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Tuesday, February 10th, 2009

Time Event
8:49a
Stimulus: Spending vs. Tax Cuts
A couple of political thoughts:

One of the interesting arguments related to the economic stimulus plan
has been the question of which would prove more effective, spending or
tax cuts. Republicans in particular argue (with some justice) that
deficit spending will prove costly in the long run and require payback
over decades to come. They, however, tacitly argue that tax cuts are
essentially "free" since the government isn't spending money, just
taking in less. This, however is not true: eight years of Bush
administration tax cut policy has in fact increased deficit spending.
Further, spending programs are one-time events. Any tax cut, unless
specifically limited, as the Republicans well know, would likely be
permanent and a further drag on government action, since the political
will to raise taxes is essentially nonexistent.

The argument that tax cuts would be more effective at economic stimulus
or job growth is specious, also proven out by the last eight years.
Despite tax cuts, job growth during the Bush administration has been
slower than at any time since the Great Depression. Real wages have been
stagnant, and there has been essentially no growth in economic areas
other than those fueled by consumer spending, which, as we know, has
been boosted primarily by easy credit based upon (sometimes
non-existent) home equity.

Further, spending programs can be and will be targeted so as to actually
create jobs and put money into circulation, which cannot be said of tax
cuts. Tax cuts have the same problem that uncontrolled bailout funds to
banks have had, only more so since there is less regulatory handle that
can be gotten on use of the funds. A business or individual that gets a
tax cut can do with it whatever they wish, including sitting on it,
paying down debt, paying "bonuses", or increasing dividends to
shareholders. This last does not stimulate the economy nearly as much as
paying wages would, by the way. Most stocks, particularly lately, pay
only cents to dollars per share per quarter, which is hardly noticeable
unless you are a high-volume investor, and which tends to get reinvested
in the company's stock or a mutual fund holding the stocks.

Of course, no one's really sure if any of this will work. The economy is
essentially a consensual group illusion, and the major crisis is that
people have stopped believing in it. However, if either measure is
likely to actually restore confidence, I would say advantage: spending.

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