Bush tax cuts not necessarily good for economy...

[DialecticMaterialist]

An article co-authored by a Nobel Prize winning economist and former president of the World Bank (Joseph Stiglitz) shows that simply throwing tax cuts at an economy isn't the best way to help with a recession.

Indeed, Mr. Hubbard's own figures reveal the weakness of his reasoning. In the op-ed, he claims the President's stimulus plan would create 300,000 more jobs. The Joint Tax Committee has estimated that the tax-cut components of the Administration's plan would cost more than $90 billion in fiscal year 2002. The cost for each job created or saved under the Administration's stimulus package thus would exceed $300,000. The reason that the cost per job created or saved would be so high is that the Administration's package is poorly designed to provide short-term stimulus to the economy. Policymakers can design a stimulus package with a much larger bang for the buck if they can move beyond the tax-cut ideology that seems to underlie both the Administration's proposals and Mr. Hubbard's article.

The principal reason that Mr. Hubbard's arguments are misguided — and the main reason the Administration's package would be relatively ineffective as a stimulus measure — is that they largely ignore the central feature of a recession: lack of demand. In a recession, the primary problem is that the nation's firms face a reduction in demand for their products — not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new business activity, would do little if anything to address the underlying difficulty.



Firms that are faced with reduced demand for their products lay off workers, regardless of how much cash they have. The managers of firms have a fiduciary responsibility to maximize their profits, and in the face of reduced demand for their product, firms therefore typically reduce costs by cutting back on production, which triggers layoffs. As the number of unemployed workers increases, a downward economic spiral can occur. Households with unemployed workers, facing a sharp decline in their incomes, cut back on spending and further reduce the demand for products. That, in turn, leads to additional layoffs. This harmful cycle, by which an economic slowdown can build into a more serious recession, can be arrested or broken by boosting demand for the goods and services that American companies produce. Only when a company faces renewed demand for its products will it end the process of shedding workers and begin to create new jobs. As a result, the primary objective of a stimulus package should be to spur spending on these products.




An effective stimulus package consequently should expand the aggregate demand for goods and services in a timely way. Mr. Hubbard notwithstanding, there is little question that increases in government expenditures can be quite effective in boosting aggregate demand and thereby stimulating the economy in the short run.

Temporary expansions in unemployment insurance, for example, would spur increased consumer spending. Households in which a worker is laid off experience a significant decline in income. They thus are likely to spend a high percentage of any additional income they receive while out of work. The extra spending on unemployment benefits that a temporary expansion of unemployment benefits provides thus has a direct economic benefit — it keeps more workers employed at firms that produce the products the unemployed workers purchase with their additional cash. Temporary expansions in unemployment insurance consequently are a "win-win" proposition: They are quite effective in helping more people keep their jobs during an economic downturn, and they also assist those who are unfortunate enough to have lost their jobs.

Also:

The notion that a dollar spent by the government "crowds out" one dollar of spending by private businesses is correct only when the economy's resources are fully utilized; in that case, additional demand on those resources by the government necessarily reduces the demands that can be placed on them by the private sector. But when the economy's resources — our workers and plants and equipment — are not fully utilized, government spending does not displace private-sector resources on a dollar-for-dollar basis. Indeed, during an economic downturn, government spending can "crowd in" additional private-sector activity by spurring overall demand and thereby making it more likely that firms will be willing to make new investments. Mr. Hubbard's argument about government spending fully crowding out business spending thus is puzzling; it would be valid only if the economy were fully utilizing its resources, which is clearly not the case now.

Indiscriminately injecting more cash into firms may, at first blush, sound like a good idea because it would give firms more money that they could spend. But the primary problem currently facing most firms is that their customers are reducing their purchases; for the average firm, the problem at hand is not a lack of available cash. Indeed, from the end of 1999 to the middle of 2001, holdings of liquid financial assets by nonfarm, nonfinancial corporations rose by more than $100 billion (or more than 17 percent), and holdings of total financial assets by such firms rose by more than $700 billion (or almost 9 percent).(6)

And last:

To be sure, some corporate tax breaks would boost spending. In particular, temporary corporate tax breaks that are tied to new investments by firms can help to spur more short-term spending by the firms. A firm that decides to build a new plant or to purchase new computers now rather than in the future in order to take advantage of a temporary investment tax incentive will have to purchase materials, services, or equipment from another firm, such as a construction company or computer manufacturer. The resulting short-run effect on the economy is similar to that which occurs when substantial numbers of unemployed workers boost their expenditures because their unemployment benefits have been increased. Unfortunately, most of the corporate tax breaks included in the House stimulus legislation and the Bush Administration's stimulus proposal do not provide such incentives. Generic support for corporate tax breaks as economic stimulus regardless of whether the tax breaks are tied to new investment — on the simplistic grounds that these tax breaks would provide firms with more cash — is unwarranted.

http://www.cbpp.org/11-27-01tax.htm


So to summarize, merely throwing tax cuts at an economy isn't necessarily the best way to end a recession. This is because just throwing money at large corporations and the wealthy doesn't necessarily work, because it fails to give corporations incentive to retain employees and because it deals more with the supply side of the economy, not the demand (which is where the main causes of a recession lie.) And in fact, government spending may stimulate the economy more effectively, this is only untrue if all the rescources in the economy are being utilized: which they are not during a recession.

Some tax cuts may work, if they are accompanied by incentive to spend now, rather then later. Unfortunately the Bush administration's tax cuts lacked such incentive.

Helping the economy, a very complex system is never just as simple as "lets throw in tax cuts to the wealthy", one has to take a multifaceted approach, that entails utilizing some increased government spending, and giving tax cuts to the right groups combined with incentive to increase job creation, corporate buying and increased job creation/retainment.