Let's take the Bush tax cuts for example... $300.00 or $600.00 per couple. What did I do with my $300... I paid off a credit card and then closed it. That did nothing for the economy... What did my parents do with their $600.00.. they put an extra payment on the house... which did nothing for the economy. But what did my friends who were just making ends meet do? They went out, and bought food, and an Xbox to provide the family with entertainment. I didn't adjust my spending habits at all, but they did and bought a luxury and therefore stimulated the economy. So it would have been better stimulus, to give me and those who make an income higher than me nothing and double or triple my friend's tax cut. OR as many poor people don't make enough to pay any taxes, perhaps double their food stamp allowance, or increase the earned income tax credit, or... I could go on. The point is tax cuts for the rich are of limited stimulative effect.
Pivoting to direct government investment. When the government pumps money into an economy directly it had multiple benefits. Large government infrastructure investments employ people... the workers, the suppliers, the food vendors nearby... and allow for greater economic activity. Adding light rail between Seattle and Tacoma will increase the flow of people and therefore the flow of money. Adding lanes to I-5, finishing 167 or the cross-base highway will allow goods and services to flow more effectively across the region. Paying states not to lay off teachers will have the net benefit of smaller class sizes, improved education (which will pay long term benefits), and oh yeah, keeping a skilled and specialized workforce employed and spending money. The benefits of direct government spending are large, but hidden. How do you know the state worker who lives next door to you kept his job due to the stimulus? But you do see that $300.00 that you ended up using to pay off that credit card. Tell me, what has a higher long term economic benefit.. a $40,000 a year job as a teacher... or $300?
Tax cuts to billionaires will go into savings accounts, or hopefully stock portfolios to increase capital available for investment, but we really can't say because as a society we have no control over what people will do with that money. Additionally, there is a lag time. You can cut taxes, but it will take people a while to realize they have more money and spend. A $1,000 a year tax cut comes down to an extra 83.00 a month... what will you use it for? Will you even notice?
You comparison of the value of tax cuts looks at only one aspect of economic benefit, consumer spending. Certainly tax cuts(or in many cases credits) for the poor increase consumer spending more than those for the more wealthy. Consumer spending, however, is only one aspect of an economy (and it is not always good to increase).
ReplyDeleteYou claim that money used to pay down debt or which is used for investment (savings, etc.) has no multiplier, but that is not true. First of all money used to pay off a debt is immediately multiplied by the interest on that debt. Money which is invested is multiplied by the return on that investment. If you "merely" save the money, then that return might go to a bank instead of you, but it is multiplied in the economy.
You seem to be arguing that the only way to stimulate an economy is to create higher demand by increasing purchasing power, but that ignores the more common way that economies increase, which is to increase demand by lowering price.
Reducing taxes on the wealthy does just that, it lowers costs which makes lower price points more attainable.
I'm not arguing that companies lower price benevolently, they do so greedily, because the lower the price the higher the demand. Because demand is on a bending curve you get into areas where lowering the per unit price can turn into increased profit. Allowing companies to reduce costs through either a direct reduction in their tax burden or increase access to capital allows them to climb down the price/supply/demand curve into areas which result in both increased revenues for the company and lower prices for consumers.
That may not always be the best way to stimulate the economy, but it does happen and it is sometime that you seem to argue doesn't exist.
Also, how do you save a $40,000 a year teacher's job with only $300? Wouldn't it be more fair to compare the economic benefit of giving 133 people each $300 compared to one teacher?
ReplyDeleteFinally, you mention many government programs and their potential positive effects, but here you look only at the supply and not the demand.
ReplyDeleteWhile additional highway construction does make it easier for good and people to flow through an area, there must be ample demand (in an economic sense) to make that increase in supply effective policy. It certainly might be there, and it is certainly good for Seattle, but it might not be the best plan for Washington. It might be of greater economic benefit for more businesses to move outside of Seattle where easy transport and lower real estate already exist.
