At the moment, tax cuts make up 42 percent of the so-called stimulus bill. This dooms it to be ineffectual, if not actually making things worse. The latter will happen because this is all borrowed money. Public investments provide the means to repay it by improving commerce and productivity. Tax cuts just piss it away. Where are the fighting liberals who are going to filibuster this mess and make the president realize his bipartisanship dance has only reinvigorated the Republicans, the party that wrecked America?
In 2003, Nobel laureate economist Paul Krugman laid out the exhaustive case against the cult of tax cuts, in a must-read, must-keep article in the New York Times Magazine. Yet this remains the only idea of the GOP, the party that wrecked America. And it has been given center stage by a naive president and weak Democrats who don't know how to act as winners. As a consequence, public investments in infrastructure, the best way to generate jobs and a return for the future, have been pared back. The perfect should not be the enemy of the good. But this is a rotten bill, and it is the enemy of the good, whether the punked good has realized yet or not.
Context is important to understanding how tax cuts work. John F. Kennedy cut tax rates in the early 1960s, providing incentives to invest, which in turn created jobs. This worked because top tax rates were very high, and arguably kept capital in shelters instead of being used for productive purposes. The same move worked, to a degree, for Ronald Reagan, although rates were not as high. Unfortunately, in Reagan's case the resulting investment boom was often acted out in destructive financial plays and mergers. Still, millions of jobs were created. Yet Krugman debunks the idea that this brought in more money to the Treasury than if rates had remained at their Carter levels. And combined with a major arms build-up, these tax rate cuts created record deficits. (To be fair, the Gipper was pragmatic enough to later raise some taxes, as did George H.W. Bush). A slight rise in the rates for the top earners in the Clinton years refilled the Treasury and gave George W. Bush a surplus.
Bush cut taxes, but this time the reliable old contraption misfired. Although the economy went into a mania of mergers and financial plays, job creation was the slowest in decades. Incomes of wage earners stagnated or declined — this was cloaked by the Fed-induced housing bubble. Meanwhile, the well-off — people who make their living from investments, rather than wages — did better than ever. With very low capital-gains taxes and an eviscerated estate tax, investors and family dynasties reached levels of wealth not seen since the run-up to the Depression. The same was true for the disparity between rich and poor. We now have a genuine oligarchy with interests at odds with the national interest. With the help of fighting an elective war, Bush left a monstrous economic calamity and monstrous deficit.
What happened? Arguably, rates fell too low to stimulate productive new capital use that would be widely beneficial. In a global economy, what investment that was stimulated by cutting taxes on the wealthy resulted in investments in China, India, eastern Europe, etc. This was a different case from Kennedy's time, or even Reagan's. So while tax-rate changes can influence behavior, we now know they are not a panacea. We know that rates too low only widen the gulf of incomes and grow deficits and debt. Now is not the time to raise tax rates. But that time must come.
On a more fundamental level: there's no free lunch. It costs money to operate an advanced nation, including the duties of government. Americans want their tax cuts and their government services — and so insular are they out in suburbia, they don't even realize Americans pay far lower taxes than other advanced nations (and get less for it, including an educational system that fails to prepare more people to rise to good jobs). Now, thanks to a quarter century of bad policy, we have a mindset of entitlement. Tax cuts! Tax cuts! Tax cuts! Do the duhs and ignos realize they are being played by the oligarchy that controls our politics — and keeps them in low-wage jobs frying their minds on cheap TVs from Wal-Mart?
The rebates to "average Americans" are especially wasteful, as we also learned under President Bush. With $1 trillion in unpaid credit-card debt alone, these Americans are not going to stimulate the economy with $500 checks. They would with, say, well-paid, secure jobs manufacturing transit equipment, rebuilding our passenger rail system and operating a 21st century rail network. Oh, wait — that has to be killed or scaled back for more tax cuts.
When you’ve got Martin Feldstein essentially saying Keynes is the only way to go, there’s really not much left to argue over. The problem for Obama was not the facts themselves, it was the surreality of the debate. Instead of informed opinion dueling with other informed opinion, there’s Compromise and Ignorance screaming at one another from across the room. Citizens are understandably zoned out. The crazy person arguing with himself behind the bus station makes more sense.
Obama’s style here, as Krugman pointed out this morning, is a matter of giving away your hand before the other players have even bid. Nice to be nice but it helps if you think your viewpoint matters. Such are the perils of postpartisan bonhomie.
Obama is going to have a tough time getting this right even with the best possible legislative outcome. He didn’t create this crisis but he willingly assumed responsibility anyway. Magnanimity of this order is not usually rewarded by the beltway Darwinists. I hope Obama remembers, if for a brief moment, who voted for him.
Soleri-
Please don’t call them Darwinists. Darwin was all about natural selection. There is nothing natural about the blatant manipulation that they are all trying to implement in different ways. Even the Republicans so-called free market is not really an example of natural selection.
Darwin Day is February 12th, his 200th Birthday (shared with Abraham Lincoln).
Your messiah is in over his head.
https://www.telegraph.co.uk/comment/personal-view/4561229/Barack-Obama-is-a-novice-and-it-shows.html
You better remember 46% of this country didn’t vote for this empty suit.
Jon,
I am SOOOOOOOO glad you don’t have to mince words at all!
Mr. Talton has convincingly argued why small checks to net debtors may bleed off a considerable portion of the stimulus, if they use it to service debts and pay bills. Any stimulus plan ought to take this effect into account and budget in an offset.
At the other end, the reason why tax cuts to the wealthy won’t stimulate the economy is that they already have more disposable income than they can spend on consumption: if they were living check to check they wouldn’t be wealthy. Income not used by them for consumption doesn’t stimulate the economy: instead, it goes into speculative investments or (in the current market environment) into safe savings instruments. Again, that does nothing to stimulate the economy.
What is needed is to take money (preferably by taxation, but by borrowing if necessary to do it quickly) from those with large amounts of funds devoted to these non-consumption purposes, and give it to those who don’t earn enough to satisfy their desires for consumption, or whose earnings are insufficiently large, in the present economic context, to make consumption spending a comfortable option.
This means redistributing funds from the wealthy to the working and middle classes, starting with the working class since they are the ones most likely to spend it on consumption (provided it is sufficiently large to avoid the problem Mr. Talton elucidated).
Expecting tax cuts to stimulate the economy is like expecting job cuts to make a company healthy. The first time you try it, it will likely work because there really is something that should be cut.
After you’ve made job cuts over and over, year after year, you’ll reach a point where the people you have left can’t keep the business going because there is too much work to do and not enough people to do it. Every possible economy of efficiency has been adopted. Further job cuts make the company fail by their inability to deliver goods or services.
In the same way, tax cuts only work work for so long. Jon and the commenters above have given mamny reasons to suppose that it won’t work this time. Even if it does work, it will not work as well as before. It will almost certainly not be enough on its own. Something else is needed and Jon has made some good suggestions.
Jon, I actually disagree about JFK’s and Reagan’s tax cuts. The highest period of economic growth in our history coincided with the highest marginal tax rates. One of the main ways the wealthy “sheltered” their money was by putting back in their own business, which (of course) created jobs.
Also, I always find it ironic when conservatives insist that cutting taxes actually puts more revenue into government coffers. My response is to them is, “Well, why would you want that?” Seems to me that if that’s truly the case, then the Grover Norquists of the world would have been demanding higher taxes all along, so as to hasten the glorious day of bathtub drowning.