Tax cuts to end fiscal stimulus: a fallacious opposition?

brainstorm

I was reading the post about fallacious contradictions such as reality being an illusion or truth being non-existent and the one that came to mind was the idea that tax cuts are a way to end fiscal stimulus by government spending.

Maybe from a tax-payer's point of view, they are simply keeping more of what they got in the first place, but from a fiscal economic perspective, I think the effect of lowering taxes and increasing take-home pay is exactly the same as injecting money through other kinds of government spending to stimulate spending. Either way, some people are getting more money in their bank accounts than they had the year before.

Do you think this qualifies as a fallacious contradiction or is government spending really the opposite of lowering taxes?

mgb_phys

Macro-economically they are identical, in reality the government spending and tax cuts are targeted at different people and have wildly different effects.

brainstorm

Are you sure about the different effects? Don't they both just end up as consumer spending eventually one way or the other?

mgb_phys

Different consumers spend differently.
If you give back a few $M in tax cuts to Bill Gates it doesn't have quite the same effect as creating a million minimum wage jobs.

Suppose everyone was fiscally responsible and you gave them a tax-cut, they would use it to pay off any debts/mortgage and the remainder would be put in their retirement fund. That doesn't generate an economic recovery.
What you need is for people to immediately blow the tax cut in bars and restaurants generating income for businesses that employ lots of people who pay tax.

It's one of the ironies of economics that you need people to be irresponsible with money in a downturn and responsible in a boom!

turbo

Tax cuts to the rich don't work. If you want immediate economic stimulus you have to give it to the people who need it. Look at the chart at the bottom of this page and see where the big bumps are. There are lots of types of spending that create more stimulus than the initial dollar amount of the expenditures, but they are directed at people who need to spend the money in order to make ends meet.

http://www.usatoday.com/money/econom...ent15_CV_N.htm

CRGreathouse

There's a serious difference in terms of deadweight losses to the economy.

brainstorm

It does if the money gets invested in companies and charities that create jobs. If he buys stuff with it, the money changes hands to the sellers of the stuff, and they in turn spend it or save it, in which case it gets lent out as mortgages that generate revenues for the sellers.

The big thing that prevents real-estate sales from causing fiscal stimulus is the fact that the mortgage is overvalued, which causes the payoff to result in a loss. If real-estate was traded in liquidity instead of mortgage debt, any sale would result in revenue. It's the fact that these mortgages were traded at a value-levels of futures that were never sustainable that has now put every property sale in the position of creating loss. If mortgages were discounted across the board to some pre-inflationary level, properties could be traded without loss - but that would require people admitting that pre-2007 appreciation was actually pure unsustainable market inflation, which they don't want to do as long as they think they can keep the money they made on the trading of mortgages during that time.

Well, that's a pretty short-sighted fiscal view. Another view would say that economic growth resulting from money blown in bars and restaurants is like trying to start a marathon on a stomach full of candy. Sustainable growth comes from stabilization of income levels and expenditures. Debt raises the ante for instability. When people default on a high mortgage, it makes a bigger impact than when they default on a lower mortgage or no mortgage at all.

If a sustainable economy could evolve from debt-reduction and deflation, it would be less vulnerable to income and business instability. People could lose their job or go out of business, or do seasonal or temporary employment without putting banks under stress. No one would have to be evicted from their house because economic crisis occurred, which would reduce the need for fiscal stimulus and other government intervention. Wouldn't all that be good for the economy, even though it resulted in less fiscal stimulus spending in the short-term?

Perhaps it's even more ironic that if people can weather an economic downturn without becoming fiscally irresponsible, they might emerge from the crisis with a more stable, sustainable economy.

John Creighto

What is holding job growth back isn't a lack of corporate investment. Here are two sources which suggest that comapnies are investing the money over seas instead of in America:

http://robertreich.org/post/86330426...fits-from-jobs

Read more: http://www.creditwritedowns.com/2010...#ixzz0v7fA1TVW

brainstorm

I find it so funny when these "analyses" report that corporations, banks, or anyone else is "sitting on money." The implication is that the only point of money is to spend it and thereby stimulate job creation and growth. There is another point of money, namely to conserve it to avoid overexploiting labour resources and unnecessarily depleting people's freedom. Of course, people who don't feel free without income don't care about freedom when they're unemployed. Such is the irony of modern economies.

