The Stimulus Can Giveth and the Budget Cut Can Taketh Away [48]

WHEN the government inserts a large sum of money, and I mean a really large sum of money, into the economy it can have a multiplying effect, under certain conditions, on the economy. I have shown in other hubs that studies have come up with historic multipliers for such things as the Bush tax cut, 23%, to the Bush $250 tax rebate, 173%. My own very simplistic modelling for the Hub "A Response to Opinion Duck Regarding TARP and Stimulus" came up with a factor of 2.9 or 290%.

What this multiplier means that every $1 invested in the economy would cause an additional $1.73, in the case of the tax rebate, to be spent in the economy just because of that investment. To be sure, for this to happen several things have to in place:

1. The stimulus has to be large enough not to just simply absorbed into the economy
2. The interest rates have to be stable and not affected by the stimulus
3. The same for price levels
4. The stimulus cannot compete with private investing (which would drive up interest rates or reduce investment)
5. Its affect will be enhanced when unemployment is higher than normal

Now, I suspect a lot of Conservatives are rolling on the floor laughing their heads off about how preposterous I am, government stimulus's have NEVER helped the economy. They say this all of the time, it is all I hear from them on TV and the radio and in print and on the Internet; the stimulus is bull-pucky, it is worthless, it is worse than worthless, it makes the debt sky-rocket!

Don't you find it a bit interesting and ironic, at least I do, that their precious panacea to all ills that face America ... TAX CUTS ... is just that, an Economic Stimulus? What is even more ironic, is the Conservatives proudly proclaim far and wide that tax cuts, any tax cut, will stimulate the economy by, guess what, putting more money in the hands of American workers and corporations.That, they say. is how to grow the economy, put money back in the hands of those who can spend it ... hmmmm, where have we heard that before? If you guessed President Obama talking about his stimulus program, you would be right!

So then, isn't it reasonable to ask why wouldn't it better to give always give a tax cut rather than go through the bother of creating a stimulus program? Of course it is reasonable, that is a very good question and should be asked EVERY time the economy needs adjusting. The obvious answer to this question is that there is a time and place for everything. There is NEVER one right answer to same problem because the circumstances surrounding that problem might not be the same.

It is all a matter of Timing. I have shown where trying to stimulate the economy with a large stimulus program is Not the right thing to do, now I will show you where trying to stimulate the economy with tax cuts is not the right thing to do in the next section. The last section will look at when the timing is right and wrong for large spending cuts as well.

ALL tax cuts are, are stimulus' by another name. When, like the most recent Bush tax cuts, they are not in concert with significant decreases in government spending all that happens is:

• tax cuts decrease revenue requiring the government to borrow money to pay its bills
• the debt goes up
• the deficit goes up

When the government has a stimulus program, all that happens is:

• the government borrows money to give to the public
• the debt goes up
• the deficit goes up

Assuming the tax cut and the stimulus are of the same magnitude, the increase in debt and deficit are identical. (Now, to say those things, I assumed a whole lot of real world things away such as none of the money received by the citizens was spent on anything.so, as a consequence, there are no new tax revenues and the like.)

Now, what is different between tax cuts and stimulus' is tax cuts remove revenue from the government which it uses to provide the services to the people while a stimulus does not. It is this feature that leads to the matter of Timing. For people who actually understand how economic systems work and don't listen to uneducated political clap-trap that hasn't an iota empirical evidence to support their broad and brash claims, it is clear them that the solution must fit the circumstances and that there is a time for stimulus, a time for budget cutting, a time for tax cutting, and a time for simply doing doing nothing.

It is this certainty that leads me to the final section.

An Aside - I want to use this as an example in my continuing saga about Social Dominators (SD) and Right-wing Authoritarian (RWA) followers.  While it is clear to almost all that both a tax cut and an outright stimulus program attempt to do exactly the same thing, stimulate the economy, and it is also clear that both can succeed or fail, depending on the circumstances, SDs and their RWA followers deny it.  To SDs, and therefore the RWAs, a stimulas program will never work and a tax cut will always work, if you don't see that, then Rush Limbaud will think you are an idiot.  It is a characteristic of those who score high on RWA evaluations to be able to, in clear conscience, talk out of both sides of their mouths like this because they have a high degree to compartmentalize ... they simply don't see the conflict because they are so in tune with their authoritarian leaders.  SDs do, however, often see and understand the conflict but they have an agenda to follow and will ignore the truth and count on their RWA followers to carry it out.

