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Sun Nov 11, 2012, 09:37 PM

In case anyone forgot— Every dollar of the deficit = more than a dollar in the economy

Last edited Mon Nov 12, 2012, 12:00 PM - Edit history (4)

Macroeconomics kind of got lost in the shuffle during the drama of the election but, now that we are back to policy, here is what we have learned in the last century, and last decade.

Every dollar of the deficit represents more than a dollar in US economy. If we reduce the deficit by five billion dollars next year then the US economy will be five, ten, fifteen billion dollars smaller. The exact amount depends somewhat on exactly what was cut, or how revenue was increased.

Thus anything, and I mean pretty much anything anyone does about the deficit short term is destructive... crazy, really. That fact the average American does not believe this does not change the math.

As an obama economic adviser once said, to the shock of a TV host—when asked how we would pay for the stimulus package he said, "If we paid for it then it wouldn't be stimulus." Correct. The deficit adds extra money to the economy, versus merely rearranging the money. That advisor probably got a talking to because that truth is at odds with our national mythology... but it is true.

We can gain some from rearranging money. A new tax on the rich that went entirely to useful government programs, or to tax relief for the non-rich, would have a net positive effect. But borrowing the money has an even greater net positive effect.

__________

Everyone seems to recognize that the "fiscal cliff" would deal a blow to the economy. This is because the fiscal cliff would reduce the deficit—increasing revenue and cutting spending.

People will be panicked by this and will suggest that we need to do something to to fix the problem by increasing revenue and cutting spending. You will note that this supposed solution is the same as the problem.

So sane(r) people will push to increase revenue and cut spending at some fixed point in the future. This is more sane, but still dumb since we know a lot less about the future than we will in the future. The idea that we know today what year it will be okay to raise taxes and cut spending is foolish. Nobody knows that.

It is all politics. The bond market is not currently demanding a deficit reduction pageant so there is no good reason to have one. But we probably will... or won't, in which case the failure to pass some meaningless deficit cutting deal will be considered the worst thing that ever happened.

And where does this leave the Bush tax cuts for income over $250,000/year?

First off, the income tax is a minor part of the real Bush tax cuts for the upper class. The Bush capital gains rates and (important) the dividend income tax rate are what really matters to the very rich.

So, speaking about that whole wad of tax policy on upper incomes —the economic effect of letting the cuts expire depends on what is done with the revenue generated thereby.

If the upper income taxes increase and the deficit decreases it will please some beltway bobble-heads but it won't benefit the economy any time soon. Quite the opposite. But if taxes on the 1% go up and all of that tax money is spent on needed infrastructure or public employment or assisting the poor and unemployed that would be fine.

As long as the deficit doesn't go down in the short term. (2-3 years)

As to what will actually happen? Beats me. Both parties are apostate Keynesians. Most Republicans believe in Keynes while pretending not to, or thinking they don't. Most Democrats believe in Keynes, but many don't really believe it, thinking it must be a dodge of some sort.

The Reagan slogan machine has been so influential. Stupid rhetorical questions are treated as wisdom. "Name one country that ever taxed its way to prosperity (or borrowed its way to prosperity)." Answer: ALL OF THEM. All. Of. Them. There has never been a great or rich power that was not built on borrowing and "tax and spend."

So I never know what to expect from these things.

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Reply In case anyone forgot— Every dollar of the deficit = more than a dollar in the economy (Original post)
cthulu2016 Nov 2012 OP
DBoon Nov 2012 #1
madrchsod Nov 2012 #2
cthulu2016 Nov 2012 #3

Response to cthulu2016 (Original post)

Mon Nov 12, 2012, 12:04 AM

1. It's called a fiscal stimulus

it used to be standard policy when faced with an economic downturn

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Response to cthulu2016 (Original post)

Mon Nov 12, 2012, 12:10 AM

2. that`s in the first chapter of my econ101 book....

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Response to madrchsod (Reply #2)

Mon Nov 12, 2012, 11:41 AM

3. ...yet will be strangely absent in much discussion of what we need to do right now.

It's as if NASA a funding debate was dependent on the 'fact' that rockets cannot work in space because there is nothing to push against.

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