A tax cut puts money into the economy and comes right back out to buy the extra Treasury bonds

[progree]

I get sick and tired of hearing the CONNEDservatives talk about how tax cuts stimulate the economy. When they say this, e.g. in a comment to a news story like http://news.yahoo.com/culture-hard-lessons-drive-gops-anti-tax-stand-072644634.html , then reply with this comment (any better ideas?)

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A $100 billion tax cut doest NOT put more money into the economy -- because the federal government immediately sells $100 billion in additional Treasury bonds to make up the revenue shortfall and continue to pay the bills. So the tax cut puts $100 billion into the economy only to come right back out of the economy to buy the extra $100 billion in Treasury bonds. So this crapola that the CONNEDservatives keep spewing about about how the tax cuts stimulate the economy is nonsense -- because it ignores the part about where the money comes from to make up the near-term revenue shortfall.
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[fasttense]

1. There is one very simple proof that tax give aways to the wealthiest

does NOT stimulate the economy - the current 2nd RepubliCON Great Depression. Raygun and others have steadily shrunk the portion of taxes the uber wealth pay to a 60 year low. And yet our economy is still very, very sucky.

I always believe my own eyes.

[progree]

2. Proof3: Clinton's economy created 22 million jobs. Bush II created only 1.1 million jobs

Clinton famously raised taxes on the upper brackets. The Clinton economy created 22 million jobs.

Bush II famously cut taxes (and of course all of the tax cut money ended up buying the Treasury bonds needed to finance the tax cut). The Bush II economy created only 1.1 million jobs (ironically by creating 1.8 million government jobs and destroying 0.7 million private sector jobs). The 1.1 million jobs over 8 years was not enough to keep up with the growth of the working age population, consequently the unemployment rate rose from 4.2% to 7.7%. The U.S. stock market (as measured by the S&P 500) fell by 37% during the Bush II years.

[golfguru]

6. Clinton also had to deal with repug congress in both houses!

Except for the first 2 years of his 8 year presidency.

[just55650]

8. +1000

[just55650]

7. +1

[Warren Stupidity]

3. It isn't that simple. The money circulates. It is stimulative.

The 100B in your example spent on T-bills issued to finance the 100B missing in revenue is then spent by the government to purchase 100B of goods and services.

Note however that if the government, instead of continuing spending at the same level, reduces spending by 100B - the stimulative effect is diminished.

Now ask yourself why in the midst of a new slowdown in the Great Recession the government is dead set on reducing spending?

p.s. raising taxes and reducing spending right now is fucking insane.

[progree]

4. No, not if the government doesn't increase spending

"The 100B in your example spent on T-bills issued to finance the 100B missing in revenue is then spent by the government to purchase 100B of goods and services."

No, there is not an additional 100B spent by the government on goods and services as a result of the 100B tax cut. The 100B in Treasury bond sales simply makes up for the revenue shortfall:

100B reduction in tax revenue made up for by 100B in additional bond sales = 0 extra money for the government to spend. And likewise a net of 0 for the economy.

Its true though that its not really all that simple (though its fun to watch the CONNEDservatives react to it). Actually, most of the U.S. Treasury bonds these days are purchased by foreigners -- Chinese, Japanese... so for the most part foreigners are paying for the tax cuts -- a net stimulus to the U.S. economy but at the cost of more unsustainable (yes unsustainable) debt to foreigners.

If the tax cut goes mostly to the wealthy, a lot of it is spent on foreign stock and bond markets and creating jobs overseas. And in creating asset bubbles everywhere.

[econoclast]

5. Ummm ... how is that different, then, from Government Spending?

Not sure you really like your line of reasoning ...By the same argument Government Spending puts money into the economy and it comes right out to by the extra Treasury bonds needed to finance the extra spending.

[Yo_Mama]

9. The same is true for unemployment and social benefits

When you are borrowing the money to give to people, it works exactly the same way. You put the money in the economy, and borrow that money by issuing treasuries, so the money comes back out of the economy.

in either case, you have foreigners buying your treasury bonds in droves, which is what appears to be happening. Then the borrowing temporarily stimulates the economy. Obviously, as with all good things, eventually it doesn't work any more if you keep doing it, because eventually you turn into Greece.

I think you are right about the tax cuts not being a good idea, because in a decade our economy will be way more hurt by it than it was helped back when the money was borrowed.

