Tax Cuts or Demand Increase?

"The Third-Term Panic", by Thomas Na...

"The Third-Term Panic"

In upcoming weeks look for news about corporate profits and executive bonuses.  Both will look like stories from pre-recession days, perhaps better.  Then look at the Republicans America elected into office this November.

Republicans have been harping on the need to cut taxes, reduce government spending, and ease regulation on business as the way to restart our economy.  The problem with their argument is so simple that even a conservative IQ can grasp the errors inherent in this argument. 

First of all, high taxes, government spending, and excessive regulation were not the causes of the current recession.  In fact, if anything, you might draw a cause-and-effect conclusion that tax cuts, smaller government, and less regulation caused the problem.  I won’t make that argument, but using the unsophisticated logic popular with Republicans it would be more plausible to believe that than anything conservatives argue today.  Haven’t we just concluded three decades of trying to do less with less? 

But back to the profits and bonuses.  Profits at the Fortune 500 companies regained their losses earlier this year and have been building ever since.  Economic productivity at the same time grew, and even surpassed historic averages, in recent quarters.  And this recent productivity growth was accomplished with millions of Americans unemployed.  (Some of that is due to how GDP is calculated.  Outsourced work by American companies counts in US GDP  calculations.) 

We have an economy that is entering a jobless recovery and that may be the start of defining a new normal in this country.  We are, in essence, in a global economy more than we are in a national one, let alone an economy that is defined at the state and local level.  Republican “solutions” — when they are the most sincere — treat economic opportunity in outdated, overly-simplified concepts that are essentially ahistorical and out of touch with the new global reality.  (In a post last week I wrote about the challenges we will have with matching our lifestyle expectations with what a global wage market will offer in the future.)

Local jobs will not pick up until local demand for goods and services increase and even then there is no guarantee that jobs will develop locally.  American labor cannot compete on a global labor market without some competitive advantage to change the trend to more profitable outsourcing.  Arguments from the conservative right for tax cuts for “job providers” fails to understand this fact. 

Wages and Productivity

It is more of the failed supply-side argument that hasn’t delivered the promised prosperity.  Real wages for most Americans have been flat or declining in real dollars while economic inequality between the haves and have nots is at levels last seen in this country in 1928. 

Money isn’t a problem that tax cuts will solve.  Again, corporations have huge reserves of cash.  There is no compelling reason for these corporations to reinvest…at least not in the United States.  Some industries — such as finance — can profit on the spread between record low interest at the Fed and rates on government bonds.  Borrow from one, buy the other, pocket the profit.  No need to hire anyone.  Cash is not the problem. 

Furthermore our wealthiest Americans are not opening local roofing companies and beauty salons.  They are investing in funds that pool assets and play in the global economy.  So is your 401(k), by the way.  Conservatives remind us that people making $250,000 are not wealthy and they argue that that amount is the threshold for most small business owners in the United States.  I won’t argue that point.  I’ll agree.  However, a tax increase on that level would be too modest to influence hiring decisions.  First of all, if business is not hiring with the current tax cuts it is hard to argue that those tax cuts generate hiring.  (Right?!)  And if you give additional tax cuts on incomes at that level you have to ask yourself if you think an additional few hundred dollars in tax savings would be enough to make a new hire.

Think about it with an example.  Pretend you are a roofing contractor.  Business is what it is, good or bad.  If you hire an extra crew of roofers, will that increase sales?  Or will you have a bunch of idle roofers sitting around?  You’ll hire roofers when there is a need to hire roofers.  You’ll hire them as long as you make a profit regardless of taxes.  The tax argument is a red herring that is leading to stupid policy decisions in this country.  Time to change. 

Tax Cuts Are Not Cheap

Business — large and small — is unsure of future demand.  No one is buying.  Tax breaks to people who are already banking  their cash reserves will only add to their reserves.  Nothing wrong with saving, not arguing against that, but saving will not restart the economy.  And this again leads to another fallacy propogated by the GOP

Cutting government spending, especially federal spending, is not going to help the economy.  Republicans are abusing the economic crisis to further an agenda of small government and privatization.  It serves them well.  We get misleading arguments about tax cuts and even more shift of public services to the private sector.  They can squawk about reforms and get them pulled back.  All of these things are counterproductive in a recession. 

Short-term deficit spending introduces demand in the economy.  Demand is what we need.  Demand is good.  Government investment in public goods and infrastructure increases demand in local economy sectors that create local jobs.  Once that happens we need to keep pushing the economy for momentum.  When that happens we can again look at sustained GDP growth.  Sustained GDP growth is good.  Would you rather have the lifestyle opportunities of 1900 or 2000?  Economic growth makes the difference…for everyone.

Rarely can people take a side in a political argument and say that the opposition is completely wrong.  Today we can make that statement about the political right in this country.  The tea-infused right is absolutely wrong…immoral or blind, I’m not sure which, likely a mix, but in either case not good for America.  When people like Palin, Beck, Bachmann and even that little Faustian, Tim Pawlenty, can lead economic discourse in this country versus trained economists, we have problems that go beyond our economic situation.  (We got problems.)

In summary (I have to go out and grab a beer), conservative government isn’t the solution to our problem, conservative government is the problem. 

(Reagan is turning out to be a bit of a Mephistopheles, isn’t he?  Sure plied his magic with people like Pawlenty well enough.)


2 thoughts on “Tax Cuts or Demand Increase?

  1. U No Hu

    this was really good. but now we’re going to have to shift to a war in Korea–a war we’re sure to find the money to fight. will it save the economy? like the first Korean war did?

  2. U No Hu

    don’t apologize, and don’t characterize your writing for what it sounds like you assume is your stupid reader. please let the reader make up his own mind and demand apologies, if that becomes necessary


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