Practical Reasons Why Stimulus Spending Doesn't Work

Tax cuts are the best way to stimulate economic growth

Anthony Randazzo | January 12, 2009

A stimulus package has two objectives it must meet in order to qualify as successful: First, it must generate quick economic recovery. Second, that recovery must lead to sustained economic growth.

Contrary to popular belief, the government spending programs implemented during the Hoover, Roosevelt, Ford, and George W. Bush administrations that intended to generate this kind of economic stimulus did not create sustained economic growth or reduce unemployment long-term. Neither did Japan's years of stimulus spending in the 1990s bring Japan's economy out of recession. Stimulus packages are never fully successful.

The myth that stimulus works, achieving these ends, stems from the thought that increased demand for products will encourage increased production and thus spur economic growth. President-elect Barack Obama and Congress are beginning to debate a proposed two-year, $775 billion stimulus package that includes up to 40 percent in tax cuts. However, there are very practical reasons why this and other stimulus packages—either cash distribution or spending projects—don't work the way they are projected.

1. Stimulus packages frequently misdirect national resources

Stimulus spending draws economic activity to short-term projects (such as expanding a road or fixing a school roof) but as a result pulls resources away from investment in sustainable economic projects (based on what the market demands). The federal government, with its limited knowledge and lack of price signals represented in a market economy, can't always know how best to spend money.

2. Stimulus packages don't increase aggregate consumption

In order to inject money into the economy, the government has to take money out of the economy. Whether by increasing taxes, national debt, or printing the money (growing inflation), the government has to damage long-term wealth in order to provide short-term economic activity.

3. Stimulus packages don't create sustainable jobs

Infrastructure projects create jobs because they require workers. You need construction workers to build a road, but once the project is complete, the jobs go away. The contracting firm that used stimulus money to hire workers no longer can afford to keep them on staff. Employment is not sustained. As a result, the worker, while employed for a short-term period of time, is not able to seek long-term employment. The worker, while likely grateful for the short-term job, is still not sure if, or when, the next job will come. As a result, they will still likely limit their spending, thus reducing consumption and overall economic growth.

4. Stimulus packages increase national debt or cause rapid inflation

In order to pay for any stimulus—whether building roads or building schools—the government has to pass the cost on to future generations. The national debt more than doubled under New Deal spending during the Great Depression. While there may be some short-term economic activity, the weight of the national debt will limit economic growth in the future. Alternatively, if the government printed money to avoid debt, inflation would grow, also hindering sustained economic growth.

5. Stimulus packages are pork-laden and caught up in federal bureaucracy

Large government spending programs fall victim to pork spending. The U.S. Conference of Mayors recently submitted over 11,000 projects that are "ready to go" on their national infrastructure wish list. Duck ponds, dog parks, sports parks, tennis centers, and swimming pools were all part of the infrastructure stimulus that the mayors say is "needed" for economic recovery. Private firms and industries nationwide will line up to try and get their piece of the federal money, regardless of whether this will result in the most efficient use of tax dollars. The rent seeking behavior will deter politicians, under pressure from donors and constituents, from putting the money to the most effective use.

Tax cuts are a much better way to stimulate economic growth. Allowing companies to keep more of their revenue is an incentive to create more wealth and thus promote economic growth. Allowing individuals to spend more of their own money as they see fit helps the market more accurately understand demand signals than when the government just spends trying to create demand out of nothing.

Some of the tax cuts Mr. Obama has proposed will be helpful. Letting firms write down their losses to reduce tax bills will allow firms to keep much needed capital in the economic downturn. And any tax incentive to help employers keep or add jobs will be beneficial.

Comments

LurkerBold|1.12.09 @ 4:39PM|#

Still ignoring the closing of Guantinimo while bashing Obama and FDR? Shame on Reason.

|1.12.09 @ 4:40PM|#

Hijack alert!

