Does Bush think it's monopoly money?

Great Debates
21

I hate to disappoint my country but, I used my tax rebate this summer to pay down additionally on my personal debt. I’d likely do the same thing if I got a further rebate.

However, I was thinking about purchasing a new vehicle next summer, but those no-interest financing deals Ford and GM are offering right now are really enticing me …

If airfares drop very dramatically, I’ll consider purchasing a ticket for another long trip.

I think a lot of people are thinking like me, too.

We’re cautious right now, but times are not terrible. We can be bought. For this reason, while profit margins are going to decrease, and some companies are going to suffer hardships, I don’t see us really going into the tank.

You can discount all of this, of course, if we get hit harder in Round 2 by the terrorists than we did in Round 1.

22

by Scylla:

Now I’m no economic whiz, but if/when we go to war, won’t we kind of be able to “buy” our way out of the slowing economy we were experiencing with all the defense spending that should happen? I thought that the defense spending would make the economy improve, but after whatever military action ends, then we’ll really be in trouble.

Like I said, I’m no economic whiz, so I’m interested to hear what you think.

23

by Scylla

Does anyone have any gains to liquidate? The market has been hit pretty hard since the dot-com bubble burst.

24

Seems like just last year we had a booming economy and a huge federal surplus. Hey, it WAS just last year. What happened, George? You got an explanation, Alan?

I do like his idea that cutting capital-gains and inheritance taxes in 10 years will help end what will inevitably be known as the Bush recession today, though. Dunno how anyone keeps a straight face saying that.

The tax rebates were supposed to help end the recession right now - well, that money is all in the economy now, and has it helped? Or is the government’s ability to influence the economy for the better just that much more diminished?

25

Elvis: There were some pretty good signs that the economy had ‘turned the corner’ before the WTC attack. And I fail to see how you could possibly have put even the slightest amount of blame on Bush for the recession, since it had started developing before he took office, and since the actions he took since being in office could not have had a negative effect.

You can argue that his tax cuts wouldn’t have much of a positive effect, and you can argue that they were fiscally unwise, but it’s pretty hard to argue that cutting people’s taxes would throw the economy into a recession while government spending is increasing. If you think you can make that case, let’s hear it. Otherwise, you can stop your knee-jerk Bush bashing any time.

Still, you hit on an important point - the ability of the government to control the economy IS limited. So let’s say they put 50 billion dollars into circulation tomorrow. Into what, a 4 trillion dollar economy? There’s a real limit to what effect that can have.

And that’s why the government keeps saying it would give a ‘psychological’ lift. They are hoping that if people think things have gotten better they won’t just spend the money the government gave them, but more of their own. They are hoping for a multiplier.

When people stop spending because they are anxious about the economy in general, cutting taxes or increasing spending can have a multiplier effect if it restores confidence. But it sure isn’t clear to me that they are going to get much of one when the reason people have stopped spending is because they aren’t sure if we are going to be embroiled in a world war a year from now, with hundreds of thousands of dead citizens, and with blackouts and transportation disruptions from terrorist attacks.

That’s one reason why I think this situation is different.

26

With all due respect to the various posters, Keynesian spending has the greatest stimulative bang for the buck if conducted “correctly” such as basic infrastructure spending.

It’s been 16 years since I earned my economics degree, but I thought supply side economics had been pretty well debunked by now given the US experience in the late 80’s/early 90’s and Japan since 1992.

One facet not yet fully discussed in this debate is the long term. How are we going to pay for the stimuli being bandied about now? It’s a lot easier to have a one-off deficit spending program than to cut taxes and then raise them in the future. Deficit spending may also require some tax increases, but not of the same magnitude as if you cut taxes now and then have to raise them to a higher than current level.

If anyone really wants to talk about the various Asian economies, I’m reasonably knowlegeable about that area. Basically, I don’t think the Asian experience is applicable to the US, with the possible supply side debacle in Japan.

27

RTFirefly <<<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>>

I started that thread. I’m so proud. <beaming>

Many thanks to RTF and Scylla and Sam Stone for some very lucid and informative posts.

Scylla: <<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.>>

Are you really talking about velocity?

Stoid: <<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.>>

Funny, President Kennedy would disagree with you.

