"Your analysis is perhaps overly simplified. In times such as these, with pathetically low interest rates and virtually unlimited access to capital, it is highly questionable whether another 30 billion in capital investment will enhance capacity in any meaningful way. We are already operating far below capacity in the manufacturing sectors, so where is the incentive to expand further? Unlike the Reagan experience, what we are suffering from at the moment is a crisis in level of demand, not in supply. In such times, a 30 billion "relief" package aimed at the Bentley and Brie crowd cannot honestly be considered an efficient means of redressing our economic woes."
Again, keep in mind that this is a long run initiative. The additional presence of capital may not mean quite as much with really low interest rates, but it provides additional supply of loanable funds in the future. As the demand curve for funds starts to shift to the right, as businesses now actually are starting to increase investment, the additional supply will help keep interest rates a notch lower. Meanwhile, the 70 billion consumers spend does in fact fuel growth in the short run.
Also, consider that the very wealthy often do in fact invest in bad times. When everyone else is selling, it is a perfect time to buy, all else being the same. As for the relatively small amount of capital added, this is true, but is the most that could really be managed. If Bush's tax cut saved taxpayers 500 billion per year in taxes, and half of that was invested, the result would be much larger, but so would the cost. Also, as this is a long run policy, even if the rich do not invest their share when conditions are poor, when conditions pick up, that capital and future capital from the next round of tax cuts will still be there to fuel investment. Even if we wait a couple years, the results will come through eventually.
"It is very likely, given the current state of affairs, that the ratio of 30 billion invested and 70 billion spent is unrealistic anyway--anecdotally, my experience is that a larger fraction will be invested. I happen to be in that crowd, and I invest 100% of the tax "relief;" one of my investment priorities is to shelter a good portion of my assets from the dollar's collapse, which is looking more imminent and less immanent of late. The wealthy have the luxury of being able to hedge on the failure of the U.S. economy. Too bad for the fixed-incomers in this failing state: the school-teachers, the nurses, the firemen."
There's some truth to this, but the 70 and 30 billion were really just there as arbitrary numbers. In this case, the short run impact of consumption would be diminished, and the long run impact of additional capital would be increased. No significant challenge to my overall analysis I think, as one thing increases and the other decreases, reducing the short term and increasing the long term impact. Consider also that invested over one century at a 6% rate of growth, 30 billion dollars becomes 10,179 billion dollars. Granted, inflation will reduce the real purchasing power of this sum, buteven with an inflation rate of 4%, we still are looking at 201 billion dollars in today's dollars.
Regarding the collapse of the dollar, I'm not as confident about that as you are. Central banks in Asia and Europe are concerned about this, as they do not want their exports to diminish. The result is that even with a decline in the relative value of the dollar, there is some protection in that at a certain level, banks will start buying up dollars to prevent their currency from growing too strong. A serious collapse in the dollar will also significantly affect the rest of the world, as the Asian financial crisis of 1998 affected countries far away. We really are an international economy. To an extent, our problems are the world's problems.
Don't take this to mean that I am particularly confident about the future of this country. I'm not, and in fact, I'm quite concerned with out future, though more for what I see as a decay in society, though that is another issue.
"To counter the Progressives, it should be noted that if the entire $100 billion were spent by low-income wage earners in the current economy, the money is not all going to be going for goods and services. Given the large amount of consumer debt held by households in America, a large fraction of that money will simply go toward servicing that debt. Such tax cuts merely ensure that Citicorp gets its due right now at the expense of the greater public's taking on debt in the future. Granted, some of the 100 billion may be spent on growth-stimulating goods and services, but a large fraction will merely go the way of the 30 billion above and be invested by the consumer debt holders in non-growth-inducing ways--buy gold, acquire (but not necessarily develop) real-estate, hold Euros, hire Accenture to offload more services to China and India, etc. While reducing their debt burden may improve the quality of life of the poor and may make future tax cuts geared at them more efficacious, the immediate response will likely be an inefficient stimulus, perhaps even less efficient than tax cuts for the rich."
