Thursday, January 24, 2008

Tax Cut Druggies

Commenting on the upcoming stimulus package, the keen economic minds at Powerline inquire:
Along with election-year cash, the plan will include some tax breaks for businesses that are intended to stimulate investment. These are probably a good idea. I wonder, though: if more money in the hands of taxpayers and lighter tax burdens on businesses are now urgently needed to rally a slumping economy, why wouldn't it be a good idea to have lower tax burdens all the time?

I know just how they feel. When I urgently need painkillers because my body's in trouble, my doctor prescribes morphine. But then I wonder, why wouldn't it be a good idea to be strung-out on opiates all the time?

Seriously, they've got to be joking with this logic. The point of a stimulus package is to provide a temporary boost to the economy. It's not designed to increase economic growth permanently, and if it's built into the system, the economy would adjust around it (with unpredictable results) and the next time it slumped, which it will, we'd need to lower taxes again (at which point Powerline would wonder why not make it permanent again, until our tax rate was a flat 1% and the government was so weak we could be overrun by a squad of Haitian bellhops). Drug addicts know that you can rather quickly adapt to any level of stimulant -- for it to have any effect, you need to keep increasing the dosage.

On the other hand, even if Powerline's correct, a permanent working stimulus would not be a good thing either. Again, the point of a stimulus package is to provide a temporary boost in economic activity to get folks through tough times. You don't want that supercharger running when thing are good, else the economy get, well, over-stimulated (and we all know what happens then). Controlled growth is the key -- ask the Hoover administration what happens when things go too fast.

2 comments:

Cycle Cyril said...

Your analogy is awful, even superficially. This article indicates that stimuli are usually too late to make a difference and that our economy is self correcting.

For the economy to self correct it needs both profits AND losses. Interrupting either, as happened during the Great Depression under BOTH Hoover and Roosevelt, prolongs the agony.

Minimizing tax rates has been shown over and over again to increase tax revenues. The problem with deficits is, more often than not, the amount of spending that is done.

Further, as implied by Powerline's allusion to a retailer's aversion to sales but a desire to keep a constant low price on items, Powerline is not suggesting an elimination of taxes but a lower tax burden.

And there is nothing wrong with economic growth such that you want to restrain it. Any bubbles will pop and if let alone will be painful but for a brief period of time.

Of note the present sub-prime problem was a result of the government pushing banks to lend money to more people with questionable means because of politically correct ideology that banks were not lending enough to people with questionable means.

PG said...

cyril,

Of note the present sub-prime problem was a result of the government pushing banks to lend money to more people with questionable means because of politically correct ideology that banks were not lending enough to people with questionable means.

Do you have anything to actually back this assertion? I find it painfully unlikely that the Bush Administration -- the government under which subprime lending became a significant problem -- has been "pushing banks to lend money to more people with questionable means because of politically correct ideology."

Though the idea that Usury Is Bad isn't popular among Republicans, even the Bush Administration is unlikely to hate poor people so much that it would be pushing banks to lend money at deceptive rates to people with limited income and education, for properties at inflated value.

Seriously, do you have any evidence that the subprime lending was a product of a new kind of government pressure rather than a product of the same financial system that encourages college students to get high interest rate credit cards?

Moreover, as even two British comedians know, the reason the subprime loans and housing bubble pop have affected the rest of the market so much is that these loans were repackaged and given absurdly good ratings by Moody's et al., and bought up by supposedly intelligent financial institutions. (Goldman Sachs was the main exception to the rush off the cliff, and it's getting slammed for having made these products available to its customers while wisely short-selling them itself.)

If your alleged "pressure" is just the same government requirement as under several previous administrations that lenders not engage in racial discrimination, then you'll have to explain why this requirement suddenly was being taken seriously -- and to an extreme -- by banks in the last few years when they never seemed to notice it so much before. The share of subprime mortgages to total originations increased from 9% in 1996, to 20% in 2006.

As far as I know, there's nothing new in fair lending law, regulation or "pressure" to have caused this problem. Rather, there has been an explosion in new practices in the financial sector -- including both lending and securities -- that government regulators haven't kept up with. It's not a problem of government over-interference in the market; it's a problem of the market's getting too clever for the government, and for its own good.

My securities professor, who is so unPC that he didn't realize MLK Day was a holiday and puts references to "bimbos" in his exam hypotheticals, explained the issue without reference to politics. But hey, if you can invoke the evils of political correctness to explain finance, why bother learning about CDOs, MBS and SIV?