shanek
14th June 2003, 03:29 PM
Here's an excellent description, full of sound economics, as to why Republican "Tax Cuts" just don't work:
On May 28 President Bush signed into law a $350 billion package of tax cuts and state aid. Millions of Americans will begin to see the effect of the package within weeks, in the form of bigger paychecks. Also, in July some 25 million families will receive up to $400 per child in tax credits.
With more money in their pockets, the President believes Americans will be able to spend more and this will speed up economic recovery. According to President Bush,
"By ensuring that Americans have more to spend, to save and to invest, this legislation is adding fuel to an economic recovery. We have taken aggressive action to strengthen the foundation of our economy so that every American who wants to work will be able to find a job."[/b]
The belief that putting more money in consumers' pockets will revive the economy is based on the popular view that a given dollar increase in consumer spending will lift economic activity in terms of gross domestic product (GDP) by a multiple of the increase in consumer expenditure. An example will illustrate the magic of this multiplier.
[The article here describes what I have in other threads detailing how lending creats money in the economy.]
The magic of 'the multiplier' however, is just wishful thinking. Every activity in an economy has to be funded and therefore it is always in competition with other activities for scarce real funding. Hence if more is spent on consumption goods, less is left for capital goods. An increase in retailers' activity will be offset by a decline in the activity of capital goods producers.
It is therefore not possible to lift the pace of general economic activity without an increase in the sources of funding. In other words, for a given pool of real funding any increase in some activities must mean less funding for other activities. Now if it would have been otherwise then by the magic of the multiplier we could have generated an almost unlimited prosperity.[1]
The proponents of the tax cuts are, however, of the view that tax cuts generate incentives to work harder and provide incentives for businesses to expand their activities. Again, without an expanding pool of real funding irrespective of tax cuts announcements no general expansion in economic activity can emerge. For every expansion in activity of some businesses, some other businesses will not have the required funding to embark on expansion.
Now, what does it mean to lower taxes? It means that Americans should have greater access to the pool of real funding. The only way this can be made possible is if government access to the pool is reduced. After all, in similarity to all other activities, government activities must also be funded.
Thus when government decides to promote a particular activity, this means that the government will supply various individuals that are engaged in this activity with money. The received money in turn will permit individuals in that activity to access the pool of real funding.
Since government is not a real wealth generator it relies on its sources of funding from the private sector. This in turn means that the more government spends the less real funding will be available for the wealth generating private sector. Obviously this will impede the creation of real wealth and impoverish the economy as a whole. Observe that if government could generate real wealth, it wouldn't need to tax the private sector.
Looking at the history of government outlays shows relentless increases. For 2004 the President's budget outlays stand at $2.229 trillion[4]. This is an increase of 19.8% on the outlays in the 2001 budget, which President Bush inherited from President Clinton (see chart). Per capita government outlays since 2001 increased by 17.2% (see chart).
So long as the pool of real funding is expanding various fiscal tricks appear to work—the muliplier seems to be the real thing. It is only once the flow of savings disappears all together on account of reckless fiscal and monetary policies that the facts of reality begin to assert themselves. Once this happens, irrespective of loose policies the economy falls into a severe slump.
In this regard, the government-compiled data indicates that the pool of real funding may be in trouble. Since 1986 real disposable income adjusted for imputations was below real consumer outlays. Consequently real personal savings, which are the difference between real disposable income and real consumer outlays, have been negative since 1986. In 2002 real personal savings stood at -$321 billion against -$363 billion in 2001 (see chart). The personal savings rate stood at -8.3% in 2002 against -9.8% in 2001 (see chart).
http://www.mises.org/fullstory.asp?control=1243
Tax cuts are meaningless unless they are met with spending cuts. Further, government spending does not create wealth in the economy. All it does is take money that would have been spent one way and spends it a different way.
If Bush & Co. were really concerned with fiscal responsibility, they would be working to reduce the overall amount of government spending and delivering real tax cuts with it. They certainly wouldn't be growing government at a rate that would make even Bill Clinton's eyes spin in their sockets.