LookerBoyd|1.12.09 @ 4:41PM|#

The above poster was not me.

|1.12.09 @ 4:47PM|#

First you say stimulus programs should be scrapped because they don't always work as intended or aren't always fully successful. Then you suggest tax cuts will stimulate growth, when it is flat out obvious that this doesn't work. Can you name a single instance in which tax cuts for corporations led to overall economic growth? Ever? Because I can name at least one act of government stimulus that made our economy the strongest and wealthiest in the world, the New Deal and the massive public works program known as WWII. In fact, if we rely on evidence, the economy was strongest when taxes on the wealthy were highest, and now that we've gone back to 1920s levels of income inequality, well, you can see what we got.

Libertarians are welcome to favor economic policies based on philosophical principle, but you're not entitled to your own facts. Until you can demonstrate how tax cuts are enough to grow the economy, most people are going to laugh the idea out of the room for a long time to come.

|1.12.09 @ 5:28PM|#

I can name at least one act of government stimulus that made our economy the strongest and wealthiest in the world, the New Deal and the massive public works program known as WWII.

What's your next guess?

WWII didn't end the depression. The removal of the wartime economic controls in 1946 ended the depression.

-jcr

Egosumabbas|1.12.09 @ 5:30PM|#

Hey Tony, ever heard of the 1980's?

|1.12.09 @ 5:40PM|#

wow Anthony, you seem to be missing a couple of key points.

1. The market is great at allocating supply and demand for things like TVs and pizza. It's very poor at doing so for public goods like roads etc. That's why it's normally up to the government to provide them. Thus, yes it is something that the government can/should do.

2. True, but is investment/consumption is below what it should be, the government can provide that demand temporaily to keep things moving until the private sector recovers. If the money was being used in the private sector at the moment we wouldn't be having this converstation.

3. If that's the case then no construction job is ever sustainable, because the projects are always temporary. The fact is we have many years of work ahead of us to repair our failing infrastructre (bridges anyone? ) plus build our national energy grid etc. We have construction workers out of work, and jobs that need doing. Shouldn't be a big leap to make them happen.

4. Yes, spending will create more debt, but when it's on needed infrastructure that spending is then an investment with benefits to future generations.

5. Agreed, there will almost certainly be some pork, but that just means we need to be mindful, not that we can't do anything.

If you need an extra econ book or two let me know, I'll let you borrow one :)

Jay S|1.12.09 @ 5:40PM|#

Where to begin with you...

First you say stimulus programs should be scrapped because they don't always work as intended or aren't always fully successful.

Actually, the author said stimulus spending doesn't work. A stimulus package consisting of tax cuts is far different from a package consisting of spending.

Then you suggest tax cuts will stimulate growth, when it is flat out obvious that this doesn't work. Can you name a single instance in which tax cuts for corporations led to overall economic growth? Ever?

As someone said before, the 1980s through the present were some of the times of greatest economic growth. Even though we're going through a tough time, our economy is far bigger than it was in 1950 and GDP per capita in real terms is far greater.

Because I can name at least one act of government stimulus that made our economy the strongest and wealthiest in the world, the New Deal and the massive public works program known as WWII.

The New Deal was failing and WW2 was only helping while the war was going on. Much like the workers on the hypothetical infrastructure projects that await us, the soldiers were temporary employees and the economy went into troubling times post-WW2. It was only the quick abandonment of the New Deal that kept the economy from going back into the crapper.

In fact, if we rely on evidence, the economy was strongest when taxes on the wealthy were highest, and now that we've gone back to 1920s levels of income inequality, well, you can see what we got.

The 1920s had very high income tax rates on the rich. In some ways, Reagan made the tax code more progressive. Take a look sometime at what the top 1% of income earners earn and pay in taxes. Then tell me they aren't paying their 'fair share.'

Libertarians are welcome to favor economic policies based on philosophical principle, but you're not entitled to your own facts. Until you can demonstrate how tax cuts are enough to grow the economy, most people are going to laugh the idea out of the room for a long time to come.

