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Sat Nov 17, 2012, 07:13 PM

Normal Economics and Supply-Side Economics

If the economy is slow and you cut taxes and borrow to make up the difference it has the effect of increasing growth in the economy. This is normal economics. Almost no serious person disputes it.

The same goes for spending. If you spend more and borrow to make up the difference it has the effect of increasing growth in the economy.

(The limit on borrowing is the point where borrowing has other effects that reduce economic growth, in the big picture, more than the stimulative effect creates. As a for-instance, if your borrowing causes interest rates to go up those higher rates have a contactionary effect on the economy. If the rates increase too much then your borrowing might actually be hurting overall economic growth.)

Both increased spending and cutting taxes have the effect of increasing economic growth. How much they do depends on the real world conditions at the time and what money is being spent on, or what taxes are being cut.

That is all normal, conventional economics.

Because the Republicans always want to cut taxes, that has created a false impression in some quarters that Supply-Side Economics is the idea that cutting taxes increases economic growth. It is not.

Trickle-down economics/Supply-side economics is a theory that cutting taxes for the rich is magicial, and creates jobs and growth in a way that spending and tax cuts for the non-rich do not. This theory is false. Tax cuts for the rich are the least stimulative, not the most.

But tax cuts for the non-rich are not always useless. A tax cut for the non-rich can be an efficient version of a "money drop"... of distributing government money widely, to the type of people who will spend it. The current payroll-tax reduction is like that. It adds a small amount to everyone's paycheck.

There are political arguments against using FICA as a means to do a money drop, but if we do eliminate the payroll tax reduction it should be replaced with some equivalent sort of money-drop.

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