicans creeping up.

Both sides apparently have turned into Keynesians, which means that they believe that the government should engage in deficit spending in times of a weak economy to prop it up, then run surpluses during the good times to get the money back. Thus, the government acts as a moderator, softening the valleys and the peaks of the business cycle.

My personal opinion is that an economic slowdown in a time of uncertainty is RATIONAL. It’s what we SHOULD do. This is not the time to be mucking about with the economy with ANY kind of ‘stimulus’ package. I see a lot of danger in the government building a lot of false consumer confidence through either spending increases or tax cuts, losing a whack of revenue, and then having consumer confidence shatter again after the next attack.

I myself have cut back on spending and put off on a couple of large purchases because of this uncertainty. I think that’s a smart thing to do, and I’m doing the right thing for my family. Telling people that to be patriotic they have to continue borrowing money and running up their credit cards at a time when we could suffer a major attack and plummet into a hard recession just doesn’t seem to be smart to me. If we cut back now, we’ll be in a better position to climb back out later than we would if we just kept blowing money.

Isn’t spending money the government doesn’t have a fairly common approach to dealing with recession? It seems that Republicans favor cutting taxes while retaining spending, while Democrats favor increasing spending without necessarily raising taxes, to vastly oversimplify. Either way, economic recovery using borrowed funds is hardly a new idea, or one exclusive to Bush. Wasn’t it Keynes that started this whole idea, more or less?

I would tend to think that tax cuts, thus keeping more money in the private sector, would tend to be a better way of helping the economy as a whole. On the other hand, increased government spending would tend to be better at specifically helping those hardest hit.

Stoid:

Economics is a balancing act. What makes an economy strong is liquidity. Please note the caps. It’s very important.

In laymen’s terms, liquidity is the amount of money turning over in an economy. Think of it another way: How much cash is getting spent? That’s liquidity.

Liquidity is like love. The more you give, the more you get. All the dollars that get spent buy goods and services that put money in new pockets which in turn buy goods and services, and so on and so on. Spending makes goods and services in demand and means more money, more liquidity.

Now, there are times when you can get a runaway economy. People are too confident. There’s too much spending. Sometimes you see inflation. Certain goods and services get severely and unrealistically overpriced.

To contract an economy that’s booming too much, the Federal Reserve arm of the government will take on a “tightening” stance. They’ll increase interest rates, and pull money out of the economy, decreasing liquidity in an attempt to put the breaks on the runaway train.

Right now we are on the other end of the cycle. People don’t want to spend. The economy is contracting not growing. People are uncertain about the future and less willing to take on debt and spend. They’re concerned about their jobs.

If liquidity is like love, then recession is like hate. The more you give, the more that comes back on you. If people are unwilling to spend, goods and services are not in demand. The people that supply those goods and services face a crunch since nobody’s buying their stuff. They in turn become afraid to spend, and the effect builds like a pert commercial. Everybody’s afraid to spend because they think things are going to get bad, and the more they are afraid to spend the worse things get.

In response to this, the Federal Reserve tries to get people to spend by “easing.” They lower interest rates and make it easier to borrow money in order to encourage people to spend. They inject more liquidity into the markets, and encourage banks to follow suit, called “moral-suasion.”

There are some other tactics which I’ll get into in a minute, but at this point I should state that the goal of all this Federal policy is to moderate the boom phases of the economy and mitigate the bust phases. When they do this succesfully, and slow the economy without crashing it like they did (or at least take credit for in '94) it’s called a “soft landing.”

We were on our way to another soft landing before the WTC disaster. “Soft” is of course a relative term. Chances are that this cycle would have been worse than what we went through in 1994, but probably not a serious recession.

Current economic events though, as well as the WTC incident have put some serious brakes on the economy. It now appears that a serious recession is likely.

Remember, you slow an overheated economy by decreasing liquidity, and you revitalize a recessionary economy by increasing it.

But, how do you do the latter?

