ideas that led to disaster

[JBA]

Issues & Insights
Wednesday, May 14, 2003
   
 An economic stimulus plan from IBD Chairman Bill O'Neil
   
 
Depressing Ideas
INVESTOR'S BUSINESS DAILY

Fiscal Policy: When it comes to taxes, the two sides of Congress don't see eye to eye. Both have tax plans. But one of them — the Senate's — comes up way short.

We see much to admire and even embrace in the House's tax-cut plan: lower marginal rates for all, cuts in capital gains levies, breaks for small businesses, relief for married couples. In short, the plan, totaling $550 billion, offers a whole slew of things that will help jump-start the economy and build wealth for millions of Americans now left out.

Sadly, the same can't be said for the Senate's plan. It, too, cuts taxes. But at $350 billion, it's too small to pack much punch.

What particularly disappoints us is that the Senate would actually raise taxes on business to "pay for" tax cuts for everyone else. That's exactly the opposite of what it should be doing. Those taxes, or "offsets," as those in Washington like to call them, aren't small. They total some $90 billion.

Why get all in a lather over hiking business taxes? Because right now, Americans justifiably are worried about jobs.

With more than 2 million lopped off payrolls in just over two years, we can't afford another year with no job growth. If you raise taxes on businesses, they will hire fewer workers, not more. That's something no serious economist disputes. Only politicians do.

Yet instead of concern about jobs and healthy businesses, Congress worries about . . . the deficit. Indeed, it's become common to hear senators say we can't afford big tax cuts because it will "blow a hole" in the deficit. It's a case of slogans replacing logic.

At $550 billion, the House tax cut is only 1.8% of the planned $30 trillion or so in government spending through 2013 — and just 0.35% of expected GDP, according to Cato Institute data. If Congress is so worried about the deficit, it could trim spending that much — something businesses and average people do all the time.

But won't deficits cause higher interest rates, the kind that can choke off growth? Absolutely not. President Reagan cut taxes, and the deficit doubled to nearly 6% of GDP. The economy boomed, inflation fell and interest rates dropped. So did the deficit.

More recently, we swung from a surplus of about 2% to a deficit of about 2% in 2002. Again, both inflation and interest rates fell. Why? It may be that the deficit, at $300 billion, is minuscule next to the nearly $20 trillion bond market.

Still, based on their faulty fear-the-deficit logic, Senate Democrats have bashed Bush, even likening him to Herbert Hoover.

Well, here's a quote President Hoover was fond of repeating, even as the economy slid into depression: "Nothing is more necessary at this time than balancing the budget." Whom does that sound like?

In fact, to balance the budget, both Hoover and President Franklin Roosevelt raised taxes. Hoover jacked up the top income rate from 25% to 63%; Roosevelt pushed it up further to 79% in 1936. From 1930 to 1940, they doubled the corporate income tax rate to 24% and laid an "excess profits tax" on top of that.

Small wonder that after the economy tanked in 1930, it took over a decade to get it back to even. Or that the jobless rate hit nearly 30%.

How disappointing it is to hear people today espousing ideas that led to disaster in the past. And how alarming that many of them make economic policy in Washington.

[ra]

I can never understand how people can believe that a tax cut 'costs' the country anything.  All tax cuts costs the country exactly zero dollars, regardless of how big or small it is.  Tax cuts just change who gets to spend the money, the people who earn it or the government.  Tax cuts are not magic, but they do help stimulate the economy at the expense of higher deficits or less government spending.

ra

[gofaster]

The biggest stimulant to the American economy is government spending.  The Federal Government is the largest entity in the economic US market.  No other business has the impact that the Feds do.  By cutting taxes, you're essentially removing the funds the Fed has to do its business.

Letting business keep more revenue is no guarantee that it will go to The People and be placed back into the economy.  Let's look at a smaller example. American Airlines was going to give a bonus to its CEO and 5 other top-level executives after its employees agreed to pay cuts.  Do you think the execs were going to spread that wealth  to the same extent those employees would've?  Had that money gone to employees, it would've trickled out into the economy at a much faster rate - paying mortgages, credit card bills, school loans, grocery bills. Tax cuts for big business is simply taking wealth from the many and giving it to the few and hoping the few do the right thing with it with no system of checks and balances in place to make sure the money is put to work the way the government planned when it agreed to the tax cut.

Yeah, I'm just a little cynical when it comes to CEOs raping companies and misleading investors.  I've been burned too many times by my own employer.

FDR had it right.

[Mickey1992]

Tax cuts cost the country a great deal.  The government will have to borrow the money to give it back to the tax payer, because spending is not going down by $550 billion.

[ra]

The biggest stimulant to the American economy is government spending.

Possibly the dumbest thing I've ever read.  So, if we let the government spend ALL the money, we'll all get rich?

[Martlet]

Originally posted by ra
Possibly the dumbest thing I've ever read.  So, if we let the government spend ALL the money, we'll all get rich?

Agreed.  Consumer spending drives the economy.   The idea behind tax cuts is to give consumers extra money to spend.

[gofaster]

Originally posted by Martlet
Agreed.  Consumer spending drives the economy.   The idea behind tax cuts is to give consumers extra money to spend.

Read the rest of that paragraph.

Name a single consumer that spends as much as the US federal government, on as many different things, to as many different people.  Not even Bill Gates can spend that much.  Name a single company that's as big as the US federal government.  Microsoft?  GM?  Not even close.  All that spending goes towards salaries, wages, goods, and assistance.  When the government doesn't spend, the people suffer.

