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View Diary: The Great Depression Pt. III (172 comments)

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  •  Immediate how? (10+ / 0-)

    You gotta wait until tax time to claw anything back. And tax cuts only help those who file.

    You've got it entirely backwards.

    Tax cuts have bad multipliers, too: in times of trouble, people deposit any tax cut. They don't spend it in the wider economy, so it doesn't stimulate the wider economy. For a case in point, just look at what happened to Bush's stimulus checks: they simply served to provide a spike in the personal savings rate, and did extremely little to drive the economy.

    Government spending is immediate, and has strong multiplier effects. If you give me a job today, and a pay check next week, I don't have to wait until at least next February to bank that check. If I go from being unemployed to full employment, I switch from worrying about buying food and paying mortgage and utilities, to being able to think about lifestyle spending again. My paycheck doesn't just benefit me: I spend it at the mall, and that helps stem the tide of retail job losses. Someone has to deliver the stuff I buy to the mall, and that boosts the struggling transport industry. Replacing the inventory that I just bought helps boost manufacturing... etc. etc. etc.

    I would never die for my beliefs because I might be wrong. - Bertrand Russell
    -5.38, -6.41

    by sullivanst on Mon Jan 05, 2009 at 05:52:14 AM PST

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    •  you are incorrect about tax (2+ / 0-)
      Recommended by:
      taonow, New Deal democrat

      cuts not being immediate.  They figure into with holding and are therefore immediate.

      As far as being part of the mix, I am neutral to dubious about their ability to do something for the economy.

      We need leadership which gets Americans to stop spending dollars on garbage.  Stop immediately.  Send all those plastic gadgets on teevee commercials into bankruptcy immediately.

      I want to see a 'buy no junk' exhortation from the podium.

      this ain't no party.. this ain't no disco.. this ain't no foolin'around..

      by fernan47 on Mon Jan 05, 2009 at 08:12:47 AM PST

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      •  Except that (1+ / 0-)
        Recommended by:
        mentaldebris

        many of those who need the money most don't have regular enough employment that their employers will correctly figure their withholding.

        I'm pretty sure my previous co-employer would have taken several months to correctly adjust my withholding in the event of a tax change. They weren't all that competent.

        Similarly, I'd expect a big chunk of the self-employed would not choose to recalculate their withholding. It's irritating enough with a steady salary and not having to do the employer-side calculations. For the self-employed it's a real pain in the ass, and a lot of them have plenty of stress already thank you very much.

        Even conceding the point, though, I'm a perfect example of why tax cuts aren't what we need. I'm middle class, with a decent job, my wife works too, we have three kids. I'm in the sweet spot for Obama's tax cuts. When they come, I won't spend a penny of them. Not a cent. We're stretched financially: not suffering, but we have insufficient reserves, so any and all tax cuts we get will be saved, not spent. In other words, a tax cut to me would yield an economic multiplier of 0.0 (the banks still aren't lending out when they receive extra capital, so it would seem they wouldn't invest my extra deposits), whereas creating a job for someone recently laid off from, say, Chrysler or GM would yield a multiplier of probably somewhere around 2.5.

        Buying junk actually plays an important economic role in normal times. These aren't normal times, but it would still be deeply harmful to attempt to stop it overnight when fully two thirds of all economic activity in this country is retail. The major problem, though, is that the cheap plastic junk bought in this country is almost universally not made here.

        I would never die for my beliefs because I might be wrong. - Bertrand Russell
        -5.38, -6.41

        by sullivanst on Mon Jan 05, 2009 at 08:31:03 AM PST

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        •  all this fine tuning of this (0+ / 0-)

          sort seems beside the point to me.  No matter what we do, some people will not be caught up in the net directly.

          All retail is not junk.  Good clothes, household products, even major electronics are not junk unless you buy an inferior brand.  Contaminated plastic toys are pure junk.  

          And I do not consider putting your tax savings in the bank as negative, even in the short run.

          Just because the bank does not go out the next day and make a loan doesn't mean it isn't a net gain for the overall economy.

          People keep screaming that Americans need to save more and then equally scream if they don't spend their windfalls to stimulate the economy.  Be glad if you get some tax savings and not so worried about every dime going in the 'right' direction.  The important thing is to get the overall direction aimed correctly.

          Fine tuning can come later.  We can't do everything at once.

          this ain't no party.. this ain't no disco.. this ain't no foolin'around..

          by fernan47 on Mon Jan 05, 2009 at 10:27:00 AM PST

          [ Parent ]

          •  It doesn't matter where you're pointed (1+ / 0-)
            Recommended by:
            thethinveil

            if your foot isn't on the gas.

