Paul Krugman has answered part of the question I’ve been asking for some time:
Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.
So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.
Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, however, as unemployment falls — probably when it goes below 7 percent or less — the Fed will want to raise rates to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.
Do mine eyes deceive me or is Dr. Krugman arguing against letting the “Bush tax cuts” lapse? That certainly qualifies as a tax increase.
There is one whopper in Dr. Krugman’s column. He closes:
Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.
Cf. this graph. Pretty darned long hour.
I do have another question, though. Is there some point at which, regardless of whether monetary policy is an effective tool against cyclic downturns, fiscal policy, too, is no longer effective?
I would say yes. When sentiment is negative enough, fiscal stimulus effect will be reduced. Besides the direct effect of putting money into the economy which is spent, there is the psychological effect of not seeing so many people out of work. If you know anyone who lived through the Great Depression talk to them about this.
The other thing that makes me think fiscal policy effects may be more limited is what Bartlett talked about with reduced state spending. I am not familiar enough with state spending in the Depression to know how it changed while Federal government spending increased. I have never seen any papers cited on state spending offsetting Fed spending in this regard.
Steve
“Is there some point at which, regardless of whether monetary policy is an effective tool against cyclic downturns, fiscal policy, too, is no longer effective?”
Well, I’ve been flogging this point for at least a year now. Yes ( at least it is not optimized ) when the business community has the willies about the anti-business proclivities of a Congress and Administration. (especially small business) As I’ve said numerous times, the small business community has largely pulled into their collective shells based upon wave after wave of uncertainty over tax hikes and regulatory moves. And it seems to have been forgotten that this Administration set aside the notion of a first priority secured lien. (GM) Add that to a commercial RE problem and you don’t exactly have the banks greasing the wheels of commerce.
I’ve never understood the “Progressive” mentality on the economy. Bash corporations, businessmen, and “corporate greed.” Bemoan profit. Promote idealist but diseconomic endeavors. Tax the successful businesses. Increase the costs of operating or hiring……………..and then turning around and asking in wonderment, “where are the jobs?”
“regulatory moves”
What regulatory moves? I was not aware that regulating small business was high on the agenda.
“Tax the successful businesses. ”
I dont see anyone in either party willing to pursue it, but if we ever redo the tax code would love to see corporate taxes go away. Shift it more towards consumption with a large inheritance tax.
Steve
“What regulatory moves? I was not aware that regulating small business was high on the agenda.”
Perhaps you missed the health care debate.
“Tax the successful businesses.  ………….
I dont see anyone in either party willing to pursue it,……..”
Perhaps you missed the dishonest two-step being done right now by the Obama Administration, who are now characterizing the health care mandate as a tax increase to avoid legal challenges (relying on the theory of govt power to tax) but who advertised this during the debate as NOT a tax increase. Let’s not debate the meaning of “is,” OK?
On inheritance taxes, let’s save this more for another day, but………
you make income, its taxed at, what, 35% all in, you save and invest some of those after tax proceeds and its taxed variously at 15% to 35%, …….then if you dare leave some money – your property, not your neighbor’s, not the state – to your family, the Feds get another 40% whack at it?? On what theory of property rights?? And given the realities of what government does with its pirated booty, on what theory of economic efficiency?
“On inheritance taxes, let’s save this more for another day, but”
Sure, but when we do, let me stipulate that it is money being received by someone who did not work for it, and, we need tax money from somewhere.
OT- Dave, I would appreciate your thoughts on publicly traded companies and short term vs long term reward. Given the incentives of executives and shareholders, and excluding start-ups, it seems as though the incentives for near term results will almost always outweigh those of future returns. How does this then affect risk management? Does a CEO get as big a bonus for instituting better risk management as he does for short term increases in income?
Steve
Steve –
Technically, and very narrowly correct, but from an economic perspective, a gross distortion. Should every generation start from cave man days, ignoring all previous accomplishments? Further, do we have property rights, or not?
And who are “we” to confiscate the results of the most economically successful for what is the most economically ineffective enterprise in history, and one governed by crass self interest: government. Riddle me this: Obama – “vote for me, and I assure you I will only butt fuck 3% of the taxpayers, on behalf of the rest……trust me, you are only dicking a few of your neighbors, but not you.”
Sounds like good public policy to me. (snicker)
No, we should not go back to caveman days, but that is not what I suggest. First, taxes have to come from somewhere, sad but true. Even the anarcho-capitalists generally believe in a few valid governmental functions. If we do away with corporate income tax and tax consumption, we may very well have people who consume little and accumulate lots of wealth. Warren Buffett comes to mind since we were just in Omaha. Passing on that wealth to those who did not earn it risks creating a class with great wealth, hence great power in our society, based upon inheritance rights. IOW, royalty. I expect the very wealthy to act in their own best interests. Not mine, not the country’s or anyone else’s. They have earned the right to do that with money they have earned themselves. I can live with that, though there is risk. Taking that same risk for the benefit of someone who just happened to be born to the correct person is not a risk I wish to take.
