–The “unsustainable” federal debt lie.

The debt hawks are to economics as the creationists are to biology.

You’ll read and hear a great deal now, before the November elections, about how to stimulate the economy. Nearly all of what you will read and hear is nonsense. I’ll quote from a typical article, this by David Kocieniewski, published in the New York Times on September 10, 2010:

“. . . economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.”

Taxes remove money from the economy. Therefore, tax cuts prevent removal of money from the economy. Functionally, there is no difference between a tax cut and a spending increase. “Supply side” vs. “lack of demand” is economic gibberish.

“The nonpartisan Congressional Budget Office . . . (said) tax cuts for high earners would have the smallest ‘bang for the buck,’ because wealthy Americans were more likely to save their money than spend it.”

This is the “first use” myth – the belief that dollars stop after their first use. What do wealthy Americans (or any Americans) do with money they save? They bank it and invest it. The money instantly goes to such investments as bank accounts, stocks, bonds, real estate, CDs, etc. In short, the money goes to other people and businesses, which borrow from those banks and own those stocks, bonds, real estate, CD, etc.

Then those people instantly either spend, invest or save the money, and it moves into other hands. With every step, a fraction of the money is spent. In one year, an individual dollar may pass through hundreds of hands, which adds up to a great deal of spending. Money never stops moving from hand to hand, a fact the politicians never seem to grasp.

“. . . direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers . . . are considered politically untenable with many elected officials reluctant to even utter the word “stimulus” after the $787 billion stimulus.”

Why is “stimulus” a bad word? Because the recession was not completely cured by the stimuli used. Imagine your house is burning. The fire fighters pour water on it. The fire goes down, but not completely out. So the fire fighters stop. “Water” has become a bad word., because the fire still is smoldering. This is the logic that now rules our economy, while your house continues to burn.

“’. . . firms don’t hire based on tax breaks; they hire based on demand,’ said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for that they were going to do anyway.”

Mr. Williams, it’s not a matter of “rewarding people.” It’s a matter of not removing money from the economy. Personal taxes, business taxes, taxing the rich, taxing the poor – all taxes remove money from the economy. One dollar in taxes removes exactly one dollar from the economy, no matter who is taxed.

“(Predicted) surpluses have now become crushing deficits . . .”

Exactly, what is “crushing” about federal deficits? Has anyone noticed any federal difficulty servicing its debts? Today, we are talking about tax cuts, so who exactly is being crushed? This is classic debt-hawk mythology.

“The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire.”

Does this man still retain any credibility? Isn’t he the guy who thought interest rate cuts would prevent the recession?

“‘We don’t think taxes ought to be increased in the middle of a recession for anyone,” (said) Senator Mitch McConnell. . .”

Exactly right.

“The Obama administration dismisses that argument, saying that nearly a third of the cost of the cuts — more than $700 billion during the next decade — would go to the wealthiest 2 percent of Americans.”

Are they ignorant or just playing politics – or both? They want to remove $700 billion from the economy, simply because the first people to touch it would be rich?? What about the second, third and fourth people to touch it?

One curious omission in the Obama plan is the tax cut proposal that many, including the Congressional Budget Office, believe would do the most to spur hiring: a payroll tax holiday. According to various news reports, Obama economic advisers passed on the idea because they feared it would be too expensive or would deprive Social Security and Medicare of crucial revenue. Administration officials declined to discuss their decision.

Page 149 of my book, FREE MONEY, asks the question, “Which taxes should be eliminated first.” The answer given: “Eliminate Social Security and Medicare taxes.” I discuss this further at “Ten Reasons to Eliminate FICA”

“Edward D. Kleinbard, former chief of staff of the bipartisan Joint Committee on Taxation, said the reliance on tax expenditures had distorted the budget process because it induced the public to overlook the fact that — unless they are accompanied by spending reductions — tax cuts have the same effect on the deficit as additional spending. . . . The debate has become so unrealistic it makes you want to scream.”

No, what really makes you want to scream is the ridiculous, unsubstantiated, totally wrong belief that deficits are a bad thing – so bad in fact, they are worse than recessions and slow economic recovery. So long as politicians do not learn that not only is deficit spending necessary, but an increasing rate of deficit spending is necessary, we will continue to have a recession on average, every five years.

Heaven save us from them.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

6 thoughts on “–The “unsustainable” federal debt lie.

  1. Ok, but there is some research about multipliers of different types of “stimuli”, I think tax cuts rank low, and giving cash to the poor ranks high. What do you think of this? You seem to think this would be impossible.

    Related question: the MMT people tell us that banks at the moment are very risk-averse and don’t give loans, because they perceive the private sector as too deep in debt (which it is), then the money deposited by a “rich guy” at a bank would not “work at all”. What do you think? What happens if you deposit with a bank that doesn’t lend?

    Best regards.

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  2. Giving cash to anyone stimulates the economy. Giving cash to the poor is fine with me. I’ve not seen credible research on “multipliers.” I doubt credible research could exist. Too many variables.

    As for tax cuts, I am partial to eliminating FICA, which I’ve been recommending for more than 10 years, and even recommend on this blog. See: 10 Reasons to Eliminate FICA One day, the government may figure out that this is the best possible tax cut, because it immediately stimulates purchasing and business.

    If the bank buys T-securities, this may create minimal stimulus if any. Any other use of the money will be stimulative.

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  3. Correct me if I’m wrong Rodger but with regards to Piotrek’s statement about bank lending, banks do not lend out money based on deposits or reserves, they lend based on capital requirements or limitations.

    As I understand it, bank capital is what money the BANK owns not the amount of money its depositors own. If the bank is going to lend they need a certain ratio of bank capital to cover the loans. So, it doesn’t matter how much money is deposited with them.

    They can only lend based on how much capital they own.

    Is this correct?

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  4. OK, so you agree, that giving cash to the poor should be better than giving tax cuts to the rich. Because the poor will spend 100% of the money and the money will move a lot before landing in some rich guy’s bank account (assuming again that banks don’t lend and buy govt. bonds). Whereas giving tax cuts to the rich means that this happens as a first step.

    I understand that you are advocating abandoning all taxes, especially in a situation like this, when there is not enough demand and probability of inflation is zero.

    Another question: what do you say to this statement: “when demand is very poor, like now, pumping lots of money into the economy can help revive it without causing inflation, but when we get the economy to pre-crisis growth rates, all this money will cause rapid inflation.”

    Please also get around to writing a post about stagflation, thank you.

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  5. Giving cash to anyone, rich or poor, will work faster than tax cuts, because taxes are paid throughout the year, while cash can be given instantly. Has nothing to do with rich or poor.

    I do advocate eliminating federal taxes over time. The sudden elimination of taxes won’t happen, and anyway, would be too big a shock to the system. I advocate eliminating FICA taxes now.

    I disagree with the last statement.

    You can read about stagflation at: http://rodgermitchell.com/inflation.html.

    Rodger Malcolm Mitchell

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