Letting Bush Tax Cuts Die Would Kill Recovery: Analysts

[Mr. Big Dog 10,747]

That would make sense if the tax increase was temporary; unfortunately in light of all the budgetary issues that the US is facing right now, we are all very likely going to be paying far higher taxes down the road.

Not necessarily - when the economy recovers and produces jobs, the strain on the federal budget will be less severe. So, whatever helps in making that happen should be welcome. Expand business rather than sucking money out of them, boost wages and, hence, consumer spending and tax revenues in the bottom half of the income scale and things might just not look as bleak as they do now. I don't think it's a conicidence that the crash in the 1920's and that in 2007 were preceeded by ridiculous degrees of income concentration at the top while sustained economic expansions happened whenever income was distributed a bit more broadly. It's a concumer driven economy. Gotta make sure the consumer can consume in order to grow...

[Usui Takumi 1,562]

Not necessarily - when the economy recovers and produces jobs, the strain on the federal budget will be less severe. So, whatever helps in making that happen should be welcome. Expand business rather than sucking money out of them, boost wages and, hence, consumer spending and tax revenues in the bottom half of the income scale and things might just not look as bleak as they do now. I don't think it's a conicidence that the crash in the 1920's and that in 2007 were preceeded by ridiculous degrees of income concentration at the top while sustained economic expansions happened whenever income was distributed a bit more broadly. It's a concumer driven economy. Gotta make sure the consumer can consume in order to grow...

That's definitely my take on things.

[mawilson 2,133]

Not necessarily - when the economy recovers and produces jobs, the strain on the federal budget will be less severe. So, whatever helps in making that happen should be welcome. Expand business rather than sucking money out of them, boost wages and, hence, consumer spending and tax revenues in the bottom half of the income scale and things might just not look as bleak as they do now. I don't think it's a conicidence that the crash in the 1920's and that in 2007 were preceeded by ridiculous degrees of income concentration at the top while sustained economic expansions happened whenever income was distributed a bit more broadly. It's a concumer driven economy. Gotta make sure the consumer can consume in order to grow...

We can't grow our way out of this.... not with a 1.5 trillion dollar deficit.

[mendeleev 68]

We had higher debt compared to GDP after WWII -- and we grew our way out of that. Well, OK, part of the reduction is debt was from growth and partly from the compounding effects of a decade of 3-6% inflation. But I don't see any need for profound pessimism.

It will require capitalists to remember that capitalism is about risk taking, not hoarding money like scared little girls. After a while, they'll get it. But for now, the consumer and government are leading this recovery, and business remains on strike.

It is interesting, puzzling, and sobering, that presidencies that began with tax hikes in their first two years, were characterized by much more robust growth than those that sought to grow the economy only through tax cuts. I'm not sure what explains the trend -- it has been suggested that presidents who raise taxes are putting business and the wealthy on notice that they won't tolerate corruption.

[alienlovechild 75]

We had higher debt compared to GDP after WWII -- and we grew our way out of that. Well, OK, part of the reduction is debt was from growth and partly from the compounding effects of a decade of 3-6% inflation. But I don't see any need for profound pessimism.

It will require capitalists to remember that capitalism is about risk taking, not hoarding money like scared little girls. After a while, they'll get it. But for now, the consumer and government are leading this recovery, and business remains on strike.

Lots of big differences between post-WWII economy and now. For one thing, the U.S. was one the few major manufacturers not damaged by the war- little competition, so much so that the U.S. half of all goods and services for a while.

Risk taking? Consumer debt on consumer goods especially homes didn't boost productivity or exports. After WWII there was huge pent demand that stretched back to during the Great Depression. Now many Americans are maxed out on credit cards to put stuff in garages that are so filled up they can't park their cars inside.

If this is a recovery, then God help us next year when we get more of the same with people getting shorter fuses and less hopeful. Businesses will come around as the profit is always there but they're waiting for the other shoe to drop from the current gang running DC.

One source sez you got everything backwards.

