Sunday, January 25, 2009

Of tax cuts and stimulus

I will preach "common wisdom" heresy here: A middle class (or above) tax cut will do nothing -- zero -- nada -- to stimulate the economy. Why is that? Simple. Because what we have right now is a solvency crisis, not a fiscal crisis. Middle class America is insolvent right now due to unpayable debts, and incapable of buying things. Giving $2K to every middle-class American won't stimulate the economy, because it'll just get sucked towards payments on their debt load. Give me $2K, and it goes to pay down on one of my credit cards, not towards buying new "stuff".

The operative term here is what John Maynard Keynes called the propensity to spend. The point of modern economics is to balance supply and demand such that a) there is sufficient supply to avoid inflation, and b) sufficient demand to ensure full employment. Full employment is desirable in an economy because it maximizes your use of human capital -- you don't have useless people languishing around on the dole. And you better damned well have a dole (welfare) if you don't have full employment, because otherwise you get food riots, high crime as desperate people break into homes to steal food, and maybe, if you have enough unemployed, revolution and the mass slitting of throats and blood running in the gutters.

So anyhow, what we have right now is supply, but no demand. No demand because of the solvency crisis. So what can we do about this? Let's look back at our tool kit and see:

  1. Jobs. Unemployed people don't buy stuff. They're protecting what little capital they have until they find a job. Unfortunately, private enterprise won't -- can't -- provide jobs until there is demand. And unemployed people aren't providing that demand for obvious reasons -- they have no job. So we have a chicken-and-egg problem that isn't solvable by a free enterprise system. Hmm, now it seems to me that we have this other entity that we formed for handling those things where free enterprise doesn't work. This other entity that provides things like, oh, roads, libraries, and the common defense. This other entity that we call government. As in, the CCC, WPA, and other alphabet soup jobs programs of the Great Depression.
  2. A return to traditional bankruptcy. The bankruptcy "reform" act was an attempt to maintain the solvency of the banking system. Unfortunately, insolvent people can't pay their debts whether they're allowed to declare bankruptcy or not, and thus the banking system is insolvent anyhow. Except now it's taking the whole economy down with it, since insolvent people can't wipe out their debts, become solvent again, and start buying again (albeit hopefully more responsibly this time!). The bankruptcy "reform" act has killed way more solvency than it has preserved, and needs to go. In fact, I'd make bankruptcy *easier*. If more than 75% of your income goes for debt payments, you get to declare bankruptcy and wipe it out.
  3. Nationalization of the banking system. Whether people are allowed to declare bankruptcy or no, they're insolvent and unable to pay their debts, and thus the banking system is insolvent too. We might as well just allow them to declare bankruptcy and get it over with. The banks and their assets can be taken over by a Banking Trust Corporation, the bad debts written off, the banks re-capitalized via freshly printed money from the Federal Reserve, and then sold back off to private ownership after everything has shaken out. Otherwise we're just throwing money at an insolvent system to try to paper over the fact that the banking system has failed rather than addressing the fact that, well, it's insolvent.
  4. A massive hike in the minimum wage, and indexing the minimum wage to inflation. Contrary to popular belief, minimum wage hikes don't cause any real loss of jobs. Anybody who can replace a minimum wage worker with machinery has already done so. The minimum wage is a form of wealth transferal from the middle classes (mostly) and upper classes(somewhat) to the lower classes, but it's one that rewards work, rather than direct payments from the government which reward not-work. The minimum wage primarily gets paid to two groups of people: a) Teenagers, who, being teenagers, *will* spend the money thereby increasing demand, and b) poor people, who, if they get more money, *will* spend the money, since they rarely have any debt and have a long list of things they'd like to buy if they only had the money.
  5. An increase in the Earned Income Tax Credit. Once again, this goes primarily to poor people, and will immediately be spent, unlike middle class or upper class tax breaks which will go off to pay off debts or be stashed in an investment account (for the upper class), thereby increasing demand.
  6. Tax credits for hiring Americans, manufacturing tax credits to make it profitable to manufacture here in America again, a "manufacturing bank" to give out low-interest loans and other subsidies to manufacturers who want to set up factories here in America, and tax reform so that we no longer reward companies for outsourcing American jobs to India and China. One problem with increasing demand is that we're increasing *Chinese* jobs, not American jobs. Which is okay if the Chinese are willing to pay for it, but the Chinese aren't going to give billions of dollars to the U.S. government to increase U.S. demand so that Chinese workers are kept employed. The Chinese are going to just free-ride on this stimulus stuff. Well, okay. We can't stop them from doing that, they're playing chicken with us, and betting that we aren't going to deliberately smash our economy just to "beat" the Chinese. But we can ensure that in the future, those gains go to Americans too.
  7. Spending on infrastructure. Doh. Infrastructure is the gift that keeps on giving. We're still using roads and buildings built by the WPA in the 1930's.
  8. Spending on education. Doh. Same deal. We shouldn't be laying off teachers and putting 40 kids into classrooms that are standing-room-only without enough textbooks for all the kids, this is our seed capital for the next generation. And save the nonsense about how African parents are happy to have a teacher and a chalkboard standing by the side of the road with no walls or roof or desks or anything. In case you haven't noticed, Africa isn't exactly an economic marvel lately...
  9. Bailouts of states, with the proviso that accepting the money means that the states have to clean up their tax and budget systems, which are a mess right now. All this hiring stuff isn't any good if the states are busy firing at the same time because they have no money to maintain basic services.
So let's look at some "common wisdom" that's wrong:
  1. The federal government needs to reduce spending and live within its means. Bzzt. Wrong. We have data on this, folks. Things don't work the same during a depression (and we ARE in a depression right now whether the Feds want to admit it or not) as they do during normal times. In 1934, when FDR increased spending, the economy went up. In 1937, when FDR decreased spending, the economy went down. In 1942, when FDR increased spending WAY high, the economy went through the roof. During a depression, increases in government spending cause an improvement in the economy. Decreases cause a decline in the economy. This is data. This is reality. We don't need to wave our hands and talk about vague theories, this is what actually happens.
  2. Middle class tax cuts will stimulate the economy. BUZZZ. Wrong. In a solvency crisis like right now, where the middle class is insolvent, all that happens is that tax cuts to the middle class will get sucked up by lenders who are themselves insolvent. You can't make the middle class solvent by cutting their taxes, you have to do something about their debts, which means making bankruptcy more accessible.
  3. We should not reward people for being financially irresponsible. BZZT. We have *ALL* been financially irresponsible, either personally or by electing irresponsible governments. And we're all going to pay for it. Finishing the destruction of the economy because we're too busy nattering about who is more responsible than the next person is nonsense. We need to do what works, and if that requires allowing people to duck out of debts they assumed knowing that they probably couldn't repay them via bankruptcy, that's part of the price.
  4. Tax hikes on the rich will kill the economy. BZZZt. WRONG. The time period that showed the most economic growth in American history -- the 1950's and 1960's -- were also a time when the rich were taxed at 80%+ marginal rate. The rich divide their income into two streams: Consumption, and investment. If they have less income, they invest less. But we already have an excess of investment capital in our economy, thanks to the Reagan shift of the tax burden from the upper classes to the lower classes, and what it's doing is causing investment bubbles such as the dot-com bubble, the housing bubble, and so forth, which cause great economic pain once they burst. Reducing the amount of investment money in the economy by the amount needed to stop all this bubbling will be good for the economy.
And that's this week's economics post. Not that anybody who matters will read it or listen to it. What I mention above is backed by economic data out the yazoo, what I mention above is reality, but nobody gives a shit about reality anymore, it's all about ideology. Everybody is still stuck in their ideological cubbyholes, and read or believe only Party-approved statements that agree with their own particular ideology. So it goes...

