Tax Cuts in time of Economic Downturn

Welcome back. I see the rows are still empty, but thankfully, this is a lecture that others can come back to review prior to any exam. (NOT)

I have given much thought to the economic news. Today the latest job figures were released, and while unemployment had gone down significantly, there is still some consternation over the fact that “only” about 30,000 jobs were created. I personally find that to be good news, and continues to put the lie to the argument that this is a presidency reminiscent of Herbert Hoover.

First, let’s set a few historical facts right. While the “Great Depression” officially started under Hoover, the economic stage was in large measure set by the actions taken by Coolidge, and by the actions of the international community around the US prior to the Hoover administration. So, to paint the Hoover administration as the “bad guy” here, would do a disservice to Hoover. In fact, this is a point I have often pondered during this campaign–why are the Democrats so quick to compare Bush to Hoover, and not Coolidge? It certainly couldn’t be that they don’t remember their civics classes, could it? I am left with few choices–either they failed to learn their history lessons in school, and are speaking from ignorance, or else they are perhaps choosing to distort history for some other purpose. Distort history? Naw…

Moving on, today Kerry also talked more about his proposed tax cuts for the middle class, and tax cut repeal (tax hike) for those earning over 200K. This is yet another salvo leashed against Bush’s tax cuts as being irresponsible during a time of economic downturn. Let me set a few things straight here.

First, it has been an accepted Macro Economic principle that, in time of recession/downturn, the government should increase spending, and perhaps go into a deficit, to moderate the negative effects of the downturn. More pointedly, if the government pumps money into the economy through government expenditures, it helps buoy the economy, and softens the blow. Typically this has been down through increased government programs, either through the various alphabet soup programs of FDR, or various subsidy/welfare expenditures of the Great Society and beyond. The problem with this approach is that it generates a ravenous consumer of resources that usually does not go away after the economy recovers. Rarely do we see government programs end (although I will give the New Deal credit–most of those programs are now gone!) These programs have spent money on government priorities, which are not usually the same prorities that the consumers would choose, resulting in a misallocation of resources. In addition, these new government demands would compete for resources in the then heating up economy and, given the tension of supply and demand, causes an increase in inflation spurred by the limited supply and competing demands.

So what did Bush do? Bush put the money directly back into the hands of the taxpayers, while not reducing government spending (and because of the war, having to increase spending moderately.) This has resulted in deficit spending, and significant deficit spending. This though is a fiscal policy espoused by the Democrats for nearly 70 years. The difference is, the money isn’t filtered through government programs! So why is this important, and in my mind, a stroke of genius? First, there are no new programs that will continue to compete for resources after the economy begins it’s recovery, which of course means that the pressures that result in inflation will be held at bay (notice, we are not too worried about inflation yet, and most concerns are minimal in the near to mid term.) Additionally, by putting the money directly into the hands of the people, the consumers use the money on those items that they most need, and are most likely to continue to purchase once the recovery takes hold. This essentially “primes the pump” ensuring that the economy is prepared for the coming boon, and is not malpositioned by meeting the needs of the government, rather than the needs of the people.

Okay, this is enough for now. The bottom line is this: the economy is recovering, and is entering a sustained recovery, because the money has been placed in the hands of the people who best know how to spend it–the Taxpayers. Give it up for George–he performed a stroke of genius, and made it seem so easy!

Class dismissed.