"Underlying the government's report was an unusual economic crosscurrent: Corporate America is flourishing, investing heavily on new computers and other equipment. Meanwhile, many consumers are cutting their spending as they try to pare debts in the face of weak income gains, high unemployment and a shaky housing market.

Consumer spending rose a meager 1.6% in the second quarter, down from 1.9% in the first three months of the year, according to the Commerce Department."

http://www.latimes.com/business/la-fi-economy-gdp-20100731,0,6482212.story

[Pinocchio Liberal 268]

Well in the end, its a self defeating business model isn't it?

Only if your main concern is being such a victim.

[Kathryn41 3,205]

Please continue the discussion minus the personal attacks - the topic has been nicely addressed on both sides so far so let's keep it from going down the sewer.

[mendeleev 68]

One source sez you got everything backwards.

"Underlying the government's report was an unusual economic crosscurrent: Corporate America is flourishing, investing heavily on new computers and other equipment. Meanwhile, many consumers are cutting their spending as they try to pare debts in the face of weak income gains, high unemployment and a shaky housing market.

Consumer spending rose a meager 1.6% in the second quarter, down from 1.9% in the first three months of the year, according to the Commerce Department."

http://www.latimes.c...0,6482212.story

Alien, you need to be careful when you try to refute someone. You claim, erroneously, that the fact that consumer spending rose by 1.6% last quarter contradicts my assertion that consumer spending is leading this recovery. I would be embarrassed if my refutations were as consistently wrong as yours. But then, we seem to be different in many regards.

Consumer spending rose in Q2, not by much, but it rose. This is consistent with what I wrote. The consumer is in fact leading this expansion and business -- more specifically, business investment -- remains on strike. It is true that many consumers are paying off debt, and this inhibits their ability to spend more. As more of us get our balance sheets under control, things will get better. Regrettably, this will be a very slow recovery, largely due to the fact that the stimulus in January '09 was much too small compared with the size of the problem. I think everyone is surprised at the magnitude and consequences of this financial crisis that was caused by government adherence to horribly misguided orthodox Republican economic policy. Should they regain control this fall, much worse will probably befall the economy. This is the biggest domestic risk, going forward.

The fact that business investment is on strike is probably a manifestation of the liquidity trap into which the nation is falling. Even though banks and the wealthy are awash with dollars created by the Fed as a part of their brave quantitative easing policies, those banks and wealthy individuals who got a hold of those dollars are hoarding them and not putting them to work. The Japanese experience shows us that liquidity traps are really hard to get out of, especially when governments are too timid, as Obama, intimidated by an effective Republican minority, is intimidated, into not engaging in effective fiscal policy that might lead out of the trap.

Now, to review some basic things you should have learned in college. (I assume you went to college -- maybe you didn't and inadequate educational opportunities is part of the problem here.) Many of us learned, in college, that the economy is very fruitfully modeled as having three spending streams. Consumer spending, business investment, and government spending. GDP = C + I + G. Consumers are doing what they can in the face of excessive indebtedness and high unemployment. Their spending is increasing. Fortunately, we have sufficiently intelligent government that G has increased very substantially in the short term. Later on, it will need to come into balance -- and this could be done in a good way by spending cuts and tax increases on the wealthy. Investment spending remains very depressed. There are plenty of investment opportunities in this country, especially those related to creating a clean energy economy, that go unfunded because banks and investors remain on strike. It is a real pity. Later, perhaps, they will remember why they exist and start to serve their social function that also goes right to their own financial self-interest. By now they seem, as a whole, do be a bunch of sorry little girls afraid of the dark -- or something like that.

It is true that corporations are reporting very strong earnings. This further shows that business has a lot of capital that they could invest. But they are not doing so. The "I" part of the GDP identity remains far too close to zero. And, because of that timidity, the recovery will be a lot weaker than it would be if business exercise courage. But we don't expect that, do we: it is only something we expect from the long-term unemployed who are supposed to move from wherever they are where they can't find a job to some other place that also doesn't have jobs.

