Avoiding the simplistic, re: tax cuts and spending

[cthulu2016]

For all the Republican denial and scorn of Keynes you would never guess that he was the guy that settled the matter that tax cuts do stimulate the economy.

Unfortunately, ALL Republicans and a few Democrats have assumed differing politicized quasi-Keynesian views that distinguish tax cuts and spending increases categorically.

All Republicans think tax cuts are awesome and spending increases are bad. This is based on a weird fantasy that government is evil and thus cannot contribute to the economy in any productive way. Yet government infrastructure is clearly more economically productive that starting a dozen hedge funds. (Try opening your factory somewhere with no roads or running water.)

Some Democrats (and others on the left) take the view that tax cuts are simply not stimulative. Since we are the smart side, and that is flatly wrong, where does that come from?

Government spending is, on average, more stimulative dollar-for-dollar than tax cuts. Given the choice of adding $500 billion to the deficit by borrowing $500 billion to fix bridges or borrowing the same $500 billion to pay for tax cuts for the rich it is quite obvious that the bridge repairs will be more stimulative. That does not, however, mean that the tax cut for the rich is not stimulative. It is. It is merely among the least stimulative uses of $500 billion of borrowing, and thus a dumb idea.

The trap some of us on the left side of things have fallen into is that after decades of arguing that spending is superior stimulus and tax cuts are usually unwise, thatsome have gotten the impression that tax cuts are categorically unstimulative, as opposed to less-efficiently stimulative. Like saying bowling balls are heavier than billiard balls (good so far) thus billiard balls have no weight (incorrect).

Any reduction of the federal deficit in current economic conditions is contractionary. Any reduction. Even eliminating Medicare fraud is contractionary. It may be an excellent idea for other reasons but it is still contractionary, considered in isolation.

Right after Obama took office (or perhaps shortly before) a member of his team spoke some real economic truth about the stimulus. He said we should have a stimulus package. The TV interviewer said, "How do you plan to pay for it?"

He replied, "If you pay for it it isn't stimulus."

Correct. Stimulus doesn't increase the deficit as a byproduct. Increasing the deficit is very much the point. When private borrowing and consumer spending nose-dives (as it had) the the government is correct to borrow more (making up for reduced private demand for credit) and somehow get the money to consumers (making up for reduced consumer spending).

Tax cuts are not a very good efficient to accomplish that. Tax cuts are not optimal stimulus.

But if your only choice in 2009 was huge tax cuts or nothing the huge tax cuts would have been correct. Note the word "if." If that was the only choice then tax cuts would have been correct.

Tax cuts are almost never ideal policy but they are stimulative.

Now then... should the Bush tax cuts be extended? If they are all allowed to expire the US economy will shrink as a result. If they are allowed to expire only on income over $250K the US economy will still shrink as a result, but much less so.

That does not answer the question, of course. Say ending the Bush tax cuts on income over $250K generated $500 billion. (A round number for an explanation, not a real figure.)

If that $500 billion was then used to increase government spending by $500 billion over what it would be otherwise then the move would be net stimulative. If, however, the government took in an additional $500 billion and did not increase spending then it would be a blow to the economy.

There is no economic downside to the the deficit in the world of 2012-2013. None. In fact, the deficit is the only thing keeping our economy moving forward right now. Reducing the deficit would hurt working people today. It is not a desirable thing, for its own sake, no matter how it was accomplished.

[The Magistrate]

1. True, Sir

[msongs]

2. oops you forgot links to support the claims made herein. on well nt

[cthulu2016]

3. Any economics textbook not written by a teabagger would suffice.

There is not a word in the OP that is even remotely controversial.

It's pure vanilla.

Any means by which the government borrows money and puts it into the economy is stimulative. If you give more money to the rich it is less stimulative than it should be because they will just hoard most of the money. If you give more money to the poor it is more stimulative because they will spend damn near all of it and hoard very little.

But "less" does not mean "zero"... it means "less."