Jay S|1.12.09 @ 5:40PM|#

Ignore the last paragraph on my post. I forgot to delete it before posting.

|1.12.09 @ 6:02PM|#

Tax cuts are very effective when the marginal tax rates are too high, however the rates when Regan took over, and the rates now are too very different things. Of course different people will respond differently to different sets of tax rates, but overall tax rates have already come down a lot, and you won't generate that much extra economic activity from lower taxes at the moment, especially at the lower end of the spectrum. If you want to make the argument that taxes should be lowered for great equity, that's fine (although IMO untrue at this point) but the increases to effiency will probably be very small, and not worth the increased deficits.

Jordan|1.12.09 @ 6:32PM|#

If the money was being used in the private sector at the moment we wouldn't be having this converstation.

Um... what? I guess everybody is just stuffing cash into mattresses and coffee cans, then?

|1.12.09 @ 6:44PM|#

Canada tried similar government spending in the '90s under the Liberals (misnamed because it's really a centre-left party; there's nothing classically liberal about it).

It was called the National Infrastructure Program (NIP for short). It was a pool of $6B, at a time when the federal government was spending about $125B annually.

The Liberals pimped it was an investment in critical infrastructure such as roads and sewers. In practice, it went to connected private businesses.

For example, in Calgary, multi-millions were spent to renovate the Saddledome, which was ostensibly owned and operated by the non-profit Calgary Stampede Board as a trust on behalf of the taxpayers of Calgary but, in reality, was the no-rent home to the owned-by-billionaire oilmen Calgary Flames hockey team.

In short, a pool of funds that included MY tax money was used to create luxury suites for rich hockey fans.

At the same time, the provincial government in Alberta was so strapped for cash because of the downturn in the price of oil that it was imploding Calgary's largest inner-city hospital.

Government spending sounds great. Until you stop to think - the key term is "think" - about where that money comes from.

It does not grow on trees. It is not created out of thin air.

And if Kroneburg or any other socialist would like an economics textbook that isn't provable nonsense like the ones they already have on their shelves, I'd be happy to provide a list.

Hugh Akston|1.12.09 @ 6:57PM|#

but the increases to effiency will probably be very small, and not worth the increased deficits.

Easy fix for projected deficits: reduce spending.

|1.12.09 @ 7:06PM|#

Here's why tax cuts stimulate the economy better than government spending: You end up spending your own money, on yourself, instead of the government spending it for you, on someone else. When you spend your own money, on yourself, you are very stringent with your spending. You make sure that you get are getting the most value for the least dollar. That is called efficiency. You simply get more for your money with less money. The government has no incentive to spend money on something you really want, on someone you really want, at a rate which you want. To put the point tersely, the government wastes your money. It's like wasted energy. Instead of that energy being put towards something you really want, in the most efficient manner, it's spent on a guy digging a ditch and another guy filling that ditch in.

Uncle Milty puts the point much more succinctly than I ever could.

Chad|1.12.09 @ 7:15PM|#

1. Tax cuts frequently misdirect national resources

For decades, we have lived the religion of tax cuts. And what did Americans do with all this extra money in our pockets? We spent our vast discretionary resources on primarily three things: SUVs, McMansions, and cheap Chinese crap. I hardly think the government could do worse, even if a blind monkey and a dartboard was their method of picking things to invest in.


2. Tax cut packages don't increase aggregate consumption

In order to not take money out of the economy at tax time, the government must not inject money into the economy via spending, or must take the same amount out by borrowing. Zero sum games work both ways.

3. Tax cuts packages don't create sustainable jobs

Unless you consider the UAW, house-flippers, and cheap Chinese crap-makers sustainable.

4. Tax cut packages increase national debt or cause rapid inflation

Unless they are balanced by spending cuts, which they never are.

5. Tax cuts packages are pork-laden and caught up in federal bureaucracy

Nothing more porky than the holy SUV/McMansion/ChineseCrap trinity!

Jordan|1.12.09 @ 7:29PM|#

And what did Americans do with all this extra money in our pockets? We spent our vast discretionary resources on primarily three things: SUVs, McMansions, and cheap Chinese crap. I hardly think the government could do worse, even if a blind monkey and a dartboard was their method of picking things to invest in.