Nevertheless, no one with money to invest, corporation, banks, or individuals are going to do so until the real estate markets reset. What would be better for the economy generally, I think, is if the real estate markets would not reset at all but trade on a completely unpatterned way. That way, economic dependence on real-estate appreciation would not re-emerge. Free from that dependency, the economy could stabilize into something that could operate independently of boom/bust cycles in housing or any other sector.

The only way this is going to occur is if the people sitting on money get very comfortable sitting on it. That means basically writing off that money as permanently frozen, i.e. it may no longer be spent. If that were done, the supply-side would have to re-adjust to a reduced money supply and cater to demand at a deflated currency value. Until this occurs, consumers are just going to keep getting tortured by high prices and low income; which may actually be better for them in terms of creating fiscal discipline than people realize.

talk2glenn

Tax cuts are, by definition, a form of fiscal stimulus. Fiscal policy is the use of government expenditures and/or receipts to influence the economy. Fiscal stimulus is any policy intended to stimulate, or increase, economic output. If one cuts public receipts with intent to increase private expenditures, one has engaged in fiscal stimulus as a national policy.

Government spending need not be the opposite of lowering taxes, but it must be the opposite of increasing the private money supply. The public sector may spend money in one of two ways - by confiscation or loan from the private sector. If it does not aquire the funds by tax, it aquires them by bond.

John Creighto

I wonder if the flowing graph suggests it might have already reset as often a lot of peoples net wroth is in their house.


http://www.creditwritedowns.com/2010...ld-normal.html

brainstorm

That's an interesting comparison. Does "net worth" refer to the purchase price or recent assessment? What does "disposable personal income" refer to exactly? And how would this graph transparently indicate a market "reset?" It's as if you are suggesting that it's possible to just make a graph, compare areas on it and assume that the economics of the two situations are equal. There needs to be some analytical rigor here, doesn't there?

John Creighto

Disposable income as defined by both Investopedia and Wikipedia is simply the after tax income. Of course I wouldn't consider all this income disposable because it doesn't cover all living costs but it seems to be the standard definition. I would suggest that the graph is indicative of market reset in that the value of peoples assets should be affordable. The unfortunate aspect of this thesis is that housing costs are as much determined by what people can afford as the cost to produce them. This will not change until people stop viewing their home as a status symbol.

russ_watters

You misread/misinterpreted those quotes. The jobs are being created overseas because the people buying the cars are overseas. Which makes perfect sense. It is illogical to invest the money in the USA if the people buying the cars are in China.

brainstorm

Disposable/discretionary income is complicated because it depends on which products and services are more easily substituted and which are not. E.g. if someone's income remains the same but they are able to stop buying CD's and listen to the radio, youtube, or otherwise satisfy musical demand for free, their disposable income for other items goes up. The same is the case if they refinance their mortgage at a lower rate or if they pay off debt.

People don't just buy houses on the basis of status. They also buy cars, clothes, art, decoration, food, and anything else out of status concerns - if they haven't learned to live (relatively) independently of status. Also, the "cost" of housing may still be determined by status even if the price reflects the production cost, just because the land-price reflects status. So charting housing prices relative to disposable income is really just correlating one form of status with another, no?

The interesting economic question, imo, is how prosperous the economy could grow if status didn't overinflate so many commodities. Such a level of growth may not be good, but it would probably depend on how it was distributed. Imagine that everyone could invest their labor in the most efficient means of producing the most satisfying product without any concern for status. Wouldn't there be enough labor-power to generate total satisfaction for everyone on Earth?

John Creighto

This is a suitable definition of disposable income but not the standard definition. As I said above the standard definition only refers to after income tax income.

Well, people would pay less on houses which should give them more money to spend in other areas. Cars might be bought based on more practical concerns then trying to demonstrate your manhood or show how much you care about the earth. People would care less about band names. Perhaps some clothes would deliberately and outwardly display the brand name.

People of course buy things for other reasons besides status, so it doesn't mean that there still won't be a competition for the products of labour.

brainstorm

It would be more useful to understand how it is relevant - regardless of how "standard" it may be.