The devil is in the details, but I would think having the first 7-10 million exempt would work fine, then a sliding scale starting at say 50% going up to 70%. Inheriting 30% of $2 billion would not make you a caveman by most people’s standards.
Since it is a zero sum game, if we lose corporate taxes, the money has to come from somewhere, so we need an alternative. All taxes are money taken from someone under the threat of force. I see inheritance taxes as less injurious than most alternatives.
Steve
“No, we should not go back to caveman days, but that is not what I suggest.”
I know it was hyperbole, but it is actually very close to what you suggest. Just gleam at the economic results of a persons lifetime, and let the state confiscate it? Why? You didn’t address my question. Under what theory of property rights? And if you can convince yourself of this: “First, taxes have to come from somewhere, sad but true.” Then what are the limits? Alive or dead??
“Even the anarcho-capitalists generally believe in a few valid governmental functions.”
As do I. You are becoming superficial and dopey, steve, the usual refuge of those incapable of carrying the tax argument. Its not anarchy vs no taxation. Its how much.
I didn’t say anything about anarchy. Let’s do some wild assed math.
So over a lifetime, averaged, a successful person earns $200K per year. 30 years, thats $6MM in earnings. Fed, state and local taxation, (including sales taxes!) is probably approaching 35%. (that’s probably conservative) So you have $4MM in disposable income for 40 years. Now, cars, houses, college, eating……………… Suppose you save 15% for retirement (more than the national average!!) That’s $600K. And then you pay, what, 25% of that in taxes before you die?
The government has taken something approaching 38% of what you earn in a lifetime. And then they want that last bite? 40%?
What the fuck?? This is government starving anarchy? No. This is government rape. And for what? You play with the numbers and give me a materialy different result.
“Warren Buffett comes to mind since we were just in Omaha.”
I love invocations of Buffet, who is a lying, media seeking bastard. I have an old Omaha based flame, who is sort of socially connected, business associates, and a first hand encounter with his organization. You would be well served to stay away from such invocations. (If you want to communicate privately, go through Dave.)
“The devil is in the details, but I would think having the first 7-10 million exempt would work fine, then a sliding scale starting at say 50% going up to 70%. Inheriting 30% of $2 billion would not make you a caveman by most people’s standards.”
This is just numbers masturbation. You feel the state has an almost unlimited right to private citizens property.
“Since it is a zero sum game, if we lose corporate taxes, the money has to come from somewhere, so we need an alternative.”
Corporations pay no taxes; never have. But that’s another debate.
“All taxes are money taken from someone under the threat of force. I see inheritance taxes as less injurious than most alternatives.”
Ghoulish; and never once in this monologue did you ever even consider that the government already had enough, or used, their resources efficiently or had reached a boundary. Revealing indeed. I’ll put you under the category of: Taxation. How Much? More, in all debates.
Sigh. My stipulation was that we do away with corporate taxes which currently make up about 12% of federal revenue. I am looking at it from the POV of budget neutrality. Some combo of consumption tax and inheritance tax would seem to fill in the gap well, IMO.
Using your example of $6 million lifetime earnings, they would pay no inheritance tax.
“This is just numbers masturbation. You feel the state has an almost unlimited right to private citizens property.”
Nope. I am not advocating taking money from the person who earned it. I have not here advocated for an increase in taxes. I am suggesting we rearrange them. I would love to pay less tax as I am in the high tax bracket also, but we need to first decrease spending. No more starve the beast and increase the debt for me. You also do not address the issue of concentrating wealth and power into the hands of very few people. That doesnt bother you at all?
Thanks for the warning about Buffett.
Steve
Actually unemployment remained abnormally high even with the fiscal stimulus during the 1930’s. Sure it was reduced, but going from 24% to 15% isn’t great really since it still signifies serious problems in the economy. And no, it isn’t simply because it took a long time. While unemployment is a lagging indicator it doesn’t lag that much even with the last two recessions which had longer than average lags.
steve,
You are a doctor, have you discovered everything you know about being a doctor on your own, or do you rely on the work of others? You didn’t earn it. Its grossly unfair. Maybe you need a special tax for that, after all we need the tax revenue from somewhere….
Taxing accumulated capital is a recipe for having fuck-all for investment.
Next bad idea?
Actually no. The term you want are minarchists. These are people who are strongly sympathetic to the anarcho-capitalist view point, but often see serious problems in terms of princple-agent problems and market imperfections (e.g. externalities) so they move away from their ideal to a second best of extremely limited government.
And just to be clear, anarchy to an anarcho-capitalist is not chaos. It is no government and spontaneous order…i.e. order that is based on voluntary interactions instead of force, coercion and the threat of violence. I find it amusing when people argue against anarchy and say it will lead to a violent society, yet our very society right now is built on the threat of violence and for some actual violence. We’ve just designated a group of people as having the legitimate right to threaten to use and even use that violence.
We call these people the government.