Here, I cannot say that I agree. First of all, I think you're proposing an alternative, an income tax cut for the poor. The thing is, the poor don't really pay that much income tax, so I'm not sure about this as an option. The rich, who have money to invest, pay a greater share of our taxes relative to their income. This is the logic behind the typical tax cut targeted at upper clases. They will typically invest their money.
Also, if the poor use the tax cut to pay off debt, then future money they would have to use to make debt payments is now free to purchase goods and services. Ultimately, it will still have a positive effect.
"First, I think you accidentally top posted this instead of as a reply to my comment."
This is true. Sorry about that.
"me: And what evidence is there that they are working? To my knowledge, there is absolutely no way to determine whether the jobs that were created in the past few months number more than would have been created if there was no tax cut.
you: Well, by your logic, there also cannot be any evidence that they are in fact not working. Since you seem to be taking the skeptical approach here, which I certainly understand and in fact like, let's just go through some economic theory."
Well, there are seriously complicated ways of tracking capital and helping to determine what invested capital will do. Also, one can consider the long run result of investment on the economy. I didn't want to go into it, so I was willing to say for the sake of argument that the issue you highlighted was a wash, even though in fact it was anything but.
"I have two comments on this.
First, I wonder about your reasoning. Would you use the same lack of evidence as a point of the discussion was on the existence of Bigfoot or the Loch Ness Monster? Or how about in the world of medecine? Should we prescribe drugs that have no evidence as to whether they are helpful or harmful?"
Well, see above. Locating a giant monster in a swamp is a bit easier, all things considered, than tracking every investment and flow of capital. Since macroeconomic theory does such a good job of explaining the performance of the economy in the long run, it was easier to explain. Also, this method of economic analysis is tried and has proven itself to be successful. In addition to complex models of flows of capital, the performance of the economy for as long as we have statistics on it, proves the accuracy of the classical model. The example of drugs is similar. If a drug had proven effective over 100 years, would that not be evidence enough of its effectiveness?
"Second, I'm glad that you brought up economic theory. Did you know that there is absolutely no evidence that neoclassical economic theory has any relevence to the way the real world works? Therein, lies the reason that I'm skeptical of supply-side economics."
First of all, the idea of tax cuts is based on the classical model. I'd prefer to see that used as opposed to neoclassical economic theory. For capitalist economics, this is the classic theory of the performance of the economy in the long run, and explains things very well. You hit snags if you try to use it in the short run, which I have not tried to do. I suggest a brief brushing up on the classical model and glancing at some more trends in the overall macroeconomy. It is fairly easy to understand.
Another problem you encounter is that you make a classic mistake. You say there is no evidence how much of an impact the tax cuts had on the improvement in the economy. Maybe other things helped. When you study economics, however, you look at the correlation between each variable individually. Here, you will find that a tax cut has a positive impact.
"These theories seem especially tenuous to me because they are based on key assumptions such as the presence of perfect competition. I don't know if you've ever looked at the characteristics of the marketplace that are demanded by the state of perfect competition, but they seem to me to pretty far fetched."
First, perfect competition is a microeconomic subject, while we are looking at the classical model to study the macroeconomy. If you study more microeconomics, you will see that economic theory is not based on these assumptions, and that there is accounting for monopoly, competitive monopoly, natural monopoly, and all sorts of imperfect competition. Your assertion that all of this economic theory we are discussing is based on the notion of perfect competition is completely false. Please do some more research. I can sort of understand where you are coming from, but knowingly or not, you are supplying misinformation.
"Now let me address some of the minor points. With regard to the Bush tax cuts being part of a long term plan. If they are part of a long term plan, that long term plan has nothing to do with trickle-down economics. I won't despute that many economists think that tax cuts have positive long term consequences. But that is not what supply side economics is all about."
Both supply side and demand side economic policies try to improve the state of the economy. I'd argue that the Bush tax cut is both a supply and demand side policy. It has positive effects in both areas, and there is no question that wealthy people investing in ventures, starting new businesses, and the like, will lead to improved employment and higher wages, all else being the same."
