mmm, the current Us administration seems to think it’s cheap (VERY cheap) fuel and war.
Boy, am I glad those guys just yelled at each other overnight. Let’s get on with it.
Scylla, I’ve been having doubts about the concept of ‘spending’ our way out of slow growth (I hate the term ‘recession’ when the economy is still expanding) for a while now.
It strikes me that using that line of reasoning promotes a positive feedback loop in the economy where continued high spending is required to keep things going. At best increased spending encouraged by federal tax policy (“Have a check…go wild!”) would (and has) only provide a short term bump and nothing long term.
Until we address the underlying systemic causes of slow growth we’re going to stay where we are.
I like your hangover analogy, Scylla, but I think you’re missing part of it. Even with increased spending availability the rational thing for American’s to do is pay down personal debt. The long-term lack of savings in the general American consumer household makes that a no-brainer. In addition, that would help lower the number of personal bankruptcies.
So to torture the analogy, yes, the American economy went on a bender. But we don’t just have a hangover…we’ve got some liver damage as well and it’s going to take time and patience to repair the damage…not just waiting.
Helluva thread, Poly. You lured me into GD again.
Am I reading this correctly in that while a business venture may not be more “profitable” it has a higher NPV? Thus, a lot of projects that heretofore had zero or small but negative NPVs now have positive NPVs and are good investments, which implies that investment will jump as people take advantage of these new opportuinites?
Sam Stone has some good ideas, and some bad ones.
One large problem affecting the current economy in the United States is the very high levels of deficit/debt in the average American household. All those low-interest incentives offered post September 11th were great at pumping things up then-- but they’re having their effect now. In general, incentives transfer future spending to present spending.
As for a free trade zone, the US gov’t could start by removing barriers it has imposed against its largest trading partner in defiance of NAFTA. This might also encourage other countries to join in more free trade agreements.
I assume NPV stands for Net Present Value, and you are defining it as
NPV = PV of future dividend income stream - Amount of original investment
If I understand you correctly, the answer to your question is, yes
Thanks!
—So really, all the ‘stimulus’ does is move money from one account to another.—
You can’t repeat this point enough. Even tax cuts, if done without matching spending cuts, can simply be an exercise in juggling around money. The recent rebates, for instance, essentially amounted to the government charging 300$ on our national credit account and then handing us the money, acting as if it were free money we should be thankful for instead of what it much more likely is: simply taking out a loan on our behalf (albiet a loan with a very favorable interest rate!). Things like this are NOT justified in terms of simple economic efficiency: tax cuts now are not a boon when they inevitably equal tax hikes later. What they are potentially justified on is macroeconomic policy. However, they are usually far too slow, ill-timed, and small to really be of much interest to the big picture.
As a political strategy, however, even small rebates are fairly savvy: if there is any sort recovery, or even slower than predicted fall in growth, you can claim FULL credit, pointing to your cuts, and much of the public, not knowing much about the relative sizes of the economy and the potential leverage of the cuts under even the most favorable conditions, will actually buy it. The public doesn’t even know the difference between medians and averages, as exploited to fine effect recently by the current administration.
One of the unfortunate drawbacks of globalization is that it tends to minimize the effects of Keynsian stimuli. Most of the developed world is experiencing the same economic downturn as the US, hence the foreign credit to fund classic deficit spending is both rarer and more expensive. Furthermore, since so much US business is done overseas, government-funded stimulus packages are yielding less bang per buck. Since government spending just isn’t as effective as it was fifty years ago and has the potential to crowd out private investment, I think that a more intelligent and perhaps less ideological set of solutions is in order.
I admit I have a certain receptiveness to systemic reforms like removing the tax on dividends, but I start getting lost trying to evaluate some of the possible unintended consequences. Especially since our current economy seems to be sustained only be the ready supply of cheap domestic credit. Increasing consumption to stimulate the economy in the hope that it will allow people to pay their debts in the future seems especially risky.
Can someone explain to me how universal tax-breaks help the economy at all? It seems to me to only put more dollars in the economy without creating any goods.
If we all woke up tomorrow with an additional ten dollars in our pockets, what would we have gained?
[not all that serious] I think it is time to try the trickle up economy. All incomes under 50K a year are not taxed on a federal level. What, afraid we might save something substantial? 