As reported in yesterday's NYTimes: "So far, the recovery is remarkably normal for a postfinancial-crisis recovery," said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of "This Time Is Different," an economic history of financial crises." What Rogoff refers to is that the consumer leads, in an anemic way for sure but nevertheless leads, the recovery and that business remains on strike. This is a typical consequence of financial crises.

Edited August 1, 2010 by novotul

[웃 910]

Regrettably, this will be a very slow recovery, largely due to the fact that the stimulus in January '09 was much too small compared with the size of the problem.

The deficit in '09 was $1.5 trillion, give or take $100 BILLION. You think we should have spent more than this?

I am not an economist so I don't know the answer (and obviously our very best economists don't know the answer). But it's easy to find economists that support a spend-more approach as well as a spend-less approach. So there is no right answer. There are geniuses with strong economics backgrounds that are extremely liberal and conservative.

Here is an article from a Stanford economist that is apparently supporting a conservative approach:

July 20th, 2010

The Best Stimulus is to Reduce the Deficit

If we're not careful—and less spendthrift—the U.S. economy will be heading for a state of permanent recession, argues Stanford economist John B. Taylor.

The current slowdown in the U.S. economy is a serious concern. After growing at 5.6 percent in the fourth quarter of last year, the economy slowed to 2.7 percent in the first quarter of this year and likely to only 2 percent in the second quarter. It's not the V-shaped recovery it should have been, and as a result the economy is not generating enough jobs to bring down unemployment from tragically high levels.

Some argue that we need more deficit spending—another stimulus package—to boost the economy. I agree that the economy needs a boost, but not in the form of increased deficit spending. In my view, the economy is being held back by high deficit spending and related policy uncertainties. The large deficits are causing the federal debt to explode, raising concerns about how it will be financed.

The Congressional Budget Office projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.

Data recently released by the Congressional Budget Office give plenty of cause for concern. The CBO focuses on debt in proportion to gross domestic product, a measure of the resources available to service the debt. According to the CBO, the debt will reach 62 percent of GDP this year, a level not seen since 1951 when America was still working off the debt from World War II. But rather than decline as it did in the 1950s and 1960s (to less than 30 percent of GDP), the debt is now expected to rise sharply in the next 20 years—to 146 percent of GDP. In fact, CBO projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.

Experience shows that such high debt levels reduce economic growth. Historical studies conducted by the International Monetary Fund reveal that an increase in debt by 10 percent of GDP is associated with a decline in economic growth of 0.25 percent. Thus, the increase in the debt from 44 percent in 2008 of GDP to 62 percent this year is already reducing growth by about one-half a percent and the 84 percentage point increase in the next two decades by another 2 percentage points. That would bring the U.S. economy to less than zero growth—yes, a permanent recession.

Other studies support these findings. Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland find that economic growth is 2.6 percentage points higher for countries with debt below 30 percent of GDP than for countries with debt above 90 percent of GDP. They also find that ballooning debt makes the economy more susceptible to financial crises, as Greece just demonstrated. Paying interest on the debt is a growing demand on tax revenue, crowding out government programs: The CBO forecasts that interest on the debt will eventually exceed spending on all government programs combined if we stay on the current path. Such high interest payments will eventually lead to high inflation as people realize that inflating the debt away is the only recourse.

In years past, some argued that we should not worry about the debt because it is paid to ourselves, but half of U.S. government debt is owed to foreigners, which is obviously a burden on future generations. In the meantime, our foreign policy suffers: A country's bargaining position is weaker when a creditor country is on the other side of the negotiating table.

Not all the increase in the deficit is due to the stimulus packages and the recession; unsustainable growth of entitlement programs is a big part of the problem. But a focus on deficit spending distracts from efforts to address the long-brewing entitlement problem. Adding to the budget uncertainty is that many tax provisions are scheduled to expire in just six months, and without legislative action, there will be a substantial tax increase on all Americans.

The reason why a deficit-reduction plan is not being articulated and carried out now is apparently a concern that it would remove needed stimulus from the economy. But for all the reasons listed above, the best economic stimulus would be for the government to set a clear path now to reduce the deficit and to bring down the debt in the future.

