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The Classic Dilemma: Stimulus or a Tax Cut? Keynes or the Supply Siders?

Sometime late next January there will be a decree from the White House and a (very
short) debate in Congress as to whether a stimulus package exceeding one trillion dollars will be sufficient to revive a faltering economy. Doing nothing is, of course, not an option because, as Rahm Emanuel has admitted, a crisis is a terrible thing to waste. What will not happen, unless Republicans force the issue with the only legislative weapon in their bag (filibuster), is a thorough debate on what is the best path: stimulus spending or tax cuts.

During 1982-1983, Ronald Reagan, along with a new class of Republican congressmen and some boll weevil Democrats passed historic tax reductions that led the nation's economy out of one of the worst recessions in recent history. Federal tax receipts soared. Again in 2002 President Bush led the nation out of a severe post 9/11 and post dot com bubble recession with a new series of tax cuts.

The economy is in even greater peril today so one might surmise that Congress is readying another round of tax cuts to spur growth, right? Wrong. Why is this important? Because it plays into one of the most significant economic fiscal policy issues that will be addressed by the Obama/Pelosi/Reid administration next January. That not one of these party leaders is even considering a similar broad based tax cut is both reprehensible and a breathtaking display of institutional arrogance and ignorance of the very fiscal policy (reducing the highest marginal tax rates) that created the trillions of private wealth politicians so casually confiscate and spend.

After having squandered the opportunity they won in 1994 Republicans are many elections away from the majority they will need to enact responsible fiscal policy. During this time in the political wilderness they must use the only tool they have, the filibuster, to demonstrate to the electorate that only supply side fiscal policy creates wealth.


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Comments (7)

Don't just credit Reagan an... (Below threshold)

Don't just credit Reagan and Bush - Kennedy also slashed taxes to revive the economy and boost receipts and Clinton also boosted an already good economy into a fantastic economy when he agreed to sign off on tax cuts (admitting that he raised them too much - maybe we should have bubba hang around the oval office with the tyro - at least when the interns aren't around). Plus, we have the benefit of a recent negative example, HW's mistake of raising taxes.

Not that the current crop of Democratic leaders will choose to anything as stupid as learn from blatantly successful history lessons. After all, some people will benefit more from tax cuts (namely those greedy bastards that earn money and pay taxes, damn them!).

The political pendulum cont... (Below threshold)

The political pendulum continues to swing back and forth. No one should be excited for any party having a lock on both the Executive and Legislative branches - whether Republican or Democrat. Today's Fed statement certainly does not bode well for the economy going forward, so perhaps we have some televised Congressional hearings on Theories of Political Economy to look forward to...

http://deltahedged.com/

Tax cuts are proved, FDR wa... (Below threshold)
bill-tb:

Tax cuts are proved, FDR was a failure -- nuff said.

Obama's Raw Deal II will likewise be an even bigger failure.

Hugh, despite the recent aw... (Below threshold)
Steve Crickmore:

Hugh, despite the recent awful economic events, I see you you are still banging the drum of tax cuts and supply side economics - an economic theory which holds that reducing tax rates, especially for businesses and wealthy individuals, stimulates savings and investment for the benefit of everyone, also called trickle-down economics as your panacea.

But it is precisely those supply side policies that have brought us to the edge of the abyss. If you don't believe me that is fine but read Nobel economic prize winner Joseph Stiglitz..The Economic Crisis. Capitalist Fools..

Behind the debate over remaking U.S. financial policy will be a debate over who's to blame. It's crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes--under Reagan, Clinton, and Bush II--and one national delusion-The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal.


Applying the Leeches.
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease--the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity.

America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard.

The Bush administration was providing an open invitation to excessive borrowing and lending.

In the face of the worst recession in seventy years you can only think of depening the Bush tax cuts for the rich as the one out of this crisis..Surely you must be kidding!

Cut taxes and spending.... (Below threshold)

Cut taxes and spending.

Steve,A) I don't b... (Below threshold)

Steve,

A) I don't believe you.

B) I'll choose my own Nobel Laureates (all of which are loosing intellectual goodwill at a geometric rate because they are voted on by socialists)

C) Supply side tax policy has been a veritable lottery prize for big spending Democrats because of the money overflowing federal coffers. Look it up. It's true. Lowering the highest marginal tax rates increases federal tax collections. Unfortunately a lot of Republicans got drunk at that same spending party also, but they are out of office now.

Yeah, the Nobel committee, ... (Below threshold)
hyperbolist:

Yeah, the Nobel committee, an institution of socialism if ever there were one.

Read Nobel winner Amartya Sen's Development as Freedom. Should take about an hour or two, and if you like it, you can get into his meatier texts like Rationality and Freedom. He uses lots of empirical examples to prove--prove--that Milton Friedman's theories work only in certain circumstances, and that for the most part developing countries have had great success with Keynesian economics, so long as they have a stable government. He proves that ideology has no place in good economics, which is to say that always raising taxes or always slashing taxes in such-and-such a scenario is stupid.

There are too many variables to make categorical statements when it comes to macroeconomic policy. If it were as simple as you suggest it is, Hugh, then morons like bill-tb could reasonably call themselves "economists".




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