With Government programs we get only the one solution. If it works, that's great, but if it doesn't we are stuck with it. Sure it is going to be good for some, certainly it is good for Seattle and the companies which are already in Seattle. It is not very helpful for companies outside of Seattle. So how do we know that the Seattle companies are going to make better use of the savings that can bring than companies outside Seattle would?
All I am doing is offering alternatives to your earlier posts... Shall I post in the comments section?
ReplyDeleteWherever you want to post is fine. What about the questions I asked?
ReplyDeleteI don't mean to say tax cuts don't have a stimulative effect... they do. They are just not as stimulative as other spending.
ReplyDeleteIn terms of the your last post... I think you missed my point. Improved infrastructure benefits everyone not just Seattle. People in Spokane and eastern WA can more quickly get their goods to population centers. Those who work in Seattle can live farther away because improved throughput allows for quicker commutes. Goods coming into the Port of Seattle, Tacoma, Longview-Kelso, Portland can more quickly and easily get to consumers. All of this is an added benefit that tax cuts don't have.
Also tax cuts contribute to unemployment by forcing cities, and states to lay off people to balance the books... teachers, fire fighters, police all lose their jobs and cease to contribute to the economy.
Clearly one has to look at the demand when planning infrastructure improvement, you can't just randomly place projects, but in many cases the Seattle to Portland corridor for example there are decades of maintenance deferments and expansion demands.
I stick by my point about the $300.00. I only gave a few examples, but there are others of people saving their money. Sure some will spend, and I acknowledge that. They'll spend and contribute to the economy, but it won't be as stimulative as direct investment due to the savings issue. All 700 billion in stimulus will be -spent- I can say that if my portion were given to me as a tax cut.. it would pay down debt or be saved, which is hardly stimulative and I'm not alone.
My question to you, is how is my (and others) savings and debt reduction stimulating the economy?
I will concede that the infrastructure changes you outlined can provide benefit outside of Seattle, but that doesn't make them the most beneficial or even make their benefit outweigh their cost. Allowing people to commute into Seattle might be a good solution, but it comes with a very high cost. Having businesses relocate outside Seattle has a much lower cost and would have several of the same advantages. I'm not saying your projects don't have benefit, they certainly do, but do they have benefit equal to their cost? For people and business in Seattle, possibly. For those outside it, it is very doubtful. All, however, are being required to pay that cost.
ReplyDeleteSavings stimulates the economy by increasing available capital for lending/borrowing. In essence you make it easier and/or cheaper to borrow money which makes is easier/cheaper for business to grow. Even if you aren't doing any investing or lending directly you are giving your money to someone who does. Even if you take business out of it, saving allows lenders to provide more personal credit. Banks are limited in their lending by how much money they have available, more money in savings gives them more to lend. You might save the money, but someone else is borrowing it to either spend or invest. Saving doesn't take money out of the economy, it puts it into it in form of credit which is used by other to grow the economy.
The $300 you paid on your debt freed up $300 for your lender to loan to another. That $300 was then used either for purchases in which case it grew at the interest rate for it's time of lending. It might have been invested in another form would would cause it to grow at the rate of return. In any case, that money went into growing the economy.
As for tax cuts contributing to unemployment, it is possible that the cuts will result in lower public sector employment, but that same money is being passed to the private sector which allows businesses to expand and grow which lowers unemployment. You cannot just look at one aspect of the economy, changes affect all parts.
Tax cuts benefit some areas, depress others and the same is true with spending.
Of course, a large part of your argument is based on the premise that tax cuts result in lower tax revenue. While that might appear to be obviously true, it is often not the case.
If you look at the history of federal income tax revenues, you will see that it is very consistently 18%-20% of GDP. This is despite the fact that federal income tax rates have varied greatly. There are reasons for this, but that's outside the scope of a comment. I might post about it in the future.
Oh I'll concede the point that tax cuts can have a long term impact, but they don't have nearly the same impact short term and instead can even be a problem short term.