[/not all that serious]
Agreed.
Allow me to also point out that a ‘sea change’ in economic behavior has stimulated the economy over the last twenty years. That’s the increased availability of money. It has become easier to actually get some cash when you need it since 1980 with the rise of ATMs.
Previously the way to get cash out was to go to your local branch and get them to give you some. Or you might know a liquor store or somesuch that would honor your check drawn to ‘cash’.
But with ATMs on every corner to velocity of money hit warp speed. And that brings the multiplier up substantially.
—Can someone explain to me how universal tax-breaks help the economy at all? It seems to me to only put more dollars in the economy without creating any goods.—
Well, all practical taxes cause welfare losses, so reducing reduces those loses, and that’s a gain right there. It isn’t just that we gain ten dollars: we can also give up the wasteful activities we undertook trying to avoid having to give up those ten dollars in the first place. Of course, this is generally a longer term effect.
And, generally, speaking, it _doesn’t put more dollars into the economy: those dollars would have been spent differently, to be sure, but they were still part of the economy before.
Ooo. I wouldn’t agree with that second paragraph at all.
While the government is all well and good at cutting taxes I have severe doubts that they’ll cut spending.
Anyone disagree?
All taxes do cause deadweight loss. This principle can be mathematically demonstrated with supply and demand curves. I think the better question is, does a tax credit actually repair this demonstrable deadweight loss?
And cut spending? Ha. The issue is no longer spend or not spend, but who gets the proceeds.
A few points:
- Maeglin’s got a point about globalization reducing the effect of Keynesian stimulation. But I’d look at that another way: the richer you are, the more you tend to be a citizen of the world; the less affluent you are, the more your horizons (and most of your economic activity) tend to be limited to the region or the locality you live in.
So if you want to attempt to stimulate the economy of a particular nation (in this case, the USA) in the traditional Keynesian fashion by putting money in people’s pockets right now, this tells you whose pockets to aim it at. The more of your stimulus that hits further down on the income ladder, the more it will at least start off being spent in this country, and the more chance it will have to apply its multiplier effect in our economy, rather than somebody else’s.
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I agree with Sam Stone that the effect of such stimulation is limited, simply by virtue of the orders of magnitude of difference between the stimulus and the size of the economy. I don’t think that means it isn’t worth doing, but rather that one shouldn’t expect miracles to result from it.
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js_africanus mentioned that the marginal propensity to consume is low amongst the rich (and therefore higher amongst the less affluent). Keynesian stimulation relies on a marginal dollar of aid (regardless of its form - unemployment comp, tax cut, whatever) being spent, and mostly spent again and again as it wends its way through the economy. The more money you give to people who aren’t going to spend it, the less effect the money will have as a stimulus.
Sure, all the money goes somewhere, but if you give it to an affluent soul like me, then it’s going to go into savings and/or investment.
If the hangup in the economy is that people want to invest, but they don’t have the money to do so, then this might be helpful. Our situation is the opposite - investors are reluctant to invest to create new goods and services, because people aren’t buying stuff. They’re also scared away by the reality that in many sectors of the economy, we have plenty of excess capacity already, and it’s going to take a substantial increase in consumer and business spending to take up that slack before we get to the point where people are ready to invest the money they have to generate new capacity.
So if you’re going to do anything, you want to make consumers more able/willing to spend. And if you’re going to do that by Federal spending (whether it’s a payout or a one-time tax cut), you want to get as much of your bucks as possible to the lower end of the income scale, to maximize the likelihood that (a) the money gets spent at all, and (b) that it gets spent here.
So, why are consumers reluctant to spend? Have they already gone out and bought everything there is to buy?
Well, no. They’re not getting raises, and many of them have been laid off, or are worried about getting laid off. (A casual reading of MPSIMS over the past year will tell you that that’s hit home on this board.) So how does the government make them more able or willing to spend?
It can give them a tax credit, or it can create jobs, or it can extend unemployment benefits. The latter two are especially helpful, because they reduce the fear of not being able to find another job if you lose the one you’ve got.
One thing that, to me at least, would have a useful symmetry of it, seeing as how part of the economic doldrums may be due to the uncertainty of a post-9/11 world, would be some sort of…well, instead of a Civilian Conservation Corps, have a Civilian Homeland Security Corps. There’s no way existing police, National Guard, etc. can keep an eye on all the possible terrorist targets. This would fill that need and create jobs at the same time.
