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Tax Cuts plus the Paradox of Thrift and Savings today, growth tomorrow

Submitted by TomGrey on Sun, 02/08/2009 - 19:59
in

Tax Holiday, or Payroll Tax Cuts would, over the current and next month, current and next quarter, and even over the whole year, be a better policy than the gov't spending stimulus.

One key measure of any anti-depression policy should be the % of the total policy $ that is spent in the immediate time period (month, quarter, year).  Via Fabius Maximus, one anti-tax cut article analyzes the 2008 tax rebate: “The Economic Outlook and Stimulus Options”, Mark Zandi ( Chief Economist of Moody’s Economy.com), Senate Budget Committee, 19 November 2008 (see  Table #1 on page 10.)

The point is that the Dems want to argue that Tax Cuts aren't good enough for stimulating the economy, relative to some other alternatives like more for Food Stamps and extending Unemployment Benefits (which Reps should support in these times).

My point is that, using the same measure of effectiveness, Payroll Tax Holiday is far, far better than what Obama has.  And the difference should be estimated and publicized.

The MAIN problem is that Republicans want workers to decide how to spend any stimulus, and Dems want elite, tax-cheaters to decide. 

This is also clear in the comments to Matthew Yglesias reasonable discussion of The Paradox of Thrift.  However, the main idea seems to be to oppose Tax cuts ... because they support too much savings.

Personal consumption will help the economy now -- personal savings will help allow the future economy to grow, as would reduced debt.

Paying later for gov't directed half-mal-investment will certainly reduce growth later.

 

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Maybe you missed this

Submitted by Paleo-Skeptic on Sun, 02/08/2009 - 23:33.

Standard macroecon stuff:

GDP = C + I + G + (X - M)

That tax rebate that Bush offered?  Well, that went to the C, household consumption.  And it was rather ineffective as stimulus, because most households bear too great a debt to consider major purchases.

That I is business investment.  That's waht tax cuts should be stimulating, because it, too, is way down.

That (X - M) at the end there... well, that's the one thing that Republicans don't like to talk about.  It's called the trade imbalance.  Don't expect anything to get done about it real soon.

That leaves the G, which is, after all, government spending.

You have four things there that can fill the gap.  Stimulus directed toward households will only go to pay down their debt, which is not consumption.

Hope that helps. 

current thinking is predicated on global depression.

Submitted by RisingTide on Mon, 02/09/2009 - 13:55.

that is to say, it's an excessively stupid time for corporate investment.

Stimulus debt reduction or consumption

Submitted by TomGrey on Sat, 02/14/2009 - 23:55.

C'mon Prog Trad,

Stimulus directed toward households will only go to pay down their debt, which is not consumption

to say that 100% of tax cuts will go to pay down debt is just dumb.  Even those academics against agree with at least 17% (in the first quarter) and up to 30-40% in the first year, as measued by the 2008 tax rebates.

Rebates that were quite effective, like a 1 gal/s bucket bailing out a ship taking on 3 gal /s.  Good idea, but not enough to stop the sinking.

As RT says, with Obama's Depression coming, it's a bad time to expect business Investment.

How much of Obama's $780 bill will be spent in this quarter? less than 10%, probably less than 5%.  Tax cuts would be better.

 

Abolutes yield such unsightly distractions

Submitted by Paleo-Skeptic on Sun, 02/15/2009 - 03:59.

I did not anticipate sophomoric syllogisms from the reader.

Nor did I mean to imply that 100% of the rebates went to paying down debt.  I'm sure there are numbers out there that would show otherwise.

However, the lion's share of it surely did, and it was rather ineffective as stimulus.

Now, the numbers that I have seen show that roughly 35% of the stimulus is tax cuts.  Much of this is in the form of refundable credits.

Refundable credits are not tax cuts; they are welfare programs by a different name.

Further, I don't believe in some cataclysmic global depression.  It's a simple market correction.  These things tend to work themselves out in time.

Now, if we can get past the simplistic idea that all tax cuts are the same, which taxes do you propose to be cut?

Look at 1040 line 70.  That's a one-year delay for that particular tax cut.  Doing the same thing again won't help anything until a year from now.