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at Stanford's Hoover Institution.

http://www.thedailyb...-a-deficit-cut/

Edited August 1, 2010 by Lord Infamous

[luckytxn 2,264]

I find it strange that no one is saying maybe the one thing that will help this country financially and that is to stop spending so much. Now the main thing to do to stop spending so much is to reduce the government to levels that is supportable. Ok ok I know it is radical and all but just imagine the outcome if the government reduces to a size where their is no deficit at all and even better to have some surplus and pay down some debt. What does anyone think will happen?

[mendeleev 68]

I find it strange that no one is saying maybe the one thing that will help this country financially and that is to stop spending so much. Now the main thing to do to stop spending so much is to reduce the government to levels that is supportable. Ok ok I know it is radical and all but just imagine the outcome if the government reduces to a size where their is no deficit at all and even better to have some surplus and pay down some debt. What does anyone think will happen?

luckytxn, and I agree with you and apparently with Lord Infamous that firm action will need to be taken regarding the deficit in the coming few years. The chief questions are when and how.

This string involves scaremongering that allowing the Bush tax cuts to the wealthy to die, as they should die, would kill the recovery. This is unlikely. In fact, those tax cuts should expire and the sooner the better. As I mentioned above, the large increase in money supply that has gone almost exclusively to the banks and to the rich is doing the real economy no good at all, because they are hoarding that money rather than putting it to work in investments that would speed the recovery. Increasing tax on that idle money will be a good step toward economic recovery. For sure, additional steps need to be taken.

It is most relevant here to point out that we have nearly 30 years of experimental data in this country that shows that cutting taxes to decrease the debt load of government does not work. The ratio of debt to GDP increased very substantially under Reagan and Bush I, then decreased under Clinton (who raised taxes in his first year of office) and then exploded again under Bush II who cut taxes and put together huge spending programs that were not paid for.

Here's something of an aside: It is a strange fact that, in the past 80 years of US economic history, amongst Presidents who served two terms, those who raised taxes in the first two years of their first term saw much better economic results (in terms of overall GDP growth, especially, but also in terms of lower unemployment and GDP per capita) than President's who cut taxes. This is a peculiar fact because no economic theory that I know of explains it. The blogger who showed this correlation (I'm regrettably to tired to find him now -- if it turns out to be a point of interest, I'll dig up some links in the next couple days) suggests that the increase in taxes serves as an indicator regarding the tolerance of that Presidency to tolerate corporate corruption. Now, we know that there was a big explosion of corporate corruption under Bush II but I don't know how robust the trend is if we go back and look at Reagan, Nixon/Ford, and Eisenhower. But this is an intriguing suggestion.

But this fact also might encourage Obama to allow those tax cuts to expire and to get his first tax increase on the books.

[luckytxn 2,264]

We may have in this country not a long history to show that increasing or even having taxes does something but there is a long rich history of taxation to show whether it is a burden or a boon to a country. There are many thoughts but overall it is a burden to tax and pull out wealth of a country and let a bureaucracy take it. It is good though in a sense to have some debt and service that debt to get money circulating into an economy the only arguments mostly are how much is good until it is a detriment.

It is very inefficient for a government to take over a segment of a economy as a bureaucracy is thus entered that consumes more than it would have if it was left in a private state. This has been shown always to be the case.

It was shown by our very own depression that we had in the 20's that we could not spend our way out of it. It was tried and it was unsuccessful. In fact it was shown to probably have deepened it. That may very well be what is happening to us now. When one tried to pump money into the economy to prop it up or programs initialized in lieu of a economy doing it for us then the only way to ever keep the economy going will mean to keep doing that. The money will run out and then you are right back where you started but only poorer. To do this then taxes from others will need to be collected and that is money that could have been used by the very thing to get the economy going and that is business and consumers. It also makes business and consumers want to spend less than they would as they have no idea what their revenue will be next year. It also makes business not want to hire anyone as they do not know if they can afford to do so since they have uncertainty now and no stability.

