Tax Cuts, Deflation, Budget Deficits and the Economy
Is the US facing a future of deflation? Japan has had a deflationary period for more than a decade now. Is it possible we are facing deflationary pressures excluding some sectors? I believe we are if we don't act with some policy changes.
You may have heard some democrats cry foul with the so-called "Bush Deficits" as being a danger that would cause inflation. These democrats do not want tax cuts as they cut against the philosophy of bigger government. When people have more of their own money they are empowered and I personally view some deomcrats in power today as not wishing for people to be empowered. The democrats wish to keep those who are in need as future voters. If fewer people are in need then why the need for democrats to "help" them? That is the dilema faced by the democrats today.
As I said in my opening I believe the US is facing deflationary pressures due to a weak economy and suppliers must reduce prices to sustain sales. One can see this trend clearly with the PC business or the auto business. I have seen rebates or cash allowances on new cars from $7,500 to $10,000 lately. Indeed my latest purchase of my new truck has $7,500 off MSRP. This is an indicator of deflation within the economy. I am not saying some sectors do not indeed have signs of inflation. Indeed some have a track record over history to sustain inflation year over year.
Here is my question. If we are facing a future of deflation which would harm the health of financial instutions as well as investor confidence can we allow it to procede with no actions taken? I would submit a big "no" we can not allow it to worsen.
What do we do then....
I think President Bush is right 110% for requesting tax cuts to stumulate the economy. Yes this would mean deficits for a period but the cuts would indeed stimulate the economy. Demand needs to be fueled by some means at times as to prevent a fall in GDP and the hence the Stock Markets as well as preventing more job cuts. In addition I believe the Fed will lower interest rates for the same reasons. These two actions are bold measures that need to be taken to fan the flames of the economy and get more people jobs and more people less in debt as well as more people spending which perpetuates the job sustainability rate hence the GDP is supported in greater measure and more will have work. Will the deficits hurt the economy? I don't think so I think they are needed to help get the economy on its feet again and the tax revenues will more than compensate for the period of deficits.
I welcome your thoughts on the matter and please feel free to read this link below:
Link over the issues mentioned
Fellowship
You may have heard some democrats cry foul with the so-called "Bush Deficits" as being a danger that would cause inflation. These democrats do not want tax cuts as they cut against the philosophy of bigger government. When people have more of their own money they are empowered and I personally view some deomcrats in power today as not wishing for people to be empowered. The democrats wish to keep those who are in need as future voters. If fewer people are in need then why the need for democrats to "help" them? That is the dilema faced by the democrats today.
As I said in my opening I believe the US is facing deflationary pressures due to a weak economy and suppliers must reduce prices to sustain sales. One can see this trend clearly with the PC business or the auto business. I have seen rebates or cash allowances on new cars from $7,500 to $10,000 lately. Indeed my latest purchase of my new truck has $7,500 off MSRP. This is an indicator of deflation within the economy. I am not saying some sectors do not indeed have signs of inflation. Indeed some have a track record over history to sustain inflation year over year.
Here is my question. If we are facing a future of deflation which would harm the health of financial instutions as well as investor confidence can we allow it to procede with no actions taken? I would submit a big "no" we can not allow it to worsen.
What do we do then....
I think President Bush is right 110% for requesting tax cuts to stumulate the economy. Yes this would mean deficits for a period but the cuts would indeed stimulate the economy. Demand needs to be fueled by some means at times as to prevent a fall in GDP and the hence the Stock Markets as well as preventing more job cuts. In addition I believe the Fed will lower interest rates for the same reasons. These two actions are bold measures that need to be taken to fan the flames of the economy and get more people jobs and more people less in debt as well as more people spending which perpetuates the job sustainability rate hence the GDP is supported in greater measure and more will have work. Will the deficits hurt the economy? I don't think so I think they are needed to help get the economy on its feet again and the tax revenues will more than compensate for the period of deficits.
I welcome your thoughts on the matter and please feel free to read this link below:
Link over the issues mentioned
Fellowship
Comments
sure, at some point they might be a good idea, but now? what's the point? i don't feel they're going to help the economy out any, and esp. if Alan Greenspan isn't signing off on it.
Originally posted by alcimedes
to me the Bush tax cuts sound like a lotta' bullshit. i don't see them as really helping to stimulate the economy, which is what they're supposed to be about.
sure, at some point they might be a good idea, but now? what's the point? i don't feel they're going to help the economy out any, and esp. if Alan Greenspan isn't signing off on it.
I think we will be seeing a lot more discussed about the economy and ways to ensure it recovers in the weeks to come. This is an economic policy that needs to be discussed and addressed.
I hope those in leadership roles will enact the needed measures to get the economy moving more robustly.