Why would anybody question this? It's the basis of all liberal economic thought since at least the 1930s. The essential Keynesian insight that government borrowing can stimulate the economy means what it means. That doesn't mean it is wise to borrow to give money to the rich, but even such a foolish course would be more stimulative than zero and thus more stimulative than doing nothing.

That's not an argument for tax cuts for the rich. It is an observation about the relative stimulative effects of government actions.

The government paying to dig holes and fill them back in (as republican liars claimed FDR did) would be stimulative. But it would be better policy, if you were paying all those hole-diggers anyway, to have them do something useful like digging a needed aqueduct.

Take from the rich to give to the poor? I am all about that. Take from the rich and throw it into the ocean? Doesn't make much sense. And reducing the deficit is, at this unusual point in economic time, about as useful to the economy as throwing money into the ocean.

The fact that republicans distort basic economic precepts doesn't undermine the precepts. It only undermines republican credibility.

(I am a socialist, BTW.)

I suppose my statement that there is no downside to the deficit in current economic conditions would strike most voters as controversial, but no economist in the center or left would question it.

[ProSense]

4. This

Now then... should the Bush tax cuts be extended? If they are all allowed to expire the US economy will shrink as a result. If they are allowed to expire only on income over $250K the US economy will still shrink as a result, but much less so.

That does not answer the question, of course. Say ending the Bush tax cuts on income over $250K generated $500 billion. (A round number for an explanation, not a real figure.)

...is nonsense. Clinton raised taxes in a recession and the economy still grew. Bush cut taxes in a recession and screwed up the economy for decades.

It's not cut and dry, and tax cuts for the rich are the absolute worst.

[cthulu2016]

5. Please publish your awesome refutation of Keynes

It will be eagerly received by all wing-nuts.

You are not arguing with me. You are arguing with John Maynard Fucking Keynes. That's your right, but please understand what you are doing.

If your intention is to mount an expose of Keynes then go for it.

I do not say the following for you, but for anyone interested in reality who may read this thread:

Closing the deficit in the 1990s was economically USEFUL because the economy was much stronger (even at its worst it was much stronger) and there was room for INTEREST RATES to GO DOWN as a result.

Clinton and Obama were/are presiding over radically different economies.

[ProSense]

6. No

"You are not arguing with me. You are arguing with John Maynard Fucking Keynes. That's your right, but please understand what you are doing."

...I'm not. I'm saying that your argument is nonsense.

Here: http://www.democraticunderground.com/1002722440

[hfojvt]

8. not exactly true, is it

in two ways.

First, the Clinton economic recovery bill also cut taxes for poor people. So, it was not all tax increase.

Second, the recession Clinton was in, was not much of a recession.

Clinton signed the bill on 10 August 1993.

Here's job creation by month in 1993

Jan +307,000
Feb + 237,000
Mar - 46,000
Apr + 307,000
May + 273,000
June + 164,000
July + 300,000
August + 159,000
September + 240,000
October + 279,000

That looks to me like an economy that is humming along pretty good. Obama would love to have those numbers even today..

Quarterly growth rate of real GDP

1992.4 - 1.05%
1993.1 - .2%
1993.2 - .6
1993.3 - .5

Not spectacular, but compared to today

2011.1 - .09
2011.2 - .3
2011.3 - .5
2011.4 - .7
2012.1 - .5

But in fact, the GDP numbers sorta puzzle me because even in the Clinton boom years the quartlerly gains are not great. For example
1995.2 - .2% (wasn't that good a quarter for job creation either, with only +381,000 jobs in the three months.

[cthulu2016]

10. And...

The usual benefit cited for reducing the deficit is that it will reduce interest rates by reducing overall demand for borrowing, and that the reduction in interest rates is stimulative.

And that is true... in some conditions.

But since our current interest rates cannot be reduced below zero and private borrowing is way down those arguments do not apply to current conditions.

If fiscal policy takes a chunk out of the economy today it cannot be offset by lower interest rates. The yeild on our 10-year treasuries right now is about 1.8%. It can't plausibly go much lower than that. The Fed overnight rate is frozen at 0%.