The surest tax cut is a cut in spending.  I don't see that hapening anytime soon.

I don't see devaluating the currency further as being any significant help either-- and selling more T-bills to finance revenue shortfalls is sure to do exactly that.

But these are the two faces of irresponsibility:  where the one cries out, "We must spend beyond our means!" the other cries, "We must reduce our means that our spending might be beyond it!". 

However, the lion's share of

Submitted by TomGrey on Tue, 02/17/2009 - 20:34.

However, the lion's share of it surely did, and it was rather ineffective as stimulus.

If it was true that 55% or more of the tax rebates went to pay down debt -- the indebtedness of the US consumer should be reduced.  I've seen no graphs about this, but haven't heard of any such effect.

Here's where term definition is crucial: if one says they "plan" to pay off a credit card if they get a $1000, and then they get the cash and write the check, then yes they've paid down debt BUT if, at the end of a month or two, the credit balance on that credit card is the same as before, then the net effect is that the entire amount was consumed.  I.e., getting $1000, paying $1000 on the credit card, then charging an extra $1000 in expenses to the card ... nets out to zero debt repayment.

Graphs of debt show no such big fluctuation in debt, so I don't believe it's happening.

 

YET, if it WAS happening ... if consumers WERE paying down debt ... the 2010 mid-term effects would be far better, even if the current quarter stimulus is less.

 

 

I don't think there's much of that happening

Submitted by Paleo-Skeptic on Tue, 02/17/2009 - 23:31.

I think the net overall effect was lower debt.

Even though, many experienced a sharp reduction in asset value at the same time.

Still, the current environment is more healthy for it, though in so small a degree it would hardly be measurable. 

do you have any idea what reducing the debt of the American

Submitted by RisingTide on Wed, 02/18/2009 - 09:38.

consumer means, in the real world?

It means a permanent reduction in our standard of living -- one that is long overdue. Boomers put it off by getting deeper and deeper into debt.

but reducing our standard of living means less money floating around our economy. America in general and specific needs to tighten her belt and become more efficient and productive.

Not so

Submitted by Paleo-Skeptic on Wed, 02/18/2009 - 09:52.

Reducing consumer debt would reduce future claims on productivity.

With less debt and less servicing of that debt, the standard of living would then rise.

Less debt means a better future. 

you're assuming any of the debt was being serviced.

Submitted by RisingTide on Wed, 02/18/2009 - 09:57.

most of it, I can assure you, was not being adequately serviced. people pay minimum payments.

people only got into debt trying to keep up a standard of living that was no longer possible to afford.

Overly broad

Submitted by Paleo-Skeptic on Wed, 02/18/2009 - 10:07.

But true enough that those future claims look markedly different as they advance toward the present.  

this is why i love behavioral economists

Submitted by RisingTide on Wed, 02/18/2009 - 11:00.

they get this sort of shit. ;-)

I like reading about behavioral economics

Submitted by LnGrrrR on Wed, 02/18/2009 - 11:43.

What I'm curious about is the retirement packages offered by some places, like GM. Did the owners of GM at the time offer these retirement packages to workers knowing that by the time they cashed in on those packages, the person offering them would be long gone...

Or similarly, why should fat cats care about keeping the company in good financial standing if they can make millions on bonuses the year or two they're there?

Of course, there's the possibility of the company failing, but with the government bailing them out, there's no risk, except for dubious moral hazard that won't stop anyone.

retirement packages might actually have been a good idea

Submitted by RisingTide on Wed, 02/18/2009 - 12:11.

if they keep workers there so you don't need to train as many people.

Health Care is GM's big bugaboo. Nobody else needs to pay it, in other countries... so GM loses a lot of competitiveness.

But yeah, the whole "I'm gonna make a mint and then get a job at a new company" sucks. I'm all in favor of not investing in places that are going to give their CEOs more than a million or so per year (and NO BONUSES!)

The real problem is hedge funds, who are systematically destroying the economy by refusing to invest in companies that don't maximize profit for the extreme short term, regardless of what it does to the corporation's long term health.

*

Submitted by Paleo-Skeptic on Wed, 02/18/2009 - 10:06.

n/t