Now since the Socialists are such the "IN" thing now and profits are the enemy then why should any business even try to invest in themselves? The ones with the money are the ones that create jobs not government. Most of all jobs are because of small businesses and they are the ones the least able to absorb uncertainty. Their profit margins are thin as any businesses is. Tax more of that profit and there is less money for hiring or improvements.

I am not blaming Obama the Socialist for it all as the other party spent more than they should. I do thank Obama the Socialist though for finally showing that deficits can be scary. It took a lot to wake people up and that is the shame here. Us people should have been more vigilant way before now. We fed at the trough happily and carefree. All a politician had to do was promise the moon at no or little cost and we all ate it up.

Edited August 1, 2010 by luckytxn

[alienlovechild 75]

Regrettably, this will be a very slow recovery, largely due to the fact that the stimulus in January '09 was much too small compared with the size of the problem. I think everyone is surprised at the magnitude and consequences of this financial crisis that was caused by government adherence to horribly misguided orthodox Republican economic policy. Should they regain control this fall, much worse will probably befall the economy.

The Japanese experience shows us that liquidity traps are really hard to get out of, especially when governments are too timid, as Obama, intimidated by an effective Republican minority, is intimidated, into not engaging in effective fiscal policy that might lead out of the trap.

Later on, it will need to come into balance -- and this could be done in a good way by spending cuts and tax increases on the wealthy. Investment spending remains very depressed. There are plenty of investment opportunities in this country, especially those related to creating a clean energy economy, that go unfunded because banks and investors remain on strike. It is a real pity. Later, perhaps, they will remember why they exist and start to serve their social function that also goes right to their own financial self-interest.

Why did we need a larger stimulus if some the money from ARRA still hasn't been spent? The point of any economic stimulus is to get economy moving in short order not kicking in later when the economy isn't in a recession.

Not sure about how the GOP gets all the blame yet the recesion has been entirely presided over by a Democrat-controlled Congress since 2007. I like the bit how the GOP minority is intimidating the Democrats into inaction. If the Dems had shown a track of record of solid accomplishments which led to positive outcomes, they'd have a far stronger political situation but it was not to be.

I went to several colleges but wasn't an econ major.

The idea spending cuts and tazing the wealthy doesn't square with reality. The biggest growth in spending comes from entitlement programs that can't be cut. Taxing the wealthy assumes no tax shelters or that the rich won't simply take their money abroad. The reality is some the tax burden will hit the middle class as well. The clean energy sector won't lead to your nirvana as without heavy subsidies, it's nonexistent because the price of oil hasn't be high enough over a long period to make going green into making green. Banks don't exist to serve a social function but to make money.

[Dan J 277]

Not sure about how the GOP gets all the blame yet the recesion has been entirely presided over by a Democrat-controlled Congress since 2007.

The damage was done way before 2007. Cause and effect relationships in the economy are never immediate. Even if the Democrats never took control of congress, the fallout would have still happened.

The biggest growth in spending comes from entitlement programs that can't be cut.

Entitlement programs are founded by a specific separate tax for that purpose. While there are some problems with those programs which is not really part of this discussion. The majority of spending from general funds goes directly or indirectly into defense.

Taxing the wealthy assumes no tax shelters or that the rich won't simply take their money abroad.

Some will or try to. The IRS has been cracking down on it, and has successfully gotten records from some banks that were being used as tax shelters to persecute tax evasion.

The reality is some the tax burden will hit the middle class as well.

Yes probably, the part of the middle class that actually pays taxes and doesn't get to deduct/credit it all. Thats fair isn't it?

The clean energy sector won't lead to your nirvana as without heavy subsidies, it's nonexistent because the price of oil hasn't be high enough over a long period to make going green into making green. Banks don't exist to serve a social function but to make money.

We subsidize oil too. To be fair, other energy technologies should get at least equivalent subsidies. The cost of oil will go up in the future. It takes time to develop new technology. If you want the market to handle it, we wont start developing new technology until oil prices start increasing significantly. The transition at that point will be rough, especially if it takes years for new technology to come to market. Now, we can plan long term and get started on it now and we will have the technology ready when it becomes necessary, instead of scrambling at the last minute.