There is a high probability that medium to high RWA scorers will not even bother to read analyses like this because it makes them uncomfortable, it causes to much conflict.  It is also true that their SD leaders don't want them reading these kinds of articles because it has been shown that once RWAs start to question their leaders and start to look into some of these discrepancies, the walls sometimes come crumbling down rapidly and they become a convert to the other side.

 I am going to have to whisper this so that my Florida relatives won't hear me and disown me, sometimes cutting federal spending can be a bad thing; and what the Conservatives are attempting to do today is a very bad thing!

I do need to say, to be fair, in other circumstances, it would be a very good and necessary thing given the size of the debt; but not today's circumstances. 

First, let me look at when it is a good time to cut spending.  The flippant answer is - when we can afford it.  But, that is basically it.  In order to cut government spending, you have to have a strong economy to absorb anti-growth impact.  ANTI-GROWTH??  What is he talking about?  Well think about it.

What happens when you cut government spending?  You stop paying people and you stop buying things; this, in turn, at the very least reduces tax revenues which, in turn, reduces the effect of the spending cut.  If the spending cut is big enough, which the one the Conservatives are proposing is, you could get into the reverse of the stimulus effect and have a negative multiplier where suppliers of government goods and services start laying off people and buy from their vendors which start doing the same thing.

That is why I suggest you can only cut spending in a strong, growing economy.  Otherwise you will risk recession.  The last example of where this worked successfully was the combination of the Bush-Clinton tax increase on the wealthy combined with substantial spending cuts in the early to mid-1990s.  The economy was growing at healthy 3.5+% and the tax increases were targeted at those who would not reduce consumption or investment significantly even in the face of a minor tax increase.  The result was the elimination of the deficit, the way it is normally counted, and near zero growth in the debt.

When don't you want cut spending in a big way?  Right now!  You have a real risk of driving America right back to where it was three years ago but this time with unemployment will over 10%, given we are at 9% right now.  The economy is growing only in the 2% to 3% range at the moment.  It is predicted to do much better next year but it certainly won't if it is driven backwards by mass layoffs caused by $100 billion dollars being taken out of the economy.

Consider, we are still at 9% unemployment.  Consider, American corporations are still not investing in America.  Consider, major banks are still not extending much credit to citizens and small businesses.  Consider, the economy is just now trying to get to where employment can sustain itself, a little over 3% is needed.  Consider, we are just on the brink of success!

Now think.  Think what will happen when $100 billion stop being introduced into the economy.  Government workers, or more likely government contractors, will be jobless and start drawing unemployment.  This number will not be insignificant under the Conservative's plan.  There will be a substantial decrease in purchases of goods which may have serious consequences to some of the businesses that provide those services, especially the smaller or specialized ones.  This will feed into a reversal of economic conditions in the country.  If it doesn't put our economy in a downward spiral, I suspect it will certainly stop it from growing for awhile and prevent any improvement in unemployment.  I firmly believe, because the logic is overwhelming, that this will happen if the Conservatives are successful.

Now, should the Conservatives, if they are unsuccessful, try again in say, three years after the economy is growing at 3.5 or 4% and unemployment is back down to 5 or 6%; ABSOLUTLY.  It is critical that we do so because the deficit and debt are clearly too high.  The point is, it has to be done at the right time so you don't kill the patient with the cure.

My personal resolution to this is what Bush-Clinton did.  When the economy hits the parameters I just outlined, eliminate the Bush tax cuts for the wealthy and approach the kind of tax cuts the Conservatives want.  I think you will end up with the same kind of deficit reduction Bush-Clinton did in recovering from the Reagan debacle.