ReplyDeleteIn the short term reduced taxes will reduce revenue and force states which must balance the budget to reduce the workforce and contribute to unemployment as well as reduce services available to people and businesses, which can have a chilling effect on business investment. For example if cities must cut back on inspectors then it takes longer for buildings to be built.
You are right is is important to look at all sides of the economy, which I have done when formulating my point. Just because I discount or haven't mentioned a point or an effect of a change doesn't mean I haven't considered it in my analysis. Also, it is important to note that while savings can contribute to the economy it doesn't have anywhere near the same impact as spending does.
While tax cuts can free money for private investment, it is something that doesn't always happen and when it does there can be excessive leakage of funds out of the economy and instead into generational wealth. The lag time between when states and the federal government has to fire employees and when the private sector can pick up said employees can be excessive, also they may not be in the right industry. While it is a positive for the workforce to be nimble it is also not always realistic. And those out of work people will not contribute to overall economic growth and the economy may shrink.
It's important to look at public sector jobs with the same eye as private sector jobs, and the time to cut them is not when the economy is in contraction, or when a recovery is shaky and anemic.
Here is what I don't understand about your position. You clearly see that reducing state budgets causes cutbacks which are harmful to the economy, but you seem to dismiss that the same is true with business. You are taking one from the other, if you take from business and give to the state then the business has to cut back and the state can maintain or increase. If instead you reduce revenues for the state and increase them for business the opposite is true. While you say you consider both sides, you present your argument as if the state is the only side that must cut back with lower revenue. Why is it that you seem to argue that cutting jobs is a first resort for government but not for business?
ReplyDeleteAlso can you explain to me how this leakage of funds out of the economy works? Where do you put money (aside from a mattress) where it isn't in the economy?
As for lag time between public sector layoffs and private sector hiring, you are correct. Can you not see the opposite is also true. Again you seem to assert that if you take money away from business they will not lay people off, but if you take money away from government it will. Why is that?
I have the same question with your final point. No one is in favor of cutting jobs, but why do you think that more jobs will be cut by the government than they will be by business?
I disagree with your premise here. I'm not assuming that this is a zero-sum game, yet you seem to be looking at it that way. Both business and government can and do increase jobs at the same time, in addition they can both shed jobs the same time. Additionally states are required to balance the budget by statute, businesses are able to borrow money if necessary and have more flexibility.
ReplyDeleteAlso businesses can and do diversify their income streams, government is not able to do so in a similar way. Your question: "Why is it that you seem to argue that cutting jobs is a first resort for government but not for business?" doesn't make sense, nor was that ever argued. I do not assign priority. I'm merely commenting that state jobs lost have an impact.
Also please clarify your paragraph:
"As for lag time between public sector layoffs and private sector hiring, you are correct. Can you not see the opposite is also true. Again you seem to assert that if you take money away from business they will not lay people off, but if you take money away from government it will. Why is that?"
The only thing I can think about that is Huh? Are you saying that businesses lay people off and there is a lag between them getting picked up by government?
Again, your final question also doesn't make any sense, more, less, the same amount... it doesn't matter, jobs will be lost when an economy is in contraction.
Be careful when assuming intent.
What I'm saying is that if you take money away from business, they are just as likely to cut jobs as the government is when you take money from it. At the same time if you increase money to business they are just as likely to expand jobs as the government is.
ReplyDeleteYou appear to be arguing that by taking money away from business and giving it to the state that you will not reduce jobs, but that if you take money away from the state and give it to business you will lose jobs. I'm asking why you believe that to be the case, since I don't see what point you are making otherwise.
As to my final question, I don't know what to clarify. One of the major points of your argument is that reducing taxes results in lost jobs. My point is that increasing government spending also results in lost jobs. Shifting money from business to government doesn't prevent job loss, it merely converts private sector jobs into public sector ones.
That being that case, I don't see why you think government spending would be better than business spending. Shifting money either way results in both job loss and job creation. Do you really think shifting in one direction has a net result of fewer jobs lost?