In some ways the economy and how it is managed is similar to taking care of the lawn of your residence. Sometimes it is needed to spend a little money on fertilizer as to ensure a healthy and green lawn. If nothing is done the lawn can turn yellow and weeds take over and you have a bigger and more costly mess to deal with than if it was simply addressed and taken care of in the first place.
Fellowship
The "pro" theory is based on the Marginal Compensity to Consume." That is, people will take the money they didn't spend in taxes and buy other stuff. This theory works pretty well when people have a high Compensity to Consume (which Americans do). Note that this policy backfired in Japan because the Japanese simply saved the extra money (they have a low Compensity to Consume).
The other side of the coin is for the Government to spend the money, but it also assumes on a high MPC to get the most bang for the buck. In this case the Word de Jour is the "Multiplier Effect": if the government spends $1 billion, how many more times will that money get spent?
The question really is "Can the Government effectively manage the economy?"
Personally, I don't think either solution is ultimately correct. As much as I would love to have more of my money, either solution is only a temporary measure, comparable to jerking the wheel hard to the rght (or left) to keep the car from crashing into the wall even though now we are aimed straight at the dropoff.
But then, I have some pretty radical ideas about taxation.
Originally posted by Fangorn
The effectiveness of a tax cut is a matter of great debate even among economists.
The "pro" theory is based on the Marginal Compensity to Consume." That is, people will take the money they didn't spend in taxes and buy other stuff. This theory works pretty well when people have a high Compensity to Consume (which Americans do). Note that this policy backfired in Japan because the Japanese simply saved the extra money (they have a low Compensity to Consume).
The other side of the coin is for the Government to spend the money, but it also assumes on a high MPC to get the most bang for the buck. In this case the Word de Jour is the "Multiplier Effect": if the government spends $1 billion, how many more times will that money get spent?
The question really is "Can the Government effectively manage the economy?"
Personally, I don't think either solution is ultimately correct. As much as I would love to have more of my money, either solution is only a temporary measure, comparable to jerking the wheel hard to the rght (or left) to keep the car from crashing into the wall even though now we are aimed straight at the dropoff.
But then, I have some pretty radical ideas about taxation.
I agree with you here. The American people affect the US economy more than anything else. That said those who create tax and rate policy can influence and govern it to some degree as to try to keep it on the "road" as much as possible without it slamming into the ditch.
Fellowship
You may have heard some democrats cry foul with the so-called "Bush Deficits" as being a danger that would cause inflation. These democrats do not want tax cuts as they cut against the philosophy of bigger government.
Sometimes I really wonder about you Fellowship. Tax cuts don't cut against big government at all by themselves. Big govt is determined by expenditures not by revenues. The present administration and Congress has shown little interest in cutting expenses for the sake of any smaller government, in spite of the rhetoric to the contrary. I'm sure that you can locate the relevant figures. But regardless of what view you take of the economics, the spending is still there and the government has not gotten any smaller. It's just that now you are sending in less tax money and an IOU instead of more tax money.
Cutting taxes and simply making up the difference with deficit spending is just a way of shifting the burden on down the line till after the election while scoring political points from people who haven't figured out that those tax cuts and the resultant increases in deficits/interests will inevitably result in the need for either spending cuts or tax increases down the line to compensate. This was of course something we learned well after the atrocious Reagan deficits and then the tax increases which both Father Bush and Clinton had to put in fiscally because of the budget mess they inherited from the Reagan administration and Rostenkowski's spending bills. If you are still spending the money then the taxpayer still has to come up with that money sooner or later, or spend more on interest or lose services. Now there are some incentives that can be argued for deficit spending under some circumstances. That's fine and good. I'd argue that a time of massive military increases paired with the impending baby boom retirement with much of their FICA money already spent elsewhere in addition to the political blackhole of prescription drugs and medicare along with the relative tameness of the economic stagnation at present make that case a little sketchy. But recognize that that is what you want to do and that you will pay for it down the line and that the benefits make it a worthwhile thing to do. However please don't pretend that what is going on now is smaller govt. It isn't.
Furthermore the methods of tax cutting show that this is also a confirmation of the neocon ideology that the rich pay too much and the poor don't. Debate the morality of who pays what all you want but no reasonable person can deny that this is also an attempt at reordering the tax burden among different economic and political constituencies.
1. I agree that keeping interest rates low is good for the economy, as you say, but I think you've overlooked the problem that larger deficits increase interest rates.
2. I also agree that budget deficits are OK during recession, but we shouldn't create long-term structural deficits. If you want a tax cut, make it immediate and phase it out after a period of time so we aren't left with long-term deficits. Maybe give a one-time tax credit of $1000 to everyone, if you want a tax cut. It's a flat tax cut and it's temporary.