Mmkay. So people bought what they wanted to buy, with their own money. Why is this bad? Why does the almighty Chad get to say what I can and can't buy? It would be better if the government just forced people to buy things they don't want?

In order to not take money out of the economy at tax time, the government must not inject money into the economy via spending, or must take the same amount out by borrowing. Zero sum games work both ways.

Then just let people keep the money and spend it themselves. Oh, but then they might buy something that the Great Chad doesn't think they should buy, right?

3. Tax cuts packages don't create sustainable jobs

Unless you consider the UAW, house-flippers, and cheap Chinese crap-makers sustainable.

Yeah, if people had more money, the economic activity that you listed is the only economic activity that could possibly occur. And these economic activities in no way contribute to our wealth. *rolls eyes*

4. Tax cut packages increase national debt or cause rapid inflation

Unless they are balanced by spending cuts, which they never are.

I see that we're in agreement on this one. Cut taxes and spending! Even Chad the Great agrees!

5. Tax cuts packages are pork-laden and caught up in federal bureaucracy

Nothing more porky than the holy SUV/McMansion/ChineseCrap trinity!

Nothing more incoherent than this!

Paul|1.12.09 @ 7:37PM|#

Why does every article with the word 'stimulus' in it evoke an 'Is Your Man Gay' ad?

Paul|1.12.09 @ 7:43PM|#

Washington just revived its dead stimulus package: http://seattletimes.nwsource.com/html/localnews/2008619010_webviaduct12m.html

This package was declared as dead as something totally unalive back in early 2007.

All of a sudden, and I mean all of a sudden, it comes back. Bunch of legislators sitting around wondering what they can possibly think of that could get hundreds of people pouring large amounts of concrete a-la New Deal II, when someone pulled this hummer out of the trashbin.

We're so screwed.

|1.12.09 @ 7:47PM|#

Bail outs and tax cuts do not stimulate the economy quickly. Not govt. projects, not this and not that. Send everybody cash. Not just taxpayers, but anybody with a s.s card. It is not who deserves the $, but who will spend it.

Tax cuts for the middle class and down would be a good next step. Cuts for small business. Food stamps, unemployment -- get the $ out there. Recently Japan extended a cash stimulus to foreign residents as well as rest of the population. Why, please spend.

|1.12.09 @ 7:49PM|#

By the way infrastructure sure beats defense spending, but too slow for a real stimulus. Once you can get credit on the move, other sound ideas become cool.

Some Guy|1.12.09 @ 9:16PM|#

As long as they're determined to spend trillions more that we don't have, I'm at least happy that they're planning to do a few useful things to go along with the sub-scrapple-grade pork.

|1.12.09 @ 10:47PM|#

"Um... what? I guess everybody is just stuffing cash into mattresses and coffee cans, then?"

Yup: you can call them 0% T-bills though if you prefer the term. same difference.

"Government spending sounds great. Until you stop to think - the key term is "think" - about where that money comes from.

It does not grow on trees. It is not created out of thin air."

Only it does. Google "monetize the deficit"

|1.12.09 @ 10:49PM|#

biggreenmonkey presents the only necessary and best argument against government stimulus: inefficiency.

Chad|1.12.09 @ 11:11PM|#

Sending money back to the tax payers is not the solution to the problem. Be honest: you will probably stick it in the bank or use it to pay off debts, just like most people did last time. If anything, people are MORE likely to save the money than before, in this atmosphere of increasing unemployment.

What we need now is SPENDING, and giving money to consumers just won't cut it. Even to the extent that they would spend, it would likely be on cheap, foreign made goods, sending the money quickly out of the country. The much better plan is to spend the money on infrastructure HERE, which results in most of the money being spent HERE on American workers and materials.

