Paul BoudreauOn Economic Recovery and Tax Cuts
March 29th 2011 18:41
:
A Hypothetical Conversation With A Believer
Hiya Folks,
Hope everyone's weekend was fantastic. I spent mine (absent from our little home on the web here) writing a couple of papers (one of which I may try to reprise here on the blog.... stay tuned) and generally getting my course work under control. It's crunch time in the world of Paul (which made the incident involving my laptop and all of my paper notes, my water-proof bag, and the canteen that decided to spontaneously open inside my bag this morning all the more convenient. My screen now makes it feel like I'm typing this inside an aquarium. But I digress.).
However last night as I was going to bed at an ungodly hour I shall not mention I performed a little thought experiment. I was thinking about the economic recovery slowly coming around in most of the world and how fragile it is. This is especially important in the context of the budget debates going on in Washington, state capitals across the country, op-ed pages, and around the world, as economists and politicians rehash the debate of Keynesian interventionism versus Friedmanite style monetarism. Are spending cuts and austerity regimes the way to go? Or is it progressive taxation and government stimulus that provides the solution? Or should we pull a libertarian fast one, defund everything and go back to living in caves?
Now, in case my previous posts haven't made this at least somewhat clear, I'm a progressive. I firmly believe in the role that Keynesian thought proscribes to the state, namely as the guarantor of stability and provider of all aspects of security for the nation. This requires taxation in the good times (of which I think the American government has not done enough) and deficit spending to usher the economy through the bad.
In the spirit of intellectual honesty, though, I do recognize that the view that I subscribe to is not the only one, and that the other (though wrong) has been well thought out (to a limited extent) and is firmly believed in by a lot of intelligent and well intentioned people... who just happen to be wrong.
So last night I was thinking to myself, what would it be like to have "The Big Talk" with a monetarist? I mean, up here in the great socialist paradise that is the People's Confederation of Canada (that was hyperbole Republican Readers, we're not communists, please don't nuke us) even my macro-economics professor is a Keynesian interventionist (disclaimer, he's actually on a Soros funded panel in the near future... run with that one Glenn beck and all you conspiracy nuts. Ok, that was unkind... I'm just feeling a little angry about my computer right now. I apologize to all nuts for comparing you to Glenn Beck viewers.).
So, here, after that long-winded explanation of how I got there, is an approximate transcript of what that conversation might sound like. We'll call the monetarist Mo for short:
Me: Hello Mo, how are you today? (I'm Canadian, it entails being polite even with people who disagree with you).
Mo: Not great. The economy is in the dumps and the deficit is rising by the day. My congressman (assume for the sake of argument that we're Americans for a moment) told me he was going to cut spending by $100 Billion this year and balance the books as soon as possible and the Democrats are holding it up.
Me: And you believed him? I thought you didn't trust politicians.
Mo: That's Why I voted for the Tea Party guy! His platform was pro-gun, freedom, liberty and against everything I don't want to believe in. Plus we won't have to pay taxes anymore. And he said that he wouldn't have voted for the bank bailouts or the stimulus. Now that's my kind of responsible government.
Me: That sounds like no government to me. But never mind, aren't you worried that slashing spending will hurt the recovery?
Mo: No! The Tea Party promises no new taxes, and even made a law saying that new spending couldn't be offset by tax increases. They also want to cut taxes as much as possible, especially on corporations, so that real people can spend their money how they want and stimulate the economy.
Me: But corporations aren't reinvesting the money the record profits they're already making in job creation. People are still out of work and that situation's not really improving. Plus, because of tax law loopholes, big corporations like GE almost never pay anything close to the taxes they owe.
Mo: What, you want to penalize them for being smart? I can't believe you Keynesians, always wanting to redistribute the successful people's wealth to the lazy and unsuccessful. Don't you see that stimulus and social safety nets just create the moral hazard of knowing you can't fail? Where's the incentive for success?
Me: Some people would call that the stability required to take advantage of opportunity, and taxation the cost of doing business in a stable society. But back to tax cuts, how do you pay for government without taxation?
Mo: Who needs big government? The market is more efficient at providing services at a lower cost to the consumer, and allows for people to stimulate the economy more effectively through consumer spending and choice. If we free up capital for banks and corporations to lend, the consumers and businesses who can then borrow it will spend more and create the demand you're always harping about.
Me: (mutters something unintelligible about the U.S. private insurance system having one of the worst dollar for service health sector ratios in the industrial world)
Mo: What was that?
Me: Nothing... I don't want to get you started on it... but banks and businesses have some of the largest liquid asset bases in the history of the marketplace today. There's just a lack of qualified borrowers on the consumer side, with most people maxed out in terms of sustainable personal debt, and why would businesses borrow to expand when there's not enough consumer spending to justify current production (hence all the job losses)? We need more stimulus from the government in order to create jobs and enhance demand.