            The simple fact is that it has been conclusively proven that tax cuts and rebates have a smaller effect than direct spending.

            Obama has asked for lists of 'shovel ready' projects so that direct spending can start immediately, and those lists are already long; we don't need 40% of the two-year plan to be consumed by tax cuts for the purpose of 'immediacy'.

            Krugman's math already hinted that the package as a whole might be too small, based on an assumed multiplier computed on the basis of a much higher proportion of direct spending than 60%. By increasing the proportion of tax cuts, you reduce the overall multiplier of the total package, which means the package has to be bigger to achieve the same effect. And as Krugman points out, it's very bad if the package is too small, much less bad if the package is bigger than it needed to be.

            Shifting the emphasis away from spending may cause the package to fail. That is very concerning.

            We probably can't come back and tweak this very easily with 41 Republicans in the Senate, who would quite happily allow the country to fail completely so they could carry on with raiding its assets while blaming Democrats.

            I would never die for my beliefs because I might be wrong. - Bertrand Russell
            -5.38, -6.41

            by sullivanst on Mon Jan 05, 2009 at 11:05:19 AM PST

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            •  Only because (0+ / 0-)

              The simple fact is that it has been conclusively proven that tax cuts and rebates have a smaller effect than direct spending.

              That is only because people may save or pay down debt with some of the proceeds. This is not bad actually.

              Plus if the government is borrowing from China at 0% (and uses that money to fund the tax reductions) and a person who receives a tax reduction uses the funds to pay down debt that had been at say 10% that is a great deal.

              I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

              by taonow on Mon Jan 05, 2009 at 02:25:18 PM PST

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              •  In the long term, saving isn't a horrible thing (1+ / 0-)
                Recommended by:
                thethinveil

                But we don't borrow from China at 0%, so instead of individuals paying American banks at high rates, the country will be paying China at low rates. That's a net outflow of money from the country, which isn't a perfect situation.

                In the short term, we have some problems which won't be solved by saving.

                The CPI-U has fallen or remained exactly even each of the last four reported months. The decline appears to be accelerating: we are entering a deflationary spiral. This threatens to reduce not only the amount of a tax break that would be spent, but also the amount of workers' entire paychecks that get spent. As a further problem, in a deflationary spiral, business investment declines.

                We're also in a classic liquidity trap: for all the Fed's rate cuts, credit is still not easily available. The reason being not that potential borrowers can't afford the rates, but that the banks don't trust anyone's credit-worthiness and certainly don't see the current rock-bottom interest rates as justifying their perceived risk.

                So, the current state of play is that conditions will tend to make taxpayers (both individuals and corporations) save rather than spend their tax breaks, and banks will be more likely to keep rather than invest or loan out deposits. In other words, any tax break will be tucked under someone's mattress.

                We need something that will break the deflationary spiral. FDR showed the way: direct government spending on projects that will benefit future generations.

                The notion that when the economy is contracting, it's OK to be paying down debt is just a personalized version of the classical economic theory that caused the Great Depression and has us teetering on the verge of another. We need Keynsian counter-cyclical pressure, not classical positive feedback. Save when times are good, spend your way out of trouble.

                I would never die for my beliefs because I might be wrong. - Bertrand Russell
                -5.38, -6.41

                by sullivanst on Mon Jan 05, 2009 at 03:37:01 PM PST

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                •  This is not (0+ / 0-)

                  This is not the same situation as the Great Depression. While I agree with much of what you wrote...

                  We need Keynsian counter-cyclical pressure, not classical positive feedback. Save when times are good, spend your way out of trouble.

                  ...unfortunately we spent tons when times were good. Now there is nothing left to spend.

                  It's interesting though to see Keynes' theories resurrected from the economic graveyard.

                  I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

                  by taonow on Mon Jan 05, 2009 at 05:14:25 PM PST

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                  •  Yes, it is like the Great Depression (0+ / 0-)

                    unfortunately we spent tons when times were good. Now there is nothing left to spend.

                    That is exactly what happened back then, too. Admittedly national debt was a smaller fraction of GDP in 1932 than it is in 2009, but the world was not used to debtor nations at that time; now the debtor nation is the norm, so relative to fiscal culture our current national debt is no more alarming than it was back then.

                    We must never forget that the 1937-8 recession was caused in large part by a premature attempt to balance the budget. This is one part of the trickle-down argument that we must adopt: future growth will pay off today's borrowing. Because if we don't, future recession will erase today's saving.

                    I would never die for my beliefs because I might be wrong. - Bertrand Russell
                    -5.38, -6.41

                    by sullivanst on Tue Jan 06, 2009 at 06:04:37 AM PST

                    [ Parent ]

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