I love how domoarigato thinks that the government is "inefficient". How so? What could possibly be more inefficient than spending trillions on wasteful SUVs and McMansions, powered by enriching those who hate us, and then filling those behemoths with cheap Chinese junk that you probably have already thrown in the trash heap? That's what 25 years of tax-cut religion have allowed us to purchase. Thanks, but no thanks. I'll take a good health care, education, and public transportation systems instead. Bridges that don't fall on my head and levees that don't break might be a pretty effecient investment too...surely more so than a new Ipod.

|1.12.09 @ 11:31PM|#

That's what 25 years of tax-cut religion have allowed us to purchase.

Except that the US has one of the highest corporate income tax rate in the developed world. That's why we're buying Chinese-made crap and not US-made crap.

http://www.taxfoundation.org/publications/show/22917.html

So your bitching about buying foreign crap and SUVs is misguided. We have no choice because of our HIGH tax rate on business. So much for your tax-cut religion.

And what would YOU prefer we spend our money on? Smart Cars and mobile homes? Give a realistic alternative, or you're just blowing smoke. Plus, not everyone likes the minimalist lifestyle, nor do they want anyone to impose that upon them. So if I want to eat a Big Mac while driving my Hummer while going to Wal-Mart to load up on Beanie Babies, that's my business.

|1.12.09 @ 11:34PM|#

Oh, and Chad, as to your comment about the government being at least as efficient as us Hummer drivers, here's a real life example. I know a guy that leases helicopters to the US Navy. They fly supplies back and forth between ship tenders and US warships. The crew that the government had doing the job? 23 people. The same EXACT job done by a private contractor? 6. When you don't have to earn the money you spend, you're more likely to throw it away, just like domoarrigato and biggreenmonkey contend.

Right Wing Realist|1.13.09 @ 2:28AM|#

Chav says:

For decades, we have lived the religion of tax cuts. And what did Americans do with all this extra money in our pockets? We spent our vast discretionary resources on primarily three things: SUVs, McMansions, and cheap Chinese crap. I hardly think the government could do worse, even if a blind monkey and a dartboard was their method of picking things to invest in.


You think the average person is so dumb that they should not be allowed to make their own consumption choices that effect mostly themselves. Yet why are those same people smart enough to choose our political leaders who make decisions for everyone? This is how we get fashion politicians like Obama in office.

Yes, this is a bit of a hijack. Sue me.

|1.13.09 @ 4:26AM|#

All I have to say is: If the idiots in government thought that returning our money -which they took at the point of a government gun- was so bloody good, and if they figured that it would help us, then why in tarnation did the creeps even collect it to begin with?

And why the blazes are they COLLECTING even MORE as they return what they stole priorly?

It's tantamount to a neighborhood thug returning a stolen object with a smile, all the while he has his hand deep into your pockets taking yet MORE money.

|1.13.09 @ 6:51AM|#

If the government finances spending projects or tax cuts by printing money, this doesn't take money out of the economy. It puts money into the economy. It does cause the equilibrium price level to be higher than it otherwise would be. However, if the current price level is above equilibrium, that is, the economy requires deflation in order to return to equilbrium, then increasing the money supply prevents deflation.

If the government finances the spending or tax cut through borrowing, the usual result will be that government borrowing mostly crowds out private borrowing, but there will be a slight decrease in the demand for money. Under current conditions, where government borrowing costs are near zero, it is likely that only a little bit of private borrowing will be crowded out and there will be a substantial decrease in money demand. The impact of a decrease in money demand is similar to that above. It does raise the equilibrium price level, but if the current price level is above equilibrium, then it staves off deflation.

While in reality any simulous program will be financed by money creation, and largely prevent deflation, it is almost certain that this money will have to be removed from the economy later to prevent inflation. That is, there is a temporary spiken in money demnad at this time, and while newly created money will simply prevent this from causing deflation now, once money demand returns to normal, the money supply will need to decrease. And so, the national debt will be higher.

The same is true of direct debt finance. It obviously adds to the national debt.

In my view, quantitative easing should work to correct the imbalance between the supply and demand for money and stave off deflation--allow for a recovery of expenditure without inflation. The money supply will have to be reduced in the future, but the Fed will sell off the assets it is buying. The risk is that the Fed is taking substantial risk in its asset portfolio. Any losses will have to be compensated, adding to the national debt.