Mo: Listen. Government activity in the market kills jobs by killing choice. We've known that since the 1970's, or even since Hayek's "Road to Serfdom". Killing jobs by killing choice. It's fact. FACT.
Me: Just repeating a bad idea at a louder volume and calling it fact doesn't make it a better idea.
Mo: GOVERNMENT SPENDING KILLS JOBS!!!
Me: But what about the marginal propensity to consume? Based on the likelihood of people to spend only a portion of their earnings when factored into the spending multiplier effect, a round of government spending is, by definition, going to have a larger effect on aggregate demand than tax cuts.
Mo: You lost me. What was that?
Me: It's called accepted economic theory. You know, logic? Basically, if people spend, let's say, 75% of their take home earnings and save the rest, then the subsequent wave effect of this spending will decrease accordingly with each round of spending. So if you cut taxes, you will start with 75% of that tax cut actually going directly back into the economy, and then 75% of that amount, and so on. This takes the form, mathematically, of 1 divided by 1-3/4, or 1 over 1/4, which gives you a multiplier of 4.
Mo: Which means that tax cuts are worth 4 times as much as they cost! Awesome. I win.
Me: Except that government spending actually, by definition, ADDS its value to the economy, instead of just not taking it away (especially if its funded by deficits in bad times.) So for that last example, the formula becomes 1 (1 over 1-3/4), or 1 (1 over 1/4), or 1 4, which equals a multiplier effect of 5.
Mo: (covers ears and hums Alan Jackson songs until I'm done speaking).
I'm sorry, did you say something? I was just thinking about how awesome tax cuts and Scott Walker are.
Me: I don't know why I even bothered. We should probably stop talking about this now if we want to stay friends.
Mo: Oh, we can't be friends any more. Glenn Beck says you want to steal my money and success and Sarah Palin says you want to kill my Grandma. You communist!
Me: I don't even know where to begin.
En Fin
So that's the kind of stuff I think about when I go to bed. I'm going to end there for the day (although maybe I'll get another post up on something less frustrating later. We'll see how it goes, I'm pretty sleep deprived today.
Feel free to correct my math, economic thinking or general outlook on life in the comments section. Always looking for feedback!
and follow my Twitterings!
Cheers,
PSRB
Hope everyone's weekend was fantastic. I spent mine (absent from our little home on the web here) writing a couple of papers (one of which I may try to reprise here on the blog.... stay tuned) and generally getting my course work under control. It's crunch time in the world of Paul (which made the incident involving my laptop and all of my paper notes, my water-proof bag, and the canteen that decided to spontaneously open inside my bag this morning all the more convenient. My screen now makes it feel like I'm typing this inside an aquarium. But I digress.).
However last night as I was going to bed at an ungodly hour I shall not mention I performed a little thought experiment. I was thinking about the economic recovery slowly coming around in most of the world and how fragile it is. This is especially important in the context of the budget debates going on in Washington, state capitals across the country, op-ed pages, and around the world, as economists and politicians rehash the debate of Keynesian interventionism versus Friedmanite style monetarism. Are spending cuts and austerity regimes the way to go? Or is it progressive taxation and government stimulus that provides the solution? Or should we pull a libertarian fast one, defund everything and go back to living in caves?
Now, in case my previous posts haven't made this at least somewhat clear, I'm a progressive. I firmly believe in the role that Keynesian thought proscribes to the state, namely as the guarantor of stability and provider of all aspects of security for the nation. This requires taxation in the good times (of which I think the American government has not done enough) and deficit spending to usher the economy through the bad.
In the spirit of intellectual honesty, though, I do recognize that the view that I subscribe to is not the only one, and that the other (though wrong) has been well thought out (to a limited extent) and is firmly believed in by a lot of intelligent and well intentioned people... who just happen to be wrong.
So last night I was thinking to myself, what would it be like to have "The Big Talk" with a monetarist? I mean, up here in the great socialist paradise that is the People's Confederation of Canada (that was hyperbole Republican Readers, we're not communists, please don't nuke us) even my macro-economics professor is a Keynesian interventionist (disclaimer, he's actually on a Soros funded panel in the near future... run with that one Glenn beck and all you conspiracy nuts. Ok, that was unkind... I'm just feeling a little angry about my computer right now. I apologize to all nuts for comparing you to Glenn Beck viewers.).
So, here, after that long-winded explanation of how I got there, is an approximate transcript of what that conversation might sound like. We'll call the monetarist Mo for short:
Me: Hello Mo, how are you today? (I'm Canadian, it entails being polite even with people who disagree with you).
