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