Economics is complicated. That's why I like it. There are right answers and wrong answers, but no one is sure which is which. It's the kind of stuff that makes your brain turn. I am not an expert, but that doesn't stop me from thinking about it!
First, the economy is nothing more than the resources (money) we spend. There are three parts to this ... what we as consumers spend, what businesses spend, and what the Government spends.
So let's look at consumer spending:
We can stimulate by lowering our taxes, right? This gives us all more to spend so it stimulates the economy. True, and it has worked in the past. But logic says it can't work forever. Eventually taxes get so low that the government can't function. I don't know about you but I like having schools my kids can go to and roads to drive on.
At some point these huge government deficits are unsustainable ... lowering taxes makes that situation worse.
Right now, if our taxes were lower, most of us would save a good chunk of it (or pay off debt). These actions do not help the economy at all. So you've taken a big chunk out of the efficiency of this solution. I get an extra 1000 dollars, but I only spend 200 more than I would have without it. Not a very good return on investment.
A lot of what we would buy with our extra money is actually an import. A good chunk of it would go overseas to China or the like. China in the past has been generous in reinvesting that money in the US Government and US companies. Those investments aren't looking so good now. I doubt they will keep it up.
Some will say that lowering taxes will raise tax revenues in the future because the economy will be stimulated, causing us to earn more, thereby the percentage of our income goes down, but the tax dollars we pay goes up. This may be true at some levels. Logic again says this doesn't work forever. If taxes hit zero, revenue does not go up - there is none! Somewhere there is a line.
Lowering taxes generally affects those who pay taxes so it has a disproportional benefit on the rich. The rich have money, so it makes sense to stimulate the economy by starting with them, but this increases the gap between rich and poor. Trickle down economics is just that ... a very small trickle ever makes it to the poor.
Business Investment:
I don't have much to say on this one other than our tax rates on businesses are high and I don't really understand why. In my uneducated opinion, I would think that lowering this would be the best way to stimulate the economy. Of course, most people would see this as bailing out the CEOs while we little people get nothing. I don't get that. CEOs make way too much ... I agree. But my company also pays my salary, and I kind of like that. We all get paid by companies. If they benefit, we benefit.
Government Spending:
Here is where things get messy. As best I can tell it has never really worked. However, it is still very attractive because the people running the show get to throw lots of money at whatever they want. I read an article in the WSJ the other day saying Obama's team was using a multiplier figure of 1.5 - meaning that for every billion they spend, they think the economy will benefit by 1.5 billion. I totally don't get that! If that's really true, why not spend 10 Trillion, or 100 Trillion ... I mean a 50% return is pretty stinkin' good!
First of all the Government doesn't have the money to spend - so the cost of borrowing money must get added in and it rarely is. This would lower efficiency and take the multiplier below 1.
The government is generally inefficient. They do less with the same amount of money than a private corporation would. This would lower efficiency and take the multiplier below 1.
Government spending takes a long time which leads to inefficiency. Have you ever seen them do anything fast?
Government spending can be focused on domestic investment so this is a big advantage over tax cuts.
Government spending can be focused on the poor which may not do much for the economy, but is a nice plus.
Government spending can potentially use resources (labor, etc.) that would have otherwise been used for private investment. This lowers efficiency. The only way government spending doesn't do this is if every resource the government pays for would otherwise be sitting idle - an impossibility.
Whew! That's enough for now. Here is where I fall after all of this: I think theoretically government spending would work the best if and only if we were smart enough to know how to do it. The problem is, we are not! We may or may not target the right things. The thing I like about lowering taxes is that it allows everyone to try something different which increases the chance that someone will succeed in spurring on the economy. I think this is why tax cuts have proven to work in the past, and government spending results have been debatable.
If I were king for a day ...
First of all, I would have more information and need to be quite a bit smarter, but ignoring that point:
I would lower business taxes and temporarily lower consumer taxes.
I would focus government spending on specific projects that support business. (roads, power, etc.)
I would focus government spending on the poor so that we try to do some good. If we have to spend it somewhere, I would prefer there.
So that's my plan. Similar to what's out there, but different. More business tax cuts, and less government spending (with more focus). Of course, that wouldn't be very good politically for a lot of people ... and that brings us back to what makes government inefficient.
Friday, January 30, 2009
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2 comments:
A few thoughts.
First, the tax rate that businesses pay in the US is not very high. There is a big difference between the statutory corporate tax rate and the effective corporate tax rate. That's not necessarily a reason to rule out lowering corporate taxes but does put the idea into perspective.
I know that a lot of conservative commentators have recently been saying the government spending has never pulled the economy out of a recession. To come to that conclusion, you must ignore several things about the 1930's. One is that the economy improved in the mid-30's, so we cut back on spending and started to lower taxes. The economy took a big turn for the worse right about then. The second, and more significant, is that everyone agrees that WWII is what ended the Depression. Why? Huge government spending (it was not the only factor, but by far the most significant). Our experience with the Great Depression is very clear that in a crisis, a focus on lowering taxes is bad for the economy overall.
I also would quibble with your assertion that government spending is necessarily slow and inefficient. It can be, but is not any more likely to be slow and inefficient than spending in the private sector. Government services like Medicare/Medicaid, Social Security, and the VA healthcare system are vastly more efficient than their private sector counterparts.
The multiplier effect is different depending on what kind of spending is being discussed (which is why we are not talking about a 100 trillion dollar stimulus plan). Direct aid that puts money in the hands of people who will spend it has a very high multiplier effect. Money spent on the poor is probably the best use of money to stimulate the economy because it will be most likely to circulate. The recipient benefits, but so does the grocery store and gas station and children's clothing store, as well as the employees of those businesses, and their suppliers, etc., hense, a multiplier effect. Examples are things like extending and increasing unemployment assistant and increasing SNAP (food stamps).
Other government stimulus does not have as high a multiplier effect, but is still a necessary part of a serious plan. Our infrastructure in crumbling. Projects to rebuild bridges and dams are things that our economy needs in the long run and will provide jobs in the short and medium term. It's actually not a problem that many of these project will take a year or two before starting (although many are ready to go as soon as the money to pay for them is released). Most economist believe that we will still be in this recession for that long, and by then the immediate stimuli will have already run their course. Those project will be round 2 of necessary stimlus, but in order to be ready in two years, they need to be started now.
Thanks for the input - good things to think about! So many smart people disagree ... the only thing I can come up with is that we really don't know. There are just so many factors. Spending on a war certainly hasn't helped us this time around!!
I hope I didn't come across as being against gov spending. I'm good with it as long as we ask 'What is best for the economy?', not any other question. I'm all for many of the other items in the bill - but they shouldn't be in a 'Stimulus'.
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