It is never good to have universal economic policies (Like the republican universal cure-all of cutting taxes). Everything is dependent on the real-world environment.

What Clinton did (deficit reduction) was right in 1993.

What Obama has done so far (big deficits) has been right for 2009-2012.

[hfojvt]

14. no it has not

it would have been much better to let the Bush tax cuts expire and send that revenue to state and local governments who have been shedding jobs.

Granted, Republicans would never let that happen, but Obama did not even fight for it. He surrendered on the tax cuts and then he surrendered on the budget and the debt limit.

http://journals.democraticunderground.com/hfojvt/165

[SoutherDem]

7. I agree

Follow up question.

As to the Bush tax cuts, wouldn't allowing those on the rich to expire have less negative effect on the economy than that on the poor no matter which would produce more revenue to the government no matter what the government does with the money? The poor would then have less money to spend, thus the economy contracts. The rich have money in reserve and can still purchase.
If I recall, but I may be wrong, the idea behind "Trickle Down Economics" were that cutting taxes on the rich would stimulate the economy because they would "invest" the money back into the economy and as the economy grew it would help the poor also, "trickle down". However, the money never trickled down, the increased income was banked or went to executive salaries, making the rich richer and the poor just as poor?

Also, humans seldom allows fact to get in the way and we often like to take the parts of something we like while discarding the parts we don't. And, human don't alway do what is best for the collective but what is best for self.

[cthulu2016]

9. Yes, you are correct.

"wouldn't allowing those on the rich to expire have less negative effect on the economy than that on the poor no matter which would produce more revenue to the government no matter what the government does with the money?"

Yes. For the same reasons that tax breaks for the poor are more effective, tax hikes on the rich are less damaging.

Ranked by positive/negative economic effect, best to worst:

1) Cancel Bush tax cuts over $250K and use that revenue for some more stimulative purpose —unemployment insurance, infrastructure, government hiring, etc.

2) Leave all Bush tax cuts in place.

3) Cancel Bush tax cuts over $250K and use that revenue to reduce the deficit. (Meaning really reduce the deficit. If the lower deficit is used as an excuse for more spending then it would be just a more complicated version of #1, and would be good.)

The poster who keeps accusing my socialist ass of being pro-tax cuts for the rich seems unable to grasp that the fact that #2 would constrict the economy less than #3 is not an argument for #2 in the abstract. #1 is clearly the best so of course I do not support #2... except in the hypothetical instance where the only options were 2 and 3, in which case 2 would increase unemployment less.

I swear... if I said cat shit is better than dog shit (which it is, by virtue of being smaller) some bozo would doubtless accuse me of saying everyone should be eating cat shit.

But such is the internet.

Anyway, you are correct all around. Trickle down is very inefficient. Trickle up is very efficient.

Trickle down did hurt all of us ordinary people, but not by directly contracting GDP. It provided an inefficient stimulus that did little to help ordinary people, but did not hurt them directly. What hurt us directly was that trickle-down created deficits which were then, as a political matter, used as a weapon to cut services that help ordinary people. We got the bill for it without getting the benefits.

I am very opposed to lower taxes for the rich.

If I was running things I would eliminate the Bush tax cuts over $250K and DOUBLE the Bush tax cuts for those under $250K, and if someone wanted that "paid for" then I would pay for it by raising taxes over $250.

But I would do all of this within the bounds of normal economics. I would calculate what we would gain by doubling the tax cut for the middle class and what we would lose by raising taxes on the rich and arrive at an ethical and economic cost-benefit analysis.

But doing that would not be the same as pretending that taxing the rich has no contractionary effect. Of course it does, and that is part of the equations. The expansionary effect of cutting for the littles would more than offset the (real) contractionary effect of taxing the rich.

[SoutherDem]

12. Thank you for the reply

To spite those who disagree with you, your explanations are straight from any economics textbook not written to push the "Reaganomics" theory.

