I, like much of America, am concerned about the coming stimulus package. I am not concerned about how big it is though. What concerns me is how big it isn't. Desperate times call for desperate measures. What especially concerns me is the huge amount of the package dedicated to tax-cuts.
Republicans believe that tax-cuts are the solution to any problem. I am afraid to go to a Republican doctor for fear that his solution to 105 fever would be a drop in the capital gains tax (that was a joke). The argument is that tax-cuts stimulate spending by putting more money in people's pockets. This seems reasonable and can be at times. Right now is one of those times when it is not reasonable.
People are cutting their spending because they are unsure with the future. As they watch news of massive layoffs and pay-cuts, they can't help wondering if they're not next on the cutting-block. If traditionally stable companies like Microsoft and IBM are handing out pink-slips, nobody's job is safe. If you were fired tomorrow, what would save your butt? A big chunk of cash in savings. So a lot of people are putting money in their savings accounts as a cushion. This is a good thing on an individual level, but it's horrible for the economy. With more people saving, less people are buying. If less people are buying, companies stop making stuff. If companies stop making stuff, people lose their jobs.
Would tax-cuts get people to stop saving and start spending? Unlikely. What would you do if you had an extra $100 per month? Would you spend it, or save it? That $100 could become very, very important in a year or two, much more important than a new dress today. When we received the $600 stimulus check last year, most people saved it (or paid down debt, which is basically the same thing). Why would we expect people to do anything different; the situation has only worsened.
The solution is direct spending into the economy. With tax-cuts, we sit back and hope that the $300 billion actually makes it into the economy rather than getting stuck in someone's bank account. With direct spending, we know that every single dollar is making it into the economy. The money goes to paying employees, buying materials, and generally infusing capital into the economy from day one.
Apart from the issue of economic stimulus, this is also a great time to bolster our national infrastructure (which needs it badly). In an economic slump, everything becomes cheaper. Road and bridge projects that would have cost a fortune two years ago have become relatively cheap. We know that we should "buy low, sell high," but we rarely do it. Here's our chance to do just that.
So why are Republicans clinging so hard to the idea of tax-cuts if they just won't work? Honestly, I think that the Right is worried. They have been preaching the gospel of tax-cuts for years. If they are proven wrong, they will be in big trouble. So what's their solution? Stay the course. That's the wrong solution.
I admire President Obama's attempts at being conciliatory and trying to include Republicans in the decision-making process. That said, he must not capitulate to their demands. There is a reason why Americans overwhelmingly voted for Democrats. Republicans have had eight years to prove their hypothesis regarding tax-cuts. The hypothesis has failed, and the American people know it.
Tragedy and Kitsch
5 hours ago
2 comments:
A basic concept in economics is that for individuals that are above the poverty line (have a surplus), increases in income will result in an increase in both savings and spending. The amount which they save will, in general, be a function of how much they currently earn. An extreme example makes this very clear: if you give $2 to a beggar on the street, then their annual spending will increase by exactly $2. However if you give that same $2 to a banker who just made $25 million in bonuses last year, will their annual expenditures increase by $2? In practice, the amount that they save will differ depending on the amount of the increase and the amount that they earn & the amount they have in surplus.
Reasonable people can disagree about whether or not a given tax rate is fair, but the point in this case is moot. We need a stimulus. In order for a tax cut to be stimulative, it needs to be spent. Tax cuts for the poor get into the economy quickly and are very stimulative. However all tax cut proposals thus far include rate reductions for people above the poverty line. The bulk of tax is paid by the wealthy because of our progressive tax scheme and because they earn the most. So the bulk of the money in the proposed tax cuts would go to exactly those people who are least likely to spend the money in the economy (as illustrated above). This is another reason why Obama included tax refunds to people who don't pay taxes in his plan (these people are very likely to spend the whole amount). The other problem with tax cuts is that we just can't get enough back into the economy to fully stimulate the economy.
Again, I know that people may believe that it is unfair that the wealthy pay as many taxes as they do, or that they deserve a tax cut. However, that is a different discussion altogether. This discussion is about economic stimulation.
From Nobel Laureate Paul Krugman:
According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of [a year's] GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger. Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.
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