Country X was in bad economic shape for at least the last decade and now due to the global recession, the government of Country X is desperately strapped for cash, just like any individual or company living there. Investments and economic growth in general have come to a grinding halt, inflation has reached negative numbers and now the danger of stagflation is visible (if it is not already happening).
Government’s response? Raise taxes to everything: cars, boats, houses, gasoline, various consumer goods, introduce new tariffs etc.
Is this a good idea? What will be the effects in the short and mid term?
There are several long and boring books that would be happy to discuss the pros and cons of this with you. Or look up “Keynes” on wikipedia and off you go.
Bad idea. If your country is in recession, fiscal expansion is the order of the day, to replace lost demand until the economy recovers. This can take the form of tax cuts (if you’re a libertarian) or greater spending (if you’re a statist). One of the reasons that the Great Depression was prolonged was because in the mid '30s FDR saw unemployment start falling, and figured hey, we’re out of the woods, let’s raise taxes to balance the budget. Then the economy tanked again.
I’m curious why you put stagflation in there, though. Stagflation and recession are not synonymous.
The programs that will possibly fix the system are expensive. They have to be funded. We can not just spend,spend spend. Is it logical to wait until it is over to find ways to pay for it? Pay now and pay later until we get the budget back in shape.
That was disproved by the Bush administration. We can just spend, spend spend, so long as we don’t mind hobbling our government, government government in the future, future future. Some even see this consequence as a positive effect of fiscal irresponsibility.
If the Senate passes the cap and trade bill that the house passed yesterday, I guess we’ll find out soon. It’s a very large tax aimed squarely at the manufacturing sector, and the Democrats want to pass it just as the manufacturing sector is reeling from the worst recession since the great depression.
Maybe Bush and friends should have dealt with the problem before courting a big recession? Maybe if we’d had cap and trade instead of Iraq, the economy wouldn’t suck quite so badly today.
In answer to the OP, neither raising taxes nor cutting government spending is a good idea during a recession.
And if the OP is some kind of veiled attack on cap-and-trade it misses the mark. First of all it will take some time for the bill to be actually passed and implemented by which the recession is likely to be over. Possibly it could take 2-3 years for the administrative details to be sorted out. Secondly the bill will start off by giving most of the permits for free minimizing the early costs for businesses. At a more conceptual level cap-and-trade works by changing marginal incentives not raising revenue. Even a revenue-neutral version of cap-and-trade would help reduce emissions.
The bottom line is that the recession is not at all a valid reason to delay cap-and-trade. Indeed you could argue that passing cap-and-trade will clarify the rules of the game and reduce business uncertainty which is good for investment.
The nice(?) thing about cap and trade, related to the OP, is that the vast majority of the permits were granted to favored constituencies for free. Thus instead of auctioning off permits to generate money, we have simply distributed green-tinged pork to lobbying firms and industries.
This is a very bad deal for the American taxpayer, but in the short term it avoids the contractionary effect of a tax hike, which would damage the economy further during this recession. The real damage to the economy is in the long-term, when this bill raises energy prices and retards economic growth (that is if you believe the claim that we’re going to cut carbon to 17% of 2005 levels by midcentury).
The Bush and Reagan administrations had a mantra"deficits don’t matter’. Now they matter? The fiscal stupidity of those admins ,leaves them no room to bitch.