My Econ 101 class unfortunately used a book which should have been called Reaganomics. Luckily, I had an instructor who chose to "fortify" the information. However, I remember wanting to toss the book out of the window while reading in preparation for class.

I generally call myself a socialistic capitalist because where I live I get less flak for being gay and an Atheist than a socialist. Adding socialist might get me hung from the nearest tree.

Thanks again for the explanations.

[Selatius]

16. You may wish to explore the idea of "market socialism" as a whole, if you have the time.

However, one form of market socialism I believe could function as a very real template of reform was proposed by mathematician by the name of Dr. David Schweickart. He proposed a model of "economic democracy" not too dissimilar to the current economy we live in except for several key defining features:

1) A national public bank funded by a capital assets tax on all businesses. The tax would replace all business taxes and is a flat rate one. The money would then be dispersed to each regional, sub-regional, and local branch of the bank on a per capita basis to be invested into the economy. The tax, essentially, is the manifestation of the idea that capital assets are collectively owned by society and that a business "rents" it for its own purposes.

2) The bank will act as an agent to fund the start-up enterprises managed by the workers themselves, a labor co-op, and the bank can also offer financial advice as well as buy out existing firms to be re-organized into more labor co-ops and grant more funds to existing labor co-ops.

3) All of these enterprises will be free to sell their products and services in a market mostly free of government price controls, and prices are determined by supply and demand.

The effect of this, hopefully, is an economy that is essentially split into two sectors: The co-op sector, and the traditional private sector. Businesses in the two will compete amongst themselves and against each other, and the key here is that workers would have a real choice between working collectively to enjoy the fruits of their own labor or selling their labor to a traditional capitalist for whatever they can get.

In time, it is hoped the co-op sector would grow to match or surpass the private sector in terms of output and numbers and would become the driving force in the economy instead of the capitalists. If this is achieved, you will be one step closer to eliminating things such as hunger, disease, poverty, and homelessness.

[Selatius]

11. You understand Keynes' teachings to a degree that is refreshing here.

You are correct. It's not that Keynes said that tax cuts are worthless.

It's that he said if the goal of the tax cuts is to stimulate the economy, then it is probably the least efficient way to do so but that it is stimulative to a point. He wasn't against tax cuts per se. He was against tax cuts if there were far better tools at one's disposal in the toolbox. A far more efficient way to focus and aim that amount of cash in a direction that will be the most beneficial to an economy (a far better return on one's investment, one could say) would be something along the lines of, for instance, a jobs program or maybe a public works program.

In fact, a jobs program is probably the best way to stimulate the economy, barring total military mobilization to fight World War Two all over again. It's preferred precisely because it pumps money directly into the pockets of workers, who are also consumers. Any Econ 101 student would quickly learn that the primary driver of any major economy today is aggregate demand for products and services, and the best way to stimulate aggregate demand is to put more money into the pockets of people who are looking to buy products and services.

This is one reason why some criticized the stimulus package as being too much tilted towards inefficient tax cuts and not enough towards public works and a bona fide jobs program.

[SoutherDem]

13. Public works program.

Where I live it has taken over 30 years to finish an interstate program (it still has a few miles to go). Over the years I see it slow or stop when the economy is bad and restart or speed up when the economy is good. This has always seem backwards to me, from an over all economic perspective, let alone the fact the interstate is needed for the economy.

[coalition_unwilling]

15. Thank you for a very coherent and nuanced discussion

of tax cuts' stimulative capacity (or lack thereof).

Another way to state your point is to rely on the concept of 'velocity of money' (or the so-called 'multiplier effect'). To wit, cutting taxes on the wealthy is less efficient as a stimulative measure because the wealthy are far less likely to spend their money (low velocity), whereas government spending tends to be more efficient as a stimulative measure because government funds tend to ripple through the economy, such that $1 of government spending results in roughly $1.25 worth of economic activity. (IIRC, $1 of tax cuts to the wealthy results in $1.05 of economic activity but can't swear to the math.)

[woo me with science]

17. Kick nt