However, what liberals don't seem to grasp is that borrowing money to pay social benefits can produce the same effect. If you raise taxes and pay social benefits with them, the macro effect is neutral. The only economic benefit you would get would be if reduce the average need to save money so that more can be invested. (Like insurance) But you can't borrow money to do it once your total debt gets above 70% of your economy, because after that any efficiency effect is negated by the extra debt.

In the short term, programs like unemployment benefit and medical insurance and so forth have high benefits in recessions, because they make the downturn much less than it would have been by evening out fluctuations in income. So more money keeps flowing through the economy than otherwise would, fewer jobs are lost, and in fact government revenue is higher than it otherwise would have been.

But over the long term, if you get your tax/social benefit mix off so that you are always borrowing, you are causing more harm to the economy than good. And there is such a thing as taxation that is too high. A lot of activities have marginal profits, and raising taxes too high always cuts out marginal profit business activity, reduces jobs and cuts tax revenue.

To put it another way, if we all were being taxed 90% of our paychecks, most of us wouldn't have a job and few of those who did would go to work very regularly.

[progree]

10. Yup, good points all. Revisions and clarifications follow

econoclast } By the same argument Government Spending puts money into the economy and it comes right out to by the extra Treasury bonds needed to finance the extra spending. {

Yo_Mama } When you are borrowing the money to give to people, it works exactly the same way. You put the money in the economy, and borrow that money by issuing treasuries, so the money comes back out of the economy.

in either case, you have foreigners buying your treasury bonds in droves, which is what appears to be happening. Then the borrowing temporarily stimulates the economy. Obviously, as with all good things, eventually it doesn't work any more if you keep doing it, because eventually you turn into Greece. {

OK, I agree.

First on the tax thing of my original post - I should have specified that I was talking about a tax change that overwhelmingly favors the wealthy (like the Bush tax cuts where about 2/3 of the cut went to the top 20% and the remaining 1/3 went to the peasantry in the bottom 80%, something I heard Al Franken say FWIW); or the current policy debate about letting the top two tax brackets (affecting roughly the top 2%) rise to their pre-Bush level (so the 33% marginal bracket rate would rise back to 36% and the 35% marginal bracket rate will rise back to 39.6%, hardly an economic Armageddon scenario).

I don't remember the percentage, but the top few percent buy the vast majority of Treasury securities. So when we talk about a tax cut for the wealthy, we are talking about one that is financed mostly by the wealthy for the wealthy. Relatively little job creation here.

Now when it comes to social spending, its different, as most of it is targeted to people of low or modest means. This too, is financed by the sale of Treasury securities overwhelmingly bought by the wealthy. So you have a wealth transfer from the wealthy to the low- and middle- class. The unwealthy are much more likely to spend locally than the wealthy, thus stimulating the economy through consumer spending. (The wealthy tend to invest more of their money overseas, puff up asset bubbles everywhere, and fund a right-wing noise machine, lobbyists, and campaign finance system).

When it comes to targeted tax cuts for the lower- and middle-class, like the payroll tax cut (only the first $106,800 get the 2% tax cut), then its like social spending -- the wealthy buying the Treasury securities to finance the tax cut of the lower- and middle-class. With the same stimulus effect in domestic consumer spending as in the social spending example.

And then there's the major portion of Treasury securities bought by foreign investors.... to mess all this up...

The reason I posted the original posting (in effect a $100 billion tax cut is financed by $100 billion in Treasury security sales -- the $100 billion that supposedly flows into the economy from the tax cut flows right back out of the economy to buy the Treasury securities), is because, though oversimplified, I find its a great first response to a CONNEDservative who blathers about how taxing the wealthy -- "the job creators" -- will destroy job growth (also an oversimplified argument - the "job creators" would hire more if there was more demand for their goods and services rather than sitting on $2 trillion in cash). Then if they are even aware that most of the Treasury securities are bought by foreigners, then we can get into all of that and the unsustainably growing foreign debt implication.

But we don't have to start out talking to a CONNEDservative in hyper-intellectual "on the one hand, on the other hand" blah blah gobble-de-gook. As anything with a little bit of complexity is likely to just go over their head. (I'm not criticizing any post in this thread, in fact, as a Democrat I enjoy the mental stimulation of good ideas. Its