Hey Guys
I’m sure you all know that the Senate today passed the Stimulus Package. Well in view of all this and the discussion over which is the correct approach to stimulate the economy. I wanted to share this Article with you all that I found on the Freakonomics Site in hopes of adding clarity to this discussion Tax Cuts vs The Keynesian Model of Government Spending.
Here is the Article written by Justin Wolfers
As the Senate and the House look to reconcile competing stimulus plans, the big debate is whether to emphasize government spending or tax cuts. A new paper by the New York Fed’s Gauti Eggertsson argues that the risk of deflation should tilt the balance to government spending.
Our current problem is deficient aggregate demand. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. If consumers do indeed spend their full tax cuts (a big if), you might think that either approach stimulates aggregate demand in roughly equal measure.
But that’s not the whole story. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.
Under normal circumstances, this doesn’t present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson’s concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there’s the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire. In fact, Eggertsson reckons there’s a chance that tax cuts could even deepen the recession.
Is Eggertson’s conjecture right? Unfortunately the historical record can’t tell us: there’s never been an episode in which we’ve tried reducing taxes when interest rates were this low. When we’re in uncharted waters, we’ve got nothing but economic theory to guide us. And the theory says it’s safer to stick to a spending-based stimulus plan.
Wow, well for me, the bottom line is “You Guys have had eight years of Tax Cuts/Trickle Down Economics and it simply has not work”. So no matter how strong one believes and places faith into a given ideology, when that ideology has been proven not to work, then one should move on to something that does. It makes no difference how much some folks spout, yell and cry foul play, the fact is, it does not work.
God, the universe, life, etc.. has spoken, “Move on and do something that does work”. Placing Faith in something that does not work, still wont work. This is magical thinking at its best and will only lead to dogma and entrenchment.
Bill Harris (His whole article can be read here) said it best when he penned the following
The idea that thinking or hoping by itself will get you what you want is first-class magical thinking. It’s preconventional (see previous posts for what I mean by that). Yes, if you wish for something, every now and then it might happen. This is called a coincidence. A stopped clock is right twice a day, but that won’t help you know what time it is. If Aunt Sally sends you a check right when you need money and after you “put it out to the universe” to “attract some money”, it’s a coincidence, not your mind magically pulling Aunt Sally’s arms toward her checkbook and making her write a check and stick it in an envelope addressed to you. Try using your mind to get Aunt Sally to send a check every week and see what happens.
Meditate on these things, Peace and Love
Filed under: politics, The How Tagged: | Economics, Tax Cuts, The President, The Stimulus Plan