The most important ingredient is getting the consumer to spend money. Remember, consumer purchases have a cascading beneficial effect on the economy.

So, if a government is doing a good job, fiscally speaking, it should be in a surplus spending mode during boom phases to slow the economy, and deficit spending mode in bust phases to help it along.

The military build up will ensure that the government does a lot of spending in the near future. Bushes argument, which makes sense, is that the end is all taken care of.

However, there are two problems with government spending. Economically, the government is not a great consumer. A large portion of money spent by the government does not increase liquidity, it just disapears into a black hole. (take my word for it for now, I’ll be glad to explain if you want to know why this is true.) The fact that military purchases benefit the industrial economy mitigates this effect in this particular case though.

However, the other end of the equation needs to be taken care of as well, and that’s the consumer. Military spending will give a boost to those who are connected directly and indirectly to the military industries, but it’s not near enough to forestall a recession, and it takes time to filter through.

Somehow you have to encourage the consumer to be more confident, stop saving so much, stop paying down debt. You need an aggressive and confident consumer out there, and he needs money in his pocket and the will to spend it if the economy is going to get back on it’s feet.

A way to do this is to make borrowing easier, another way is to lower taxes.

So, while it seems counterintuitive, we need the government to go into deficit spending to help the economy get back on it’s feet. It does this by easing interest rates, spending more and lowering taxes.

Fortunately, the government is in a very good position to do this right now.

While I will happily bash Clinton for any number of things, he was a fiscal conservative. While times were good he did not increase spending irresponsibly and in fact actually reduced that rate at which the Federal Government was growing.

That leaves the Federal Government fiscally strong and able to do what is necessary to help get us out of this. When it works (so far the economy has always responded to fiscal easing) Bush is going to get credit that rightly belongs to Clinton.

That’s Ok, though, because Clinton got some credit that belonged to Bush Sr. from the last cycle. You’ll recall that the slowing economy was blamed for some of the dissatisfaction with Bush Sr. The fact is he did a good job engineering the soft landing.

Going a step further, none of these guys really deserve too much credit as all they did was listen to some smart people like Greenspan.

Hopefully, you see why lowering taxes and increasing spending is the responsible and correct thing for a government to do during a recessionary environment.

Finally, it is Monopoly money. The dollar has no inherent value except as a measure of barter that people assign to it, more or less arbitrarily. The Dollar is fiat money. That means it’s backed by nothing except people’s willingness to believe in it, their “confidence” in it as a source of liquidity.
That’s all that seperates it from Monopoly money. Really. That’s it.

The Fed’s job is to contract and ease, go with surplus or deficit as circumstances call for it.

So, in a recessionary environment tax-cuts and spending are the best thing for the nation.

You really can’t shellack Bush for endorsing this responsible path, but you can’t really give him credit either, as it’s not really his idea.

Ideally I would like it to be this way too. Unfortunately, Laissez-faire economics didn’t work well during the depression, and it hasn’t been working in Asia for the last 10-15 years.

Left alone, there’s good reason to think that the economic cycles can be very severe booms and busts, so I think the governments role of moderation of this effect is a valid and necessary one.

Aside from that, I like your analogy. Tax cuts and liquidity to the poor do provide some quick economic stimulus, and both parties to trot out the same old bag of tricks at each cycle, don’t they?

As far as this goes, you and I are in lockstep.

stoid

On the other hand, by doing that, you are pissing off mswas, you SUV-driving yupppie.

Thank you for taking the time to give me that economics lesson. What I learned is that I already knew all of that, in a vague “Sure, if you say so” kinda way.

It still comes down to the same thing I thought it did. I think (and every single person I’ve discussed this with seems to agree) that tax cuts don’t do * squat * to inspire confidence and increase spending. That’s just silly. I don’t base my spending on my tax bill. I don’t make major decisions based on an extra few bucks here or there, and * I have never met anyone who does. * If “consumers” (you have no idea how much I hate being designated as such. Until WTC, when was the last time you heard us being referred to as simply “citizens”?) are feeling concerned about their jobs and the furutre of the economy in the face of layoffs and terrorist attacks, what bonehead really believes that giving us a little break on our taxes is going to make eveyrone relax and buy a dishwasher?