The Fed's traditional policy of targetting the Federal Funds rate has "failed" or rather, become ineffective under current conditions. That doesn't mean that monetary policy cannot maintain aggregate expenditure.

|1.13.09 @ 6:58AM|#

Bastiat in The Law discussed "what is seen" vs "what is not seen".

Friedman in Capitalism and Freedom discussed "multipliers" and "reverse multipliers".

Heinlein coined the phrase TANSTAAFL, There Aint No Such Thing As A Free Lunch.

Galambos in V50 compared statist economic policies to an attempt to create a perpetual motion machine, violating the 2nd Law of Thermodynamics.

When will we ever learn ?

adrian|1.13.09 @ 9:27AM|#

I think Chad is another troll. No-one can honestly think the way he does right?

Gus Chiggins|1.13.09 @ 11:45AM|#

I agree with Chad. They took our jobs. Ay took urr jebbbss!!

Nick|1.13.09 @ 2:22PM|#

I'm going to tow the middle line and give people like Chad and Kroneborge and the future Prez credit, although I am very much a libertarian who distrusts government/taxation/spending/etc:

I think Obama's plan, while not by any means ideal, is a better stimulus than any of the things Bush did. If we're going to spend tax dollars, infrastructure is one of the best ways to spend it, because it does bring long-term economic benefits. (Compared to dumping tax money into corporate pockets, well, it's on a whole new plane...)

Coupled with tax breaks, I think the point is that these temporary infrastructure jobs will hopefully last long enough to get a large number of people through the recession, which will hopefully end soon thanks in large part to the tax breaks included in the plan (as their effects won't kick in immediately like some infrastructure spending might). I give the plan credit for being a decently thought out one from a stimulus standpoint.

However, I'm waiting to find out where Obama will cut government (with a "scalpel") in order to pay for it. Tax breaks and infrastructure spending will both lead to the same long term problems without cuts in other spending - the debt plus interest will be more expensive than paying for spending up front.

Frankly, were I a politician, I wouldn't vote for it. I might consider it if the tax cuts and spending increases were offset by cuts elsewhere (say, all the unnecessary and extraconstitutional stuff the government does).

Oh, wait...that would put even more people out of jobs...oops...

|1.13.09 @ 2:30PM|#

Chad says: What we need now is SPENDING.

Check me if I'm wrong, but isn't SPENDING what got us into this problem? As in, too much debt, not enough real assets? We are coming out of a financial bubble. That means there is a necessary, and contractionary, correction coming. Our balance sheets are out of whack, and must be restored.

Your argument is like saying in 200, "We need an internet stimulus! We need to SPEND more money on pets.com!" No, we needed to realize that there was a lot of smoke and mirrors that we thought had value, and didn't. So we needed to CUT spending on those things and allow it to go somewhere else more productive. And, we needed the old, unproductive nonsense on the internet to die so the vaccuum could be filled with better, more sustainable internet businesses.

We had a housing bubble. We allocated too much money to housing, and put too many jobs in the housing industry. Now the bubble has collapsed, and a lot of people are out of work. In a capitalist society, that's both a problem and an opportunity. Let a downturn happen naturally, and unemployment drives down wages slightly and makes workers available to other ventures. It's called creative destruction, and it's absolutely necessary to the long-term health of the economy.

What we need to do now is to prevent a spiral down ito a depression and a complete halt to lending. The proper responses right now are to let some businesses fail, and force others to write off their toxic debt and take the consequences so that financial instruments once again have known risks that can be priced. Then the economy will start to move again.