On May 28 President Bush signed into law a $350 billion package of tax cuts and state aid. Millions of Americans will begin to see the effect of the package within weeks, in the form of bigger paychecks. Also, in July some 25 million families will receive up to $400 per child in tax credits.
With more money in their pockets, the President believes Americans will be able to spend more and this will speed up economic recovery. According to President Bush,
"By ensuring that Americans have more to spend, to save and to invest, this legislation is adding fuel to an economic recovery. We have taken aggressive action to strengthen the foundation of our economy so that every American who wants to work will be able to find a job."[/b]
The belief that putting more money in consumers' pockets will revive the economy is based on the popular view that a given dollar increase in consumer spending will lift economic activity in terms of gross domestic product (GDP) by a multiple of the increase in consumer expenditure. An example will illustrate the magic of this multiplier.
[The article here describes what I have in other threads detailing how lending creats money in the economy.]
The magic of 'the multiplier' however, is just wishful thinking. Every activity in an economy has to be funded and therefore it is always in competition with other activities for scarce real funding. Hence if more is spent on consumption goods, less is left for capital goods. An increase in retailers' activity will be offset by a decline in the activity of capital goods producers.
It is therefore not possible to lift the pace of general economic activity without an increase in the sources of funding. In other words, for a given pool of real funding any increase in some activities must mean less funding for other activities. Now if it would have been otherwise then by the magic of the multiplier we could have generated an almost unlimited prosperity.[1]
The proponents of the tax cuts are, however, of the view that tax cuts generate incentives to work harder and provide incentives for businesses to expand their activities. Again, without an expanding pool of real funding irrespective of tax cuts announcements no general expansion in economic activity can emerge. For every expansion in activity of some businesses, some other businesses will not have the required funding to embark on expansion.
Now, what does it mean to lower taxes? It means that Americans should have greater access to the pool of real funding. The only way this can be made possible is if government access to the pool is reduced. After all, in similarity to all other activities, government activities must also be funded.
Thus when government decides to promote a particular activity, this means that the government will supply various individuals that are engaged in this activity with money. The received money in turn will permit individuals in that activity to access the pool of real funding.
Since government is not a real wealth generator it relies on its sources of funding from the private sector. This in turn means that the more government spends the less real funding will be available for the wealth generating private sector. Obviously this will impede the creation of real wealth and impoverish the economy as a whole. Observe that if government could generate real wealth, it wouldn't need to tax the private sector.
Looking at the history of government outlays shows relentless increases. For 2004 the President's budget outlays stand at $2.229 trillion[4]. This is an increase of 19.8% on the outlays in the 2001 budget, which President Bush inherited from President Clinton (see chart). Per capita government outlays since 2001 increased by 17.2% (see chart).
So long as the pool of real funding is expanding various fiscal tricks appear to work—the muliplier seems to be the real thing. It is only once the flow of savings disappears all together on account of reckless fiscal and monetary policies that the facts of reality begin to assert themselves. Once this happens, irrespective of loose policies the economy falls into a severe slump.
In this regard, the government-compiled data indicates that the pool of real funding may be in trouble. Since 1986 real disposable income adjusted for imputations was below real consumer outlays. Consequently real personal savings, which are the difference between real disposable income and real consumer outlays, have been negative since 1986. In 2002 real personal savings stood at -$321 billion against -$363 billion in 2001 (see chart). The personal savings rate stood at -8.3% in 2002 against -9.8% in 2001 (see chart).
http://www.mises.org/fullstory.asp?control=1243
Tax cuts are meaningless unless they are met with spending cuts. Further, government spending does not create wealth in the economy. All it does is take money that would have been spent one way and spends it a different way.
If Bush & Co. were really concerned with fiscal responsibility, they would be working to reduce the overall amount of government spending and delivering real tax cuts with it. They certainly wouldn't be growing government at a rate that would make even Bill Clinton's eyes spin in their sockets.