“Finally, it is clear that the tax credit would be more effective in inducing new investment for the same revenue loss. The entire credit would be reflected immediately in the increased funds available for investment without increasing the company’s future tax liability…”

<< 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.>>

Well, you REALLY need to get out more. Millions of Americans are more than willing to spend 7 dollars just for a tax writeoff so they can avoid giving the government three. They’ll spend oodles of money setting up offshore trusts. They load themselves down with debt and make foolish investments to get a tax deduction. They will spend 40% of their retirement fund appreciation by buying an annuity and paying an insurance company 2.1% per year for 20 years for the privilege of a tax break. Salespeople LIVE on this stuff, Stoid. And if you’ve ever met anyone who’s spent their tax refund check within a year after getting it, your assertion is false. By, the way, JFK disagrees with you there, too.
To wit: <<But so many taxpayers have become so preoccupied with so many tax-saving devices that business decisions are interfered with, and the efficient functioning of the price system is distorted. (20 April 1961)>>

http://reagan.com/HotTopics.main/HotMike/document-3.14.2001.1.html

<<My title is WAY punchier…>>

No, your title is inflammatory and imprecise.
Dignan: <<Does anyone have any gains to liquidate? The market has been hit pretty hard since the dot-com bubble burst.>>

Well, the market’s back at 1998 levels. Did anyone buy before 1998? Did ANY stocks make money since then? Have ANY stocks appreciated over the last 60 years? Has any real estate appreciated over the last 60 years? Have any bonds appreciated in price?

If yes, then there’s oodles of stuff to liquidate at a hefty gain.
ElvisL1ves: >>Seems like just last year we had a booming economy and a huge federal surplus. Hey, it WAS just last year. What happened, George? You got an explanation, Alan?>>

Well, it’s pretty abundantly clear that this slowdown has been in the making since a lot longer than Bush has even been in office. And the manufacturing sector’s been in a flat out recession for over 14 months. So maybe you should be looking to Clinton for an explanation as well, hmmm?

<<The tax rebates were supposed to help end the recession right now - well, that money is all in the economy now, and has it helped?>>

Very definately.

China Guy <<Keynesian spending has the greatest stimulative bang for the buck if conducted “correctly” such as basic infrastructure spending.>>

Well, it also has the biggest inflationary bang for the buck as well, which undercuts a lot of countercyclical benefit we have. This could be another matter for debate, but its record is pretty spotty.

<<but I thought supply side economics had been pretty well debunked by now given the US experience in the late 80’s/early 90’s… >>

Well gee, if the breaking of an inflationary spiral, the birth of a 17-year long bull market in stocks, and the longest period of sustained peacetime economic growth in our nations history up until that time is a debunking, we can sure use more of it!

<<and Japan since 1992. >>

Well, Japan’s sucked, no question about it. But the fact that they’re shouldering such a tremendous debt with no meaningful military kinda indicates to me that Japan has attempted some big time Keynesianism itself, although it failed.

You are extremely knowledgeable, China Guy, but I can’t help but wonder if croneyism and corruption have a lot more to do with Japan’s problems than “supply-side economics”

28

Too true. A common feature, I find, of many of the policies that I object to most strenuously, is that they all seem to be centered around instant gratification.

Sigh…

29

For a change, a short term focus is good! And yes, the economy does need an inflationary stimulous. In the longer term the economy will respond to a shock. Prices and wages will adjust and the system will tend towards full employment of resources. The point is that a large shock to the economy can move us a fair way from full employment and that adjustment is painful. A Keynesian stimulous is supposed to get us back to full employment quicker. And yes - as I said in the other thread - spending has a greater effect than tax cuts.

A small nitpick: a number of posters are talking about liquidity. Strictly speaking, this has to do with monetary policy, not fiscal policy. Whilst both things are going on it is useful to keep the effects of goods and financial markets policies separate. In terms of policies being thwarted, fiscal policy can be thwarted by people saving or by businesses being crowded out in their investments by the effect of deficits on interest rates; whereas monetary policy can be thwarted by people increasing the amount of money (liquidity) they hold in their portfolios due to precautionary or speculative demands.

The standard neo-Keynesian argument for the primacy of fiscal policy at times such as these is that monetary policy is like “pushing on a string” at a time of sharp downturn in an environment already featuring low interest rates*: you can flood the money markets with cash, but getting people to do something other than hold on to the money is tricky. The surest way to ensure the money gets spent (but obviously not the surest way to make sure it gets spent well) is for the government to spend the money itself.