Another thing we should be doing is, at least temporarily, cutting regulations that have high cost to let the economy breathe a little. This costs the government nothing and doesn't add to the debt, but it is a stimulus. Pass a 5-year holiday from the Americans with Disabilities Act. Suspend CAFE standards for five years. Repeal the Davis-Bacon act. Streamline environmental reviews of new projects. These things can be done at no cost, and will save businesses billions of dollars (and give them an incentive to build new facilities and products while the regulatory moratoriums are in place).

|1.13.09 @ 2:41PM|#

Yes individuals are great at making decisions about what cars they want to drive, and where they want to live. That doesn't mean we don't need public goods like roads etc though. That's why they consider spending on infrastructure to be an investment (vs spending on things like SS, or Medicare which is consumption), because you get higher economic growth in the future because you invested now.

Also, as far as SUV's, and McCansions I like big cars, and big homes just as much as anyone else, unfortunately our current lifestyle is based on the myth of cheap oil forever, and is not sustainable. It's going to be tough to adjust our lifestyles to live in a sustainable fashion, but eventually it will happen. You can rail against it all you want, but mother nature doesn't care.

For example, what if instead of allowing gas prices to stay drop after the oil embargo, we had kept them high with taxes, but matched it with a reduction in the income or payroll tax? How much different would our country look? The large trucks and SUV's would never have really come into style, and fuel efficiency would be much higher because of increased investment and demand for those types of cars. Our reliance on foreign oil would be much lower etc, and regime's like Iran, Russia, and Venezuela would have a much harder time throwing their weight around.

The market is great at allocating resources between things like Pizza and burgers, but not so great at long term planning on a national scale (especially because of the practice of discounting). When determining what is/is not good government policy it's important to recognize the strengths and weaknesses of the market, and government interference. Not all tax cuts are good, and not all spending is bad (and vice versa). Each decision should be looked at on it's own merit.

In this case, we have underspent for years on needed infrastructure that the private sector won't provide in a sufficient amount to properly grow our economy. Thus investing in infrastructure now can be a win/win provided a needed jolt to our economy today, and enhancing our productivity in the future.

|1.13.09 @ 3:26PM|#

Tax cuts frequently misdirect national resources

Category error(s): Tax cuts do not direct resources. The resources that are not directed, mis- or otherwise, by tax cuts are not national resources.

Monetizing a deficit may or may not create money out of thin air (depending on your view of the metaphysics of money), but it certainly creates inflation, which destroys wealth.

Nick|1.13.09 @ 4:23PM|#

"For example, what if instead of allowing gas prices to stay drop after the oil embargo, we had kept them high with taxes, but matched it with a reduction in the income or payroll tax?"

That's a pretty bad idea. While I do think limited natural resources are a decent basis for taxation (for instance, a land value tax), a gas tax is a regressive tax on the poor, who are more likely to drive less fuel efficient vehicles and even without that assumption would still be spending far greater per dollar of income than the rich would.

Nick|1.13.09 @ 4:24PM|#

...It's just another example of how the environmental desires of the Left conflict with the progressive desires.

|1.13.09 @ 5:31PM|#

Actually, if you do a net zero gas tax you can offset it with a reduction of say payroll taxes to make it revenue neutral. Thus it's not regressive against anyone (except large users of petrol of course).

Thus, you discourge use of a scare resource, and encourge work. Seems like a good deal to me.

Nick|1.13.09 @ 10:56PM|#

Kroneborge,

You add up those numbers and get back to me - because in the real world cutting a flat tax with a progressive benefit to offset a higher regressive tax just doesn't balance out. You'd be able to offset it eventually at a certain rate, but that won't make it any more progressive.

A rebate might work on overall sales tax (because the rich in general spend far more than the poor, one could make a rebate that matches the average amount of spending below the poverty line and make the overall result somewhat progressive) - but it won't work on a gas tax because rich and poor likely pay arguably about the same amount for gas over the course of a year. In fact, people with older, less gas efficient vehicles (often the poor or lower middle class) would end up shouldering even more of the necessary tax burden as a result (as they would raise tax rates to offset the rebate), while rich people can go out and purchase a hybrid and make money off of the rebate.

Oh, I get it - let's force poor people to ride the bus everywhere they go, while those of us who can afford the burden can drive around with spiffy bumper stickers and feel good about ourselves....