"Your last sentence is a non-sequitor. What if productivity keeps increasing? Does that not imply that employment will keep decreasing? What reason is there to believe that we are likely to see an increase in employment in the future?"
No, production in an economy is based on number of workers and on productivity. If our economy grows at 3% per year, and productivity increases at anything less than 3% per year, employment will grow. If you look at economic data over time, you will see a clear trend that shows employment increasing during a recession, and decreasing afterwards. If nothing else, a gain in productivity will increase corporate profits, as they can now produce a greater amount with the same amount of employees, or produce the amount they produced before with a lesser number of employees. As profit grows, firms will respond by hiring more employees. In the short run, the effect of productivity is to increase profits by reducing costs, which in the long run leads to increased production and employment.
As for normative and positive differences, positive differences are statements of how the economy works, and normative are statements of values and how things should be. There is great temptation to overlap the two, and you seem to have done it a couple of times.
"But the reason that economists are interested in tax cuts here isn't for the tax cuts, per se. The reason that they are for the tax cuts is to force the government to decrease spending."
This is false. Economists want to forbid Congress from having a structural deficit. Structural deficits are those based on everything other than economic conditions. For example, increased welfare benefits during a recession that further a deficit are part of a cyclical deficit. If you outlaw all deficits, you are binding Congress's hands when there is a recession. Interest in tax cuts exist for their long run benefits. Stopping Congress from spending taxpayer money is a benefit of this, not the cause.
"It is government spending that is the evil here, not the taxes. Supply side economics is the theory that cutting taxes will result in greater government revenue in the short term. It has little to do with the long term effects that are created provided the government both reduces taxes and balances its budget."
This is not true. The idea is to increase revenue in the long run. It is quite plain that if you cut taxes in half, your revenue the next year will be less than it was, unless the economy grows at 100%. This will not happen, so any attempt to ultimately increase revenue can only be valid for the long run. I've never met people who seriously believe that cutting taxes will increase revenue in the short run. That is just absurd.
"Here's an alternative scenario:
Government does not cut taxes by $100 Billion
In response, consumers in the economy don't spend anything extra.
Government spends that $100 Billion on its own projects -- roadworks, schools, military, whatever.
People who work on those Government projects also happen to be consumers
In response, consumers in the economy spend $70 billion and invest $30 billion.
Continue with your steps 3 and 4.
Looks like a wash to me."
A couple of problems exist here. First, while the theory is interesting, the fact is that the government is less efficient than the private sector in its spending and production, meaning each government dollar would be worth more in the hands of private individuals.
Second, you're ignoring the standard of living effect. If we spend an extra 100 billion on our military and it does not need it, even though the money is still being put into the economy, the money is being wasted and could be spent better on something that would make our society better off. The more money the government has, the less is in the hands of private individuals to invest and to use to further economic growth.
One last thing. The government will divert some spending to pay employees a modest salary. 1000 employees making $50,000 per year will typically invest less than some wealth individual who gets a 50 million dollar tax break. The goal of the tax cut in the long run is to increase the amount of investment and funds to make investments, thus increasing our capital stock. As a result, we should give money to those most likely to invest.
"Really, all that's changed is where the money comes from. With the government tax cuts, the money is left in the hands of the rich to invest in what will benefit them the most."
Exactly. The rich invest in whatever is the most profitable and lucrative investment. Guess what happens? This attractive industry receives an infusion of funds and is able to take off. Well, when a company grows, it needs to hire more workers. Labor demand shifts to the right, increasing both the equilibrium wage and the number of people employed.
Oy vey. This ended up being a very long post. I'll be a bit more selective in what I reply to next time, or else this will just become too massive to digest efficiently. Cheers.
Without the government tax cuts, the money gets shuffled to the hands of people who actually need jobs (roadworkers, teachers, etc), so they can invest in what will benefit them most.
Cutting taxes increases spending?
Bullshit. You think think the government just sits on the money? It all goes around one way or another.