Cut Taxes for the Rich and Boost the Economy

Another factor in the tax cut for rich people analysis is the tendency of government to expand when rich people don't have to pay for it.

The Cato Institute published a study documenting this, somewhat to their surprise, a few years ago.

Thing is, the wealthy have great influence on the size of government - when they have to pay for it, they keep it better controlled. Consider the likely fate of the Iraq War launch, or the Patriot Act bureaucracy expansion, had the legislation proposing to enable them been accompanied by proposed tax increases on the wealthy sufficient to pay for them.

An expansion of government can be good for the economy, if carefully arranged, but in general governance is a cost to be minimized from an economic point of view.

 

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I tend to agree, but it does depend upon your "time horizon" and how much borrowing the government is doing.

Currently of every dollar the US government is spending, $0.34 is borrowed. In "normal times" so much borrowing by the government would reduce funds available for private investment and make the interest cost of private investment higher - killing just marginal projects.

But these are far from "normal times" with Fed/Treasury team "running printing presses" 24/7 for several years adding at least a trillion dollar to the US debt annually. (Not to mention the upward surging "unfunded liabilities" as baby boomer cease contributing to Social Security and begin collecting form it.)

Because, US´s FED, EU´s ECB, China’s CCP/banks, and now even Japan are printing so much fiat currency, the price of everything expressed in it will be driven upwards. Inflation always settles down to the ratio of money available for spending to goods for buying. Currently, most of this newly created fiat money is "not available for spending."

Most of is just electric bits in computers. New bits are created by the FED lending credit to one or more of its (dozen as I recall) "participating banks." When this money creation surged up in volume a few years ago, the FED actually thought it would stimulate the economy, as cash rich banks made more private loans. (And it did stimulate a little, but not significantly compared to the lost jobs problem.)

Bank did not do much of that FED desired lending for two reasons:
(1a) They learned how damaging it is to lend to those who cannot pay back and are only speculating that the new home, etc. they buy will appreciate and then let them sell it, to pay off the mortgage and clear a nice profit.
(1b) The greatly indebted population with main asset (home) falling in values realized they had to "deleverage" - pay down their credit cards, etc. and were uncertain if they would be the next to get a "pink slip" discharging them. So few who qualified by the new stiffer lending standards were wanting to go still deeper into to debt - I.e. not many the banks could lend to even if they wanted to.
(2) Rather than make risky loans again to pump the new money out the bank door, they took the essentially free money from the Fed, and bought "save" US treasury paper (10 year tie up paid 2% & 30 paper paid 3% neither of which covered the inflation erosion loses, but did give a nominal profit for their books and share holders to look at.)

Note this flood of new fiat money and the fear of the ultimate inflation it would produce made many turn to the stock market. It of course went up IN NOMINAL VALUE, and for periods even faster than inflation. It also flooded in foreign markets, forcing them up even more and making such huge demand for the local currency (You can´t use dollars to by stocks in Brazil, etc) that the local currency became excessively valuable (Law of supply and demand.) This caused manufacturing goods to be non-competitive (or, as China does the local government to buy up the flood of locally unwanted dollars and hold them out of circulation.)

Brazil did this too: dollars in Brazil´s reserves went for less than 100 million to 340 million in only three years. Doing this "sterilization" is very expensive especially in Brazil which does not just run currency printing presses. It buys the dollar out of circulation by giving their holders ever more Brazilian Real for them and then sends them to the US treasury for bonds (paying less than 3%) The interest rate Brazil must pay to get the Real to give to the holders of dollars (for dollar "sterilization") is however about 10%. I.e. Brazil´s government pay >10 to get <3% - very costly. The alternative is not to "sterilization" the flood of dollars and watch the Real grow even stronger, so that many more jobs are lost (For example, the Shoe industry in Brazil is dead but 7 years ago was the world´s main supplier.)

The entire world is complaining that the US is "exporting its inflation" and that is fact. What the government does with it fiat money printing presses and its time horizon is destroying not only the US but responsible governments too.

 

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I heard a libertarian economist mention this in an offhand remark the other day. He said was pressing one of Obama's staffers about some economic questions, mainly about how to bring jobs back to the US, and the reply was "we're going to crash the dollar". The US has pretty good infrastructure, a hardworking culture, a bit of can-do left, a massive military and we've sort of secured our energy needs (for now)... all we really really need is a cheap currency. We'll never compete with China and the rest of Asia at the low wages they charge. But, with a cheap dollar, we could.

Now, I was pretty sure beggar-thy-neighbor was not a sound economic approach?

Who knows? It could be bullshit. But, I think it'd be good if it did happen.

 

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I am gob smacked at this ...

Will come back to you later Michael..

Is this the dream of your future ??

 

This is always an amusing argument. Of course the broad category of "the rich" includes a lot of different moneyholders, but for this reply let's just consider "the rich" as comprising corporate entities that would have the potential to create manufacturing jobs - let's say in the USA.

Why would they create those jobs in the US when they are free, under the auspices of NAFTA and similar legislation, to manufacture anywhere in the world? Of course there are exceptions to this, where local manufacturing still has some advantage. But overall, the global corporations are going to take this windfall and run with it. I would, if I were in their shoes.

For the small fraction of the population that includes technically elite workers, there might be some truth to the trickle down idea in the short term, since those companies still rely on areas like Silicon Valley to develop their products. That won't last long either, as virtual engineering allows these corporations to move more and more programming and IT overseas.

For the blue-collar middle class workers of the US that need manufacturing jobs, the whole idea that reducing corporate taxes will result in new opportunities for them is just a smokescreen, a pipe dream. I'm always amazed that conservatives can make such headway with this argument, I guess it says a lot about the deterioration of critical thinking skills.