3. My view is that we shouldn't do anything to "stimulate" the economy. We should think only in the long-term. Don't try to fine-tune the economy. We should keep the budget pretty close to in balance. That keeps interest rates low and is therefore good for the economy in the long run. This whole stimulus nonsense is a result of Bush's father's failed re-election because he was perceived as doing nothing to help the economy. Now every politician has to be seen as doing something, despite the fact that the economy did fine anyway.
4. Who will the large long-term Bush deficits hurt? It will hurt the middle and lower classes who benefit the most from social security and gov't subsidized health insurance which make up the bulk of the federal budget and will have to give because of these large future deficits. Bush's tax cuts have been more beneficial to the wealthy than the lower and middle classes, despite the fact that the wealthy have dramatically increased their wealth over the past 20 years (particularly in the 90s) while the lower and middle classes have remained stagnant. And now the lower and middle classes will get screwed again when we try to deal with Bush's deficits in the future.
(OK, four comments. I got carried away. The plight of the middle class always does that to me.)
Three comments:
1. I agree that keeping interest rates low is good for the economy, as you say, but I think you've overlooked the problem that larger deficits increase interest rates.
Interest Rates couldn?t get much lower and the effects are a mixed bag. Basic Supply and demand says there is too much money waiting to get loaned out and not enough demand for loans. So the question becomes "why?"
2. I also agree that budget deficits are OK during recession, but we shouldn't create long-term structural deficits. If you want a tax cut, make it immediate and phase it out after a period of time so we aren't left with long-term deficits. Maybe give a one-time tax credit of $1000 to everyone, if you want a tax cut. It's a flat tax cut and it's temporary.
Temporary tax cuts are not very effective. Remember the Marginal Propensity to Consume in my earlier post? If people think a tax cut is temporary, they are more likely to save the money than to spend it (seeing a future need for the money). The desired effect is an increase in spending, not saving.
3. My view is that we shouldn't do anything to "stimulate" the economy. We should think only in the long-term. Don't try to fine-tune the economy. We should keep the budget pretty close to in balance. That keeps interest rates low and is therefore good for the economy in the long run. This whole stimulus nonsense is a result of Bush's father's failed re-election because he was perceived as doing nothing to help the economy. Now every politician has to be seen as doing something, despite the fact that the economy did fine anyway.
This is classical thinking and I pretty much agree with it. But I think people are so afraid of another Great Depression that it gets lost. That and "me first" thinking.
4. Who will the large long-term Bush deficits hurt? It will hurt the middle and lower classes who benefit the most from social security and gov't subsidized health insurance which make up the bulk of the federal budget and will have to give because of these large future deficits. Bush's tax cuts have been more beneficial to the wealthy than the lower and middle classes, despite the fact that the wealthy have dramatically increased their wealth over the past 20 years (particularly in the 90s) while the lower and middle classes have remained stagnant. And now the lower and middle classes will get screwed again when we try to deal with Bush's deficits in the future.
I agree with the heart of what you say (balance the budget) although I don?t necessarily think the prognosis is quite that grim.
Originally posted by FellowshipChurch iBook
As I said in my opening I believe the US is facing deflationary pressures due to a weak economy and suppliers must reduce prices to sustain sales. One can see this trend clearly with the PC business or the auto business. I have seen rebates or cash allowances on new cars from $7,500 to $10,000 lately. Indeed my latest purchase of my new truck has $7,500 off MSRP. This is an indicator of deflation within the economy. I am not saying some sectors do not indeed have signs of inflation. Indeed some have a track record over history to sustain inflation year over year.
No, that's just an indicator of a shitty economy and no one making large expenditures on cars.
Originally posted by FellowshipChurch iBook
I agree with you here. The American people affect the US economy more than anything else. That said those who create tax and rate policy can influence and govern it to some degree as to try to keep it on the "road" as much as possible without it slamming into the ditch.
Fellowship
So, all of the multi-millionaires that will benefit most from this tax cut didn't have the money to spend and influence the economy before? Look, I do have some problems with the rich being burdened with a higher tax rate but that really isn't relevant here. If the point is to stimulate the economy, only the middle and lower classes should receive tax cuts. Keep the number the same...just distribute more money to the middle and lower class and there ya go....stimulation.
Originally posted by BR
So, all of the multi-millionaires that will benefit most from this tax cut didn't have the money to spend and influence the economy before? Look, I do have some problems with the rich being burdened with a higher tax rate but that really isn't relevant here. If the point is to stimulate the economy, only the middle and lower classes should receive tax cuts. Keep the number the same...just distribute more money to the middle and lower class and there ya go....stimulation.
Personally I love this idea. What are the arguments against?
Originally posted by bunge
Personally I love this idea. What are the arguments against?
Class envy want something for nothing mentality.