Nick|1.13.09 @ 11:08PM|#

The reality is that the environmentalist war against personal carbon usage is a war against the poor. Any way you cut it - the poor are going to end up with the short end of the stick. For example, it's not suburban Dad's new Hummer that fails inspection emissions tests - it's the older, inefficient vehicles that are all the lower and lower middle classes can afford. Of course, poor people could go deep into debt to pay for a cleaner, more efficient vehicle - but either way they get f'd in the a overall compared to people that can afford to bear the burden.

It's exactly like regulation - it's not the huge megacorporations that are deeply worried about it - they have all the lawyers and accountants that money can buy - it's the small businesses.

This is my problem and why I believe there needs to be a new progressive movement - because the big government policies and bad economics of the modern Left usually crush the little guy they pretend to care for in their rhetoric.

|1.14.09 @ 5:47AM|#

This guy lost me here: "As a result, the worker, while employed for a short-term period of time, is not able to seek long-term employment. The worker, while likely grateful for the short-term job, is still not sure if, or when, the next job will come. As a result, they will still likely limit their spending, thus reducing consumption and overall economic growth."

So unemployed workers who are given a 6 month job to do reduce consumption and economic growth?

No. It's not that they reduce consumption and economic, it's that because of their uncertain future prospects they don't substantially add to consumption and growth.

Did an editor review this before it was posted?

Terry Mock|1.14.09 @ 10:22AM|#

Stimulus Spending & Sustainability

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|1.14.09 @ 11:16AM|#

Every gallon of gasoline sold at a retail pump has state and federal taxes included in the price. The taxes collected at the pump were to have been used for the almighty "infrastructure". They weren't. Who on earth believes that new funds allocated to infrastructure would actually end up in bridges and roads?

Colonel_Angus|1.14.09 @ 1:22PM|#

Terry Mock

Libertarians don't want to hear about social engineering urban planning schemes that make use of taxpayer money. Post that shit somewhere else.

|1.14.09 @ 4:39PM|#

Hey Nick,

Actually lower class people are more likely to already use public transportation (why it's considered to normally be an inferior good) and thus would probably come out ahead.

Still, I would agree that no matter what policies are pursued it's often the less economically well off that have a harder time about it. But then again, they will probably have a hard time no matter what. Of course that's not to say we should try and compound it, lol.

Anyway, long term I think you will start to see a redesign of the way we live. Gas prices will go up when the econonmy starts to the recover, the the American lifestyle based on cheap oil forever will fall to the forces of supply and demand. IMO, it's better to plan for that, and ease the transition than to pretend it will never happen.

Nick|1.15.09 @ 1:55PM|#

"Still, I would agree that no matter what policies are pursued it's often the less economically well off that have a harder time about it."

That's not necessarily true - the whole system could be restructured based upon progressive merit - a consumption tax like a carbon tax WILL hurt the poor, but a land value tax or corporate value tax will not significantly impact them. A land value tax (as a replacement for income, sales, payroll, estate and property taxes) would primarily affect those who control large quantities of high value land, and the impact will be minimal on low income people renting or owning small plots. A corporate value tax (as a replacement for capital gains and corporate income taxes) would level the playing field for smaller businesses. Corporations should pay for the legal protection that being a corporation provides, and land speculators should pay for taking a larger piece of a zero sum game (every economist from Smith to Keynes to Friedman to Marx thought that land value was the ideal basis for taxation).

Regressive sales (consumption) taxes should be tax enemy #1 of any progressive, and unfortunately, carbon is one of those. These are regressive taxes we all have to pay pretty much every day.

And by the way, while some low income people may be forced to use public transit, many lower and middle income people own cars and would feel the brunt of any additional taxes on gasoline. Forcing people who may have to drive long distances to get to their place of work to use inefficient and inconvenient public transit via high carbon taxes is ridiculous. I can't believe any progressive would support that. Unless you use public transit everywhere you go, I don't believe you have any right to advocate for that without being a hypocrite...