I’m given to the impression that the CCC has been considered to be a success. Is this true?
I might be more inclined to support a CCC than a CHSC on two grounds. First, the CCC is less likely to devolve into some sort of police state tool. Second, the CCC can be more productive in the long term by investing in productive resources. A CCC that builds productive investments in places where investment is unlikely to occur via the market, it would be producing future income streams without crowding out private investment. Perhaps instead of planting trees, the new CCC could work in run down urban areas.
While it would be more long-term than a tweak to a recessed economy, it could be a good long-term countercyclical program. It could be a program where membership and funding is set by statute to rise and fall with unemployment, for example. It would put money in the hands of those who’ll spend it, it will invest in human capital through experience & (OTJ) training, and it will invest in physical capital.
Thoughts?
—All taxes do cause deadweight loss.—
Nope. Head taxes don’t. They just aren’t very practical.
—I think the better question is, does a tax credit actually repair this demonstrable deadweight loss?—
Well, sort of. A “tax” credit is basically just a forward on a future tax cut (presumably the income tax). So, if you weren’t going to work as hard as you might because the income tax made work a little less worthwhile compared to leisure, the tax credit doesn’t necessarily do that: the tax cut it’s based on would. However, a tax credit might be a good way of signalling the certainty of that future tax cut to taxpayers, and in that sense help induce them to work a little harder, now assured at least some tax savings.
If, however, you were simply giving $300 to every man, woman, and child in the economy, not premised on any cut in tax rates, then that money wouldn’t itself fix any deadweight loss: it would be exactly like the reverse of a head tax. That is, the lump sum grant of money does nothing to change the MRS between income and labor, so it isn’t going to induce anyone to change their work behavior.
However, the real question is: where did that money come from? If the government keeps spending as if nothing happened, the happy citizens might realize that the $300 is actually a signal that their tax rates will go UP in the future, not down (because they are going to have to pay for it somehow). So the signal is actually sort of ambiguous.
That’s why spending rates, not tax rates, are the ultimate bellweather for how much total burden the government is going to put on the economy over time. You can’t figure out the total DWL unless you know what taxes are used, and their relevant elasticities, but you can tell how much money the government is eventually going to have to pull back out SOMEHOW.
I’ve been advocating civilian programs since 9/11, but not in the form of a ‘corps’ of hired people with special police powers in a 9-5 job.
Rather, the government should stimulate things like Red Cross training by making these programs more widely available and offering tax deductions for taking them. Create a new federal concealed carry law, with stringent background check requirements, and offer tax-deductible training. Set up programs for civil defense drills, and offer employers tax breaks for allowing employees to take time off work for training and practice.
Create certification programs along the lines of an adult scouting system, where you can earn endorsements for things like rescue training, first aid, etc. Set up a system of awards and medals for exemplary service.
There are a lot of things the Dept. of Homeland Security could do to enlist the citizenry, and it wouldn’t have to cost a lot of money because the most expensive part, the labor, would be voluntary.
This is not a radical idea, or impractical. All kinds of programs were set up like that in WWII, to reward people for everything from collecting and turning in used tires to selling liberty bonds.
The real value of these programs is that they leverage the leisure time of huge numbers of people, which is sort of a voluntary tax to pay for a needed service. But more importantly, these types of programs tend to draw the citizenry together and give people a feeling of control, of doing something. As such, it can be a huge morale booster, and that in turn raises consumer confidence and helps the economy.
The U.S. went through all of WWII without a single quarter of recession.
In the big picture, three things help the economy. People have to have confidence. People have to have ideas. And people have to have a chance. The United States has benefitted from being a society that has all three of these factors in abundance and our economy reflects this.
Arguments over more government spending vs less government spending, higher taxes vs lower taxes, more corporate regulations vs less corporate regulations, more progressive taxation vs less progressive taxation, etc all ignore the fundamental truth that all of these ideas have their pros and cons, so none of them can simply be dismissed. Wisdom comes from looking at both sides of the issue and weighing the costs, benefits, and consequences.
D’oh, you’re right. I was thinking only of taxes on goods and services. And your following analysis makes sense.