Mo: Not great. The economy is in the dumps and the deficit is rising by the day. My congressman (assume for the sake of argument that we're Americans for a moment) told me he was going to cut spending by $100 Billion this year and balance the books as soon as possible and the Democrats are holding it up.
Me: And you believed him? I thought you didn't trust politicians.
Mo: That's Why I voted for the Tea Party guy! His platform was pro-gun, freedom, liberty and against everything I don't want to believe in. Plus we won't have to pay taxes anymore. And he said that he wouldn't have voted for the bank bailouts or the stimulus. Now that's my kind of responsible government.
Me: That sounds like no government to me. But never mind, aren't you worried that slashing spending will hurt the recovery?
Mo: No! The Tea Party promises no new taxes, and even made a law saying that new spending couldn't be offset by tax increases. They also want to cut taxes as much as possible, especially on corporations, so that real people can spend their money how they want and stimulate the economy.
Me: But corporations aren't reinvesting the money the record profits they're already making in job creation. People are still out of work and that situation's not really improving. Plus, because of tax law loopholes, big corporations like GE almost never pay anything close to the taxes they owe.
Mo: What, you want to penalize them for being smart? I can't believe you Keynesians, always wanting to redistribute the successful people's wealth to the lazy and unsuccessful. Don't you see that stimulus and social safety nets just create the moral hazard of knowing you can't fail? Where's the incentive for success?
Me: Some people would call that the stability required to take advantage of opportunity, and taxation the cost of doing business in a stable society. But back to tax cuts, how do you pay for government without taxation?
Mo: Who needs big government? The market is more efficient at providing services at a lower cost to the consumer, and allows for people to stimulate the economy more effectively through consumer spending and choice. If we free up capital for banks and corporations to lend, the consumers and businesses who can then borrow it will spend more and create the demand you're always harping about.
Me: (mutters something unintelligible about the U.S. private insurance system having one of the worst dollar for service health sector ratios in the industrial world)
Mo: What was that?
Me: Nothing... I don't want to get you started on it... but banks and businesses have some of the largest liquid asset bases in the history of the marketplace today. There's just a lack of qualified borrowers on the consumer side, with most people maxed out in terms of sustainable personal debt, and why would businesses borrow to expand when there's not enough consumer spending to justify current production (hence all the job losses)? We need more stimulus from the government in order to create jobs and enhance demand.
Mo: Listen. Government activity in the market kills jobs by killing choice. We've known that since the 1970's, or even since Hayek's "Road to Serfdom". Killing jobs by killing choice. It's fact. FACT.
Me: Just repeating a bad idea at a louder volume and calling it fact doesn't make it a better idea.
Mo: GOVERNMENT SPENDING KILLS JOBS!!!
Me: But what about the marginal propensity to consume? Based on the likelihood of people to spend only a portion of their earnings when factored into the spending multiplier effect, a round of government spending is, by definition, going to have a larger effect on aggregate demand than tax cuts.
Mo: You lost me. What was that?
Me: It's called accepted economic theory. You know, logic? Basically, if people spend, let's say, 75% of their take home earnings and save the rest, then the subsequent wave effect of this spending will decrease accordingly with each round of spending. So if you cut taxes, you will start with 75% of that tax cut actually going directly back into the economy, and then 75% of that amount, and so on. This takes the form, mathematically, of 1 divided by 1-3/4, or 1 over 1/4, which gives you a multiplier of 4.
Mo: Which means that tax cuts are worth 4 times as much as they cost! Awesome. I win.
Me: Except that government spending actually, by definition, ADDS its value to the economy, instead of just not taking it away (especially if its funded by deficits in bad times.) So for that last example, the formula becomes 1 (1 over 1-3/4), or 1 (1 over 1/4), or 1 4, which equals a multiplier effect of 5.
Mo: (covers ears and hums Alan Jackson songs until I'm done speaking).
I'm sorry, did you say something? I was just thinking about how awesome tax cuts and Scott Walker are.
Me: I don't know why I even bothered. We should probably stop talking about this now if we want to stay friends.
Mo: Oh, we can't be friends any more. Glenn Beck says you want to steal my money and success and Sarah Palin says you want to kill my Grandma. You communist!
Me: I don't even know where to begin.
En Fin
So that's the kind of stuff I think about when I go to bed. I'm going to end there for the day (although maybe I'll get another post up on something less frustrating later. We'll see how it goes, I'm pretty sleep deprived today.
Feel free to correct my math, economic thinking or general outlook on life in the comments section. Always looking for feedback!
and follow my Twitterings!
Cheers,
PSRB
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