posted
This was going to be a post in the state of the union (what I heard) thread, but I decided to put it out where more would see it, compared to that vitriolous thread.
*snorts at idea of tax hikes causing a recession*
Of course, I also snort at the idea of tax cuts causing a recession. Or tax cuts causing a boom. Or tax hikes causing a boom. That is, any of them being used as a general principle for economics.
Anyone who thinks they have found the one true solution, particularly in the actions of the fisc, is full of it (one big reason I dislike GWB -- his economic reasoning, isn't, as O'Neill made so clear). Economics is complicated, and highly situational. We know how a lot of it works, but not nearly so much as we'd like. And one thing we do know is that general tax cuts have almost no short term effect. Another is that monetary actions have far greater effect, particularly in the short term.
Tax cuts helping? I can tell you the one single tax cut that's raising the indicators: capital gains tax cut. Its the equivalent to lowering the prices on stocks without changing company valuations. And more activity in the stock market equals a general stimulus. You want to know what that middle class tax cut did? Bubkiss, so far. Over the long term it will likely have a good effect -- taxes WERE too high, as even most of the opponent's of Bush's tax cut plans agreed.
And you know what? Clinton's tax increases were a great move as well. You know why? Because the economy was in an upswing. They definitely served one purpose: getting the government out of deficit by dragging it closer along with the economy, and likely served another as well: dampening the upswing a bit so that the downturn wasn't nearly so bad.
Most of the tax cuts being implemented down the road are likely going to be much, much worse for the nation. The federal government has little direct influence on the economy, but the large debt necessitates a certain level of taxation that will be a depressant long into the future. Large tax cuts will have very little direct ameliatory effect (the actions of the Greenspan-a-like will have far more impact in any given year, and the effects of most tax cuts will have been as ripples on a breaker), but will definitely have a great indirect negative effect, as they force taxes to be much higher in the long run.
Note that this is only true because a certain President and a certain Congress aren't cutting spending before cutting taxes, to know how much tax they can safely cut.
Oh, and you want to know another thing that's done far more for the economy than the middle class tax cut? Greenspan saying that they've gone about as low as they're willing to go with the rate cuts. In a growing economy, a rate raise will mean more investment. Which is why a lot of people are jumping into the market now, to catch the upswing caused by the increased investment.
Posts: 15770 | Registered: Dec 2001
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posted
This is why I can't agree with any politician making the economy their central issue in an election. The truth of the matter is that the President and Congress have very very little short-term effect on the economy. Increased spending is offset by the knowledge that taxes must rise to compensate. Decreased taxation is offset by the knowledge that spending will decrease. Historically, the government's fiscal policy has shown very little effect on the ups and downs of the economy one way or the other.
Monetary policy - what the Fed does - has shown a strong correlation, on the other hand.
Posts: 8120 | Registered: Jul 2000
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posted
On a side note: while the capital gains tax cuts are good (I like those), they are almost entirely a stimulus effect (that is, no long term direct effect).
The investment they stir up will raise the market in the short term as people take advantage of the situation, but that's just a disturbance from the previous "equilibrium". Actually, I think "equilibrium path" is a better term. Once the markets have adjusted to the new rate of taxation, it will be pretty much as if those taxes had stayed the same, except the government will have less income.
However, the fed can (and will, I strongly hope), take advantage of the short term boost and raise interest rates a couple notches, getting some real investment flowing into the upswing, and helping it sustain.
Posts: 15770 | Registered: Dec 2001
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posted
I think here would be a good place to post my fed interest rate change predictions.
I think the fed will "surprisingly" raise rates a tiny bit in the first four months of the year. I say surprisingly, because most predictions are for june or later.
Further rate raises will start sometime between mid july and mid september.
Posts: 15770 | Registered: Dec 2001
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