Thursday, September 06, 2012

Favor Tax Cuts or Government Spending to Stimulate Economy

John Taylor lists here a few economists who argue that government economic policy has delayed economic recovery rather than help it along.

I agree.  First, our government, and most governments, are depressingly bad at designing economic policies conducive to economic growth.  In particular, the most recent bout of stimulative government spending went primarily to shoring up state finances since so many states found that their future obligations toward retired and retiring public servants were going to be hard, if not impossible, to meet.  How much extra money is a retiree going to spend when he/she finds out that the monthly pension they collect will still be coming?  Not much. 

You may argue that the backstopping of profligate state finances was necessary to prevent panic-stricken states from enacting austerity budgets.  But, you say, the next round will go toward "shovel-ready" projects like building roads and bridges (I'm starting to hate roads and bridges, by the way.  Now I just drive on the grass.)  Why is this seen as a good thing?  The rate of technological advancement promises to make many low-end manufacturing and labor jobs obsolete.  Why invest in labor and technology that will soon go by the wayside?  This promises to provide a very small bang for our government spending buck.  The government should instead focus on research and development of technologically advanced products and industries that improve technological advancement and promise future increased economic growth.

Simple, right?  Democrats generally favor government spending increases, and they are beholden to labor unions like the AFL-CIO, Teamsters, Teachers, et.c.  They have promises to keep, so they will have to continue to spend money on projects with less value and potential than what reason dictates.

Republicans tend to favor tax cuts (at least, their rhetoric does).  When taxes decrease, every individual receiving the tax cut has more income and they choose how to spend it or save it.  If they spend it, we get a clear signal about what products and services are in demand, a signal that the government cannot provide, and companies can respond by increasing their supply of products consumers actually want (this helps avoid misallocation of resources that lead to asset bubbles).  If they save it, then banks will lend out the savings to entrepreneurs and companies who are attempting to meet a demand they see in the economy.  Cutting taxes is more efficient, causing fewer distortions to the market.

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