Sorry, but it still smells like political opportunism to me. See Sam’s post.

stoid

In Keynesian spending is stimulative; tax cuts are recessionary?. There, I argued as follows that government spending to create jobs was a better antidote to recession than tax cuts:

The tax cut argument isn’t aimed at consumers, Stoid. The argument is for a capital-gains tax cut. The theory being that if you enact a temporary capital gains tax cut, then a lot of people will liquidate some of their holdings to take advantage of it, which puts cash in their pockets.

There are a few problems with this as a temporary stimulus, the biggest of which is that it’s not clear just how much you’d get flowing around again, because a lot of people have major capital losses from the last few years that they could use to offset their capital gains. So they might not have to pay any tax in the first place.

Scylla: The thing is, this isn’t a ‘normal’ slowdown we are talking about. This is a slowdown precipitated by a massive attack on U.S. soil, with the almost virtual certainty that more attacks are coming. People are hunkering down a bit, which strikes me as eminently reasonable. And if I save a bunch of money now by not buying stuff, then if I lose my job after the next attack I’ll be better able to survive without having to go to the government for aid.

What do you think the economic fallout will be if, say, Los Angeles gets dusted with Anthrax? Or the Hoover Dam gets put out of commission?

If I lived in California, I’d be preparing for lots of blackouts and distribution problems. I wouldn’t be panicking, but I would be storing bottled water, stocking up on batteries and dry goods, and making sure I had lots of candles and such in the house. And I wouldn’t be tying myself down with any large new purchases.

My pleasure. I knew those four years at College would come in handy someday.

Then you’re pretty smart. A lot of it is counterintuitive.

That’s a shame. It’s not really a matter of popular agreement. It’s a matter of provable and well-documented fact. There are 4 reasons why it works.

  1. People tend to spend what they have. If they have more, they spend more.

  2. People tend to spend what they think they are going to have, plus a little bit more. A perceived tax-cut or rebate has been observed to create a noticeable bumb in spending.

  3. Money in the hands of a citizen tends to get spent in a way that increases liquidity more than when the government spends it.

  4. A tax cut is generally considered a strong intermediate to long-term stimulus, and a weak short-term stimulus.

There’s 200 million other people in this country besides you. They don’t all do things the same way you do.

No. but you just agreed that short term fears may make you delay large ticket purchases. The opposite also holds true. Statistically you’re more willing to commit to a large item when you feel that you will have money. Also, a few bucks here and there, times 200 million people…

Pretty soon you’re talking real money.

You may not like the term, but it’s just as valid as referring to people in the hospital as “patients” or people in a store as “customers,” or people who are killed as “victims.” It helps one be specific in referring to what aspect of people one is talking about.

Nobody said that it was going to help “everybody.” Statistically though, it will make an effect. You’re confusing microeconomics (which is how you behave economically,) with macroeconomics which is how the economy as a whole behaves. Microeconomically you may be correct. Macroeconomically, you’re wrong.

You are also probably wrong microeconomically, but just don’t realize it.

What percentage of your annual income do you have in savings right now, not counting retirement accounts. Chances are you have less than 10% of what you make per annum readily available as cash.

If you’re typical you have savings equal to about one month’s salary.

If we raise your wages, chances are this ratio will not change. It is highly demonstrable that your spending is likely to vary directly in a slight geometric progression to the amount of money you receive, i.e. if you make 10% more you are likely to spend 12% more than you do currently. If you make 10% less you are likely to spend about 12% less (actually there’s a step in the latter projection. You are likely to spend the same up to a certain point and then catch up all at once if your income drops below a certain point.)

No disagreement there. Opportunism accrues on both sides. Bush’s comment of lowering taxes to combat recession may be opportunistic, I make no claim as to his motivations, but it also happens to be sound economic policy as demonstrated by macroeconomic principles, as pertains to economic stimulus.