*[sub]The extreme end of this argument is the “liquidity trap” advanced by Keynes himself (and more recently put forward by Krugman as an explanation of Japan’s problems - although Scylla’s argument is IMHO better). If interest rates are very low, then everyone expects them to rise. For interest rates to rise, bond prices must fall. So everyone hoards liquidity and monetary policy is ineffective.[/sub]

30

Sigh. Stimulus.

31

Stoid:

Recession = short to intermediate term problem and recquires short to intermediate term solutions.

This isn’t about short term gratification, it’s about tweaking the economy and responding to fiscal crises.

Your comment is akin to coming across paramedics working on a victim of a car crash, and complaining that they’re just trying to splint a broken leg instead of managing his long term health.

This is your debate. You brought up the President’s response to a short term economic problem. Now you’re complaining when the solution is appropriate?

Seriously.

Actually, if you’ve been paying attention, Bush does have a long term and a short term economic plan in place.
But, let me ask.

Why do you object to fiscal stimulous in a recessionary environment?

32

And, seeing as you do object, how would you have the Fed and Bush respond to this recession?

33

Stoid: <<Too true. A common feature, I find, of many of the policies that I object to most strenuously, is that they all seem to be centered around instant gratification.>>

I see. Bush’s tax cut–the one you say you object to so strenuously, is actually gradually phased in over a period of 8 years, with most of the benefits realized in years 5-8.

One of its most significant features–the expansion of allowable contributions to IRA’s and Roth IRA’s from 2k to 5k dollars, is designed to encourage and allow people to save and invest more for retirement 10-30 years away.

Some “instant gratification.”

<sigh>

34

Its very important that people ‘feel good’ when election time comes around so Bush can get a second term.

I doubt anyone really understands an economy because its based on rational science but people are not rational.

People are the ones that make the economy tick.

35

None that weren’t pretty much grasping for straws. The major indicators weren’t dropping as fast as they had been, perhaps, but that’s hardly “turning the corner”.

Read closer. I said the recession will inevitably be called Bush’s fault. That isn’t an accusation by me personally, it’s a prediction of how it will be perceived by the public generally, especially at election time. Yes, Presidents have limited power over the economy (except that Reagan was an exception who seems to have been an economic miracle worker, in the eyes of some). If I were trying to blame Bush, I’d point out that stock prices are dependent mostly on investor confidence in the future, and that the recession started with the stock market dip that occurred when it began to look like Bush would be elected. There was a rally in November when it appeared that might not happen after all, but then it went back into a slide that it continues on today. But I’m sure that’s a coincidence, and no Republican policies could be to blame for that, right? But I’m not saying that.

Since when is it “knee-jerk bashing” to ask for simple evidence, which is exactly what I did, no more, no less? Do you or anyone else have evidence that the rebates helped in any measurable way, or do we just have another example here of “knee-jerk conservative defending”? Please. You know better than that.

Of course consumer psychology is important. Now, how do you explain the loss of consumer confidence prior to September 11? Could it be the fear of a return to inflation, caused by a return to deficit spending, caused by excessive and excessively-rapid reduction in government revenues?

36

No, it’s about political opportunism and the perverse form of class warfare practiced by the Republicans (and many Democrats as well). We are in a period of greater uncertainty – nobody can say at this point how long the “war on terrorism” will last, or how much it will cost, or indeed if there will be another major attack on US soil. Reducing government revenue at this point is the height of fiscal irresponsibility. It’s akin to someone entering a hospital with a serious, unknown disorder and then asking his boss to cut his sick benefits.

Yes, some Keynesian deficit spending at this time is highly appropriate (though wouldn’t it be nice if we could dip into the surplus first – oops, Bush took care of that) but tax cuts will needlessly increase the size of these deficits.

Again, this is a political move on Bush’s part, not an economic one. He probably figures he’s covered either way – if the economy does pull out of recession without too much pain, he’ll have something to point to other than a Keynesian effect of increased military outlays and WTC recovery efforts. If the economy goes into a serious tailspin, we are looking at a return to the deficits of the Reagan years or worse. Such deficits are secretly loved by many Republicans because of the pressure they create to reduce government spending and to further dismantle the social safety net – a wet dream of many Republicans. All the while his tax breaks go to those who need them the least, further enriching the already-wealthy. Class warfare, my friends.