Fellowship
Originally posted by bunge
Personally I love this idea. What are the arguments against?
That it's unfair to tax people differently based on how much they earn. However, if our economy is so horrible that it needs drastic measures to stimulate it, that argument is irrelevant.
Originally posted by FellowshipChurch iBook
Class envy want something for nothing mentality.
Fellowship
If the purpose is stimulation, there is no better way to do it. Everyone will benefit if the economy is stimulated...yes, the rich can still get richer without the tax cut for them. I would argue that the rich would be better off with more money going to the middle and lower classes because with the economy stimulated, those rich business folk will be earning a hell of a lot more money via the stock market.
Originally posted by FellowshipChurch iBook
Class envy want something for nothing mentality.
That's stupid. If it works, it works. It's just stupid to offer aid in a way that doesn't help, or would help significantly less.
I'll gladly approve of a 'refund' that starts just below my tax bracket and includes everyone south of there.
Beyond this, the United Stated depends on $1.6 Billion daily in consumer activity in order to stay afloat. Well actually to maintain it's current debt load. During the 90's people ran up credit card and other high interest consumer debt. Bankruptcies skyrocketed as people discovered they could not pay off all this debt. At the same time these same Americans went for the home refinancing trap to finance more debt, usually on consumer goods; that is, goods that do not generate income.
So now these people are faced with a bad economy and the prospect of losing jobs and having little prospects for immediate re-employment. They are desperately, or should be desperately, attempting to repay the high interest debt they have. So any tax check that comes thier way will go directly to their debtors, though some will foolishly go and get more consumer goods. So the tax money, instead of going into income generating vehicles will actually go right into the hands of the corporations that put Mr. Bush and Dick in power. I mean, I have clients and it would do ME a whole lot of good if they could pay me what they owe me faster rather than invest in their own futures.
The smart thing to do now is to hold taxes right as they are and cut this military spending. It is out of control The costs of one semester of Higher Ed for all students is somewhere around 2% of the entire Federal Budget. If the govt paid for one or two semesters for every student in college not only would it result in real savings by reducing the actual debt that a student would have, but it would go a long way to better prepare the population for furture employment (self-employed preferable). The money that was spent on arming the Military for this war could have gone to various school programs which would have paid dividends in less school delinqency which in turn would have had an effect of the number of crimes, the number of the low skilled unemployed, etc.
But Americans have shown that theyed rather have thier money spent on blowing Iraqis to bits and sending arms to Israel to blow up Palestinians, than take care of "home."
Now, tax cuts. BRussell says tax cuts should be temporary. That's wrong. There are two types of people in the US: Those who think taxes on the whole are outrageously, immorally high....and those who don't. I am in the first group. BRussell's rhetoric on the rich getting richer and poor getting poorer is simply tired and ridiculous. The fact is people have a right to keep their money. It isn't the government's job to redestribute their wealth. We have poor and we have rich. It's not fair, and neither is life. As I have said: We don't just need cuts....we need complete and total reform....such as a low flat tax with no deductions.
Deficits: In the short term, they don't matter. In the long term, they do. I'm too tired to go on more about that.
Originally posted by SDW2001
BRussell's rhetoric on the rich getting richer and poor getting poorer is simply tired and ridiculous. The fact is people have a right to keep their money. It isn't the government's job to redestribute their wealth. We have poor and we have rich. It's not fair, and neither is life.
It's not about redistributing wealth. If the government did that there would be no more super rich. It's about ensuring domestic tranquility and promoting the general welfare. It's also about promoting the progress of science and useful arts. It's also about a freaking post office and roads for the post office to use. It's about a lot of things, but not redistributing wealth.
Originally posted by BR
So, all of the multi-millionaires that will benefit most from this tax cut didn't have the money to spend and influence the economy before? Look, I do have some problems with the rich being burdened with a higher tax rate but that really isn't relevant here. If the point is to stimulate the economy, only the middle and lower classes should receive tax cuts. Keep the number the same...just distribute more money to the middle and lower class and there ya go....stimulation.
This is what I have been saying every time taxes have been discussed in AO.
The richer a person you give money is the more likely it is he put it in the piggy bank.
And about public or private spendings: Public spendings is more likely to generate domestic jobs.
Try it. It worked for us ten years ago when we were in the same mess you are in now. Tax cuts for the poorest and started public spendings. We build two of the longest bridges in the world, a new district and a much needed metro here in Copenhagen and started a lot of other public construction work. All in the 90s. Now we have surplus on state and national budget.
Originally posted by Anders the White
And about public or private spendings: Public spendings is more likely to generate domestic jobs.
Try it. It worked for us ten years ago when we were in the same mess you are in now. Tax cuts for the poorest and started public spendings.
So if it worked for you Anders, why wouldn't this work in the United States?