You asked for reasoned replies, so I won’t venture into what Bush’s motivations might be. SInce we can’t read his mind, maybe you shouldn’t either if you want to stick to a reasoned debate.

Sam Stone:

An excellent point! Before the attack though it was a regular slowdown. It’s been excacerbated dramatically by th WTC attack, the long term effects of which, and what happens next are best left to fortune tellers.

All that we have to work with is that the U.S. Economy and markets have always responded to fiscal stimulous within a 12-18 month period in the past.

Hopefully they will again. This is by no means a certainty though. The Japanese consumer continues to hoard and save a large proportion of his income despite stimulous by their government. I reconcile this fact by guessing that the Japanese consumer is smarter than his government, and resistant to policy until it’s accompanied by reform. Reform that does not apply to the US consumer (who may not be as smart or savings-minded anyway,) but that’s just speculation on my part.

What isn’t speculation is the fact that you respond to economic situations, typical or not, with proven tools.

RTF:

Unless you have an example of when this wasn’t so, that’s a completely moot point, useless for any conclusion one way or the other.

Actually this is false. It’s been my observation that balance sheets have been shrinking as a result of the economic difficulties were in, as many corporations find themselves a victim of the tech crunch and resulting economoic bust, which caught many of them with their pants down and irresponsibly overextended. Now their trying to rebuild.

If you disagree, please explain.

The first part’s correct. The second isn’t. Only a small portion or workers lose their jobs as a result of any given recession. On the other hand a large portion of the workforce suffers a crises of confidence as they worry about their jobs. Not everybody gets layed off who worries about it. Only a small percentage do. The tax cut increases capital for those who do not, and helps maintain capital for those who get a pay cut, or spend a period unemployed, or suffer a layoff. Increased capital means increased spending. It’s that simple.

That’s so simplistic it’s difficult to reply to. The answer though, is “no.” We’re in a recession. How much has your liguidity increased in the last 12 months?

Amen. If nobody’s borrowing it don’t matter what rates are at. For this to be meaningul you have to have reason to suggest that this might be so, and that consumers and corporations are not responding to lower interest rates. Lower interest rates also enable consumers and corporations to stay afloat in a recession that otherwise wouldn’t so it’s unfair to argue that lower interest rates don’t have a direct beneficial economic effect.

Good things, economically. The key of course is that the government is doing the right kind of spending that helps economically. Even in your example, it doesn’t help the economy as much as if Joe Consumer buys $20 billion worth of Chrysler Sebrings.

That’s a statement of faith. Either they do or they don’t. If they don’t they usually borrow it. Lower interest and tax rates mean that more of it gets in the hands of consumers and get’s leveraged or inflated by the economy.

Yeah, less unemployment does mean more jobs. I’ll give you that. How do you get the lower unemployment though? You do know that government spending is a demonstrably poorer stimulous historically than consumer spending, don’t you?

Yeah yeah yeah, but yhow do you get there most efficiently? A combination of stimuli is historically most effective. By what rationale do you exclude tax cuts?

You do realize that interest rates have more effect on the wealthy and tax cuts more effect on the poorer and harder hit citizen, don’t you?

Unless of course you’re referring exclusively to the capital gains tax cut, waiting for which has killed more Christians than the Lions of Rome.

My title is WAY punchier…

There you have it, folks, plain as day.

** Sam, Scylla ** could you two put your heads together and get back to me on whether the tax cut is supposed to motivate poor people to buy TV’s or whether it’s supposed to motivate fat cats to liquidate stocks?

stoid

Some of both, really.

Look at it as a lifeboat anaology. You increase the amount of water on the lifeboat by giving them a five gallon jug of water, and you’re going to help the lifeboat. Some people will share, some people will hoard, some people don’t need it, some people it won’t be enough.

Overrall though, everybody in the lifeboat will benefit from the additional water.