Bush’s original tax cut was outrageous enough, this is just amazing. And yes, you can call this Bush bashing – he deserves it for pushing his reactionary political agenda in this time of crisis.
Note added on preview: Panzerman, part of the proposal Bush is pushing now is to accelerate his tax cuts. From Paul Krugman’s column yesterday:

"Another key administration proposal is an acceleration of tax cuts for higher income brackets that under current law are not scheduled to happen for several years. On the face of it this idea seems bizarre: it gives money to precisely the people who are least likely to spend it. Is this just a case of knee-jerk conservatism, of the belief that tax cuts for the affluent are the answer to all problems?

Alas, no: it’s worse than that. The real reason to accelerate the Bush tax cut is surely to forestall the growing likelihood that part of that tax cut will eventually be rescinded."

37

The theory behind a capital-gains tax cut (BTW, I don’t agree for the need for one - just giving you the theory) is that reducing the tax increases the effective return on capital investments.

Example (N.B. all math made up, but the idea is correct): Investor X wants a 10% actual rate of return on his investment, in order to make worthwhile the risk of the investment (i.e., the stock tanking). Because of the 28% capital gains tax, that means the stock he invests in has to have a 15% growth rate, so he can pay his taxes and get his 10%. If the stock (and the stock market) is growing less than 15%, Investor A won’t invest his money (and the stock market will not grow the amount of his investment). If the capital gains tax is eliminated, the stock need only be growing 10% a year for Investor A to make his investment. The stock is much more likely to grow at least 10% than 15%, so Investor A is that much more likely to take the plunge and make the investment.
And it becomes a self-fulfilling prophecy. If Investor A invests, he bumps up the market in his small way, and these bumps convince others that the stock market is going to go up the 10%, so more invest, causing the stock market to go up even farther.

Scylla

Agreed, with a caveat. One-off tax rebates, where people know that long-term tax rates aren’t going down, have generally been shown to be used for savings or to reduce debt, rather than increased spending.

Sua

38

I can only add that as far as people actually doing something with those additional dollars, everyone I work with, myself included, happily spent their tax rebate. That was school clothes for the kids and stuff that I couldn’t have bought prior and four people in my office area alone, refinanced their homes Friday, and all of them now have approximately $300 more in their pocket each month because of it. Perhaps you don’t need or appreciate a tax cut. You are more than welcome to send more than your tax share to the government if it makes you feel better and lobby for yourself, but please don’t presume to lobby on my behalf that I don’t need a tax cut or lower interest rates, and that I won’t do anything with it. Government money has always been monopoly money. That’s why there are so many ridiculous grants given out, like a recent one where an incredible amount of cash was given out to a small group of people to research why people like to drink alcohol. What’s next, a government funded program to figure out why some people prefer cheese on their hamburgers? I worked for the government. The wasteful spending that occurs is amazing, and sometimes unbelievable even to people who understand it. The few cuts that will be required here and there for the tax cut will be largely invisible.

39

Elvis said:

No, it couldn’t. Mainly because the tax cut didn’t pass until the slowdown was in full swing in the first place, and also because even with the tax cuts the government was still running a 153 billion dollar surplus. It so happens that that surplus was supposed to be put into the Social Security trust fund, but it was still a surplus, and therefore things like the long bond wouldn’t have been affected by that.

The lack of consumer confidence was due to these things: First, the loss of 4 trillion dollars in equity from the dot-com bust. Second, a lot of layoffs due to high manufacturing inventories and restructuring due to the dot-com bust. Third, a whole raft of profit warnings issued by major corporations, which gives people the fear that there will be future layoffs coming.

If you want to argue that consumer confidence is rocked by deficit spending, then you might want to explain why we had plenty of years of massive growth at times when the government was running 200-300 billion dollar deficits. Your argument is ridiculous.

Ace_Face Said:

Let’s see… reducing revenue is the height of fiscal irresponsibility, but spending an equal amount of money isn’t? I’m not sure I follow this. Please explain.

40

Glad to. Doing both is irresponsible. We will have to increase spending to pay for military operations, WTC recovery, plus other intangibles related to 9/11, such as the bailout of the airline industry. It’s hard to guess the full cost at this time. We don’t have to cut taxes, ergo Bush’s cuts should be ditched.