Yes, consumer spending drives the economy, but the US federal government is the biggest consumer of them all.

Raise taxes = more money for government spending.

[Rude]

The following 19 months will bring irony, lies and deceit at a level never before seen in US political history.

Just watch and see.

[ra]

"Yes, consumer spending drives the economy, but the US federal government is the biggest consumer of them all.

Raise taxes = more money for government spending."

Ok, now that WAS the dumbest thing I've ever read.   Democrat, or just a Troll?

[Nash]

Has anyone seen an estimate from any of the tax cut advocates (such as the author of the article, Bill O'Neil) saying how long it will take for the positive effects of the tax cut to appear?

[gofaster]

Originally posted by ra
"Yes, consumer spending drives the economy, but the US federal government is the biggest consumer of them all.

Raise taxes = more money for government spending."

Ok, now that WAS the dumbest thing I've ever read.   Democrat, or just a Troll?

What's your counter argument?  Deficit spending, reduced government spending, or program cut-backs?  Those are the only 3 options available and the money's gotta come from somewhere.

If you want to see the effects of program cuts, take a look at the education system.

Corporations don't spend money on highways, schools, police, defense, judicial, military, parks, and public assistance.  Businesses spend money on 1 thing: business.  I wouldn't count on things good for business necessarily being things good for We The People.

[funkedup]

Take cover JBA, the socialists are coming.  

[ra]

Originally posted by gofaster
What's your counter argument?  Deficit spending, reduced government spending, or program cut-backs?  Those are the only 3 options available and the money's gotta come from somewhere.

If you want to see the effects of program cuts, take a look at the education system.

Corporations don't spend money on highways, schools, police, defense, judicial, military, parks, and public assistance.  Businesses spend money on 1 thing: business.  I wouldn't count on things good for business necessarily being things good for We The People.

My only argument is that tax cuts don't cost anything.   The government can't (unfortunately) change its budget as fast as the economy fluctuates, so deficit spending is the way to go.

You don't seem to understand that the wonderful government gets nearly 100% of its income from the evil private sector.  So any tax increases add a burden the private sector and put drag on economic activity, thus reducing government revenues.   How a particular rich CEO spends his income is a non-issue.  

Any economy can only support so much government, and I think we are way past that point.  It is just more obvious now because of the economic downturn.  

Most states were able to maintain balanced budgets during the Federal deficit years of the 80's, but in the go-go 90's they lost all fiscal discipline an allowed their spending to grow with the bubble.  Now, many states (and local governments) are in deep poop, with huge budgets and declining revenue.  There is no way to tax your way out of that situation.

ra

[gofaster]

Originally posted by ra
My only argument is that tax cuts don't cost anything.  

Wrong.  Tax cuts cost government revenue.  Less government revenue = less government spending = less pay for government programs and the employees and people affected by those programs.  Ask a teacher.  Better yet, ask an assistant principle (if you can find one still employed).

Originally posted by ra
You don't seem to understand that the wonderful government gets nearly 100% of its income from the evil private sector.  So any tax increases add a burden the private sector and put drag on economic activity, thus reducing government revenues.   How a particular rich CEO spends his income is a non-issue.  

No, I understand that completely.  The money has to come from somewhere, either taxes or credit.  I prefer to have it come from taxes.  Credit bills come due eventually, with interest.  As for creating a drag on economic activity because of a burden on the private sector, I would agree that its a drag on business, but it doesn't necessarily impede economic growth.  The real question is, which has a bigger economic impact - $550billion in tax cuts or $550billion in government spending?  I'll guess government spending.

Originally posted by ra

Any economy can only support so much government, and I think we are way past that point.  It is just more obvious now because of the economic downturn.  

You're confusing taxes with regulation.  

In my opinion, the economic downturn was caused by two things:

(a) a change in the pension regulations that allowed corporations to cancel their employee pension funds and replace them with cash-balance plans, which forced workers to invest their savings in businesses that may or may not have been based on sound business principles.  Once that pool of investment money dried up when the pension money ran out, companies started to drop off (Pets.Com is a good example).  A lot of people lost a lot of money and will never be able to recoup that sort of loss.  With less money in their bank accounts, people became very conservative with their spending.  The decreased consumer spending initiated the slowing of the economy.

(b) Tuesday, September 11, 2001, 8:45am, which really just accellerated an economy that was stalling from (a) above.  Tourism dropped off, which impacted airlines, hotels, theme parks, and retailers. States that relied on the tourism industry suffered the most, particularly Florida.

Originally posted by ra
Most states were able to maintain balanced budgets during the Federal deficit years of the 80's, but in the go-go 90's they lost all fiscal discipline an allowed their spending to grow with the bubble.  Now, many states (and local governments) are in deep poop, with huge budgets and declining revenue.  There is no way to tax your way out of that situation.
ra

That's a popular misperception.  State budgets aren't impacted by business profit growth (other than the stocks the governments buy to fund worker pensions and bond issues).  If state budgets were impacted by business growth, then teachers and police and firemen would've been dancing in the streets under Reagan and Bush.  State budgets, believe it or not, operate on a different set of principles, namely, spending.  They have a goal and are awarded a budget suitable for meeting that goal.  There is no profit/loss measurement in a government program.

[ra]

No, I understand that completely.  The money has to come from somewhere, either taxes or credit.

State budgets aren't impacted by business profit growth

I give up now.