-- Badtux the Skeptical Penguin


  1. Hi there. Been awhile. Nice list.

  2. Great list. Same as mine but much better explained and written.
    This would go along ways to fixing the economy for the rest of us, that is those not getting large bonuses or even having a job.
    Now if we could only get the powers that be to listen and act.
    Hopefully the adults in charge now understand that good for the majority becomes good for all in the end. And of course the opposite that we have seen for so long, good for the few, almost never works out in the end.

  3. The sad thing, Ruckus, is that I didn't have to dig deep to create the above list, I created it off the top of my head this morning, and indeed can add to it readily. There are a *lot* of things that can be done to prevent the economy from entering into a new Great Depression (we're already in a depression, whether the poobahs in Washington want to admit it or not), but I still see too much ideological claptrap going around. All you have to do is look at the data to see what's been going wrong with the economy for over twenty-five years now. For example, trickle-down has been a ridiculous failure, shifting the tax base away from taxing the rich towards taxing the middle and lower classes has resulted in asset bubbles rather than income growth for the average American, and the last round of middle-class tax cuts did nothing, nada, for the economy. But nooo, folks would rather cling ridiculously to their ideologies...

    - Badtux the Disgusted Penguin

  4. Calling a spade a shovel:

    Money that buys stock certificates is speculation, or keno, or roulette, or black jack.
    No money goes to the company whose share is purchased, just as no money goes to a manufacturer when you buy a used car.

    Money given to an entrepreneur is investment. The company has more cash to buy equipment or pay people.

    Important distinction we need to make. Nu?

  5. And here I thought Big Gov
    was " of the rich , by the rich and For the rich . "
    You mean " we the poor dumb people " are actually supposed to get some of this magical ' money' thingy ?
    a confused and broke w3ski

  6. Yeah, w3ski. The problem is that rich people can only buy so much "stuff". Past a certain point they have more money than they can reasonably spend, so giving them more money after that, and they don't buy more "stuff", they just save or invest the money.

    Which isn't a problem if you don't care about producing and selling enough "stuff" to keep your population employed, but democracies don't survive mass unemployment and dictatorships tend to be as bad for the rich as they are for the poor (just ask all the Russian oligarchs who crossed Putin and ended up getting the axe). So you're going to have to spread some of that money downwards, or you can't produce and sell enough "stuff" to keep your populace employed and thus out of everybody's hair.

    But hey, that's just reality. Who needs reality when they can have ideology instead?!

    - Badtux the Snarky Penguin

  7. Ideology schmideology, the list makes sense.

    'nuff said.


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