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Reply #19: Far Too Two Dimensional In Your Thinking [View All]

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ProfessorGAC Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Feb-09-04 04:29 PM
Response to Reply #12
19. Far Too Two Dimensional In Your Thinking
The rise in revenues in the JFK cuts were based upon the elimination of DOZENS of tax deferrals at the same time. So, the impact on the highest income earners was less profound than a 90% to 70% cut would indicate.

Also, there was a huge jump in productivity per worker due to the first advances in industrial automation. Since wages were being pushed up by big union successes (UAW, Steel Workers and The Teamsters), there was a lot of cash to chase after those more plentiful goods. Thus, growth without significant price inflation.

At the same time, the first wave of Japanese goods, all very cheap, hit the shores in the early 60's. The impact of this was that American companies targeted more value-added and higher value goods wich meant the reduction of net export value was offest by more durable goods being made and sold.

In the 80's, the revenues did not really rise. Any dimensional analysis will show that the revenues increased to within 2% of where they would have gone without the tax cuts, due to the lowering of interest rates in 1982 and population growth. Given the first big advances in electronic monetary exchange, the velocity of money changed radically in the early 80's, resulting the the same dollar buying more goods. Hence, reduced inflation (which was very high just prior) and more taxable income overall. (More than 2 people being paid with the same set of dollars drives up GDP, and the 19.6% of GDP as gov't revenues drives up those revenues, too!)

In reality, the real GDP growth was very poor in the 80's and the tax cuts didn't stimulate anything. The GDP was artifically propped up by massive increases in deficit spending, so the growth was artificial with no change in productivity to support it. Volcker lowered interest rates more to make the gov't borrowing more affordable than he did to stimulate growth. And, it's a good thing that was his reason, because it didn't improve real growth at all.

You're taking two points in fact and making a simple X/Y correlation. But, macroeconomics doesn't work that way. There are far more variables and outcomes that need to be examined.

Lowering taxes and impinging on revenues, while increasing spending is a dreadfully poor way to manage an economy.

Last point: Stores often lower prices, not just to increase volume, in hopes of enhancing revenues, but also to shed inventory. They can carry only so much inventory on their books before the liabilities of those goods not being sold begin to impact equity values negatively. As a result, the prices go down, not to increase revenue, but to lower inventory value, increase short term cash flow, and make those funds available for new salable merchandise. This is a perfectly acceptable financial tactic, but you also seem to be confusing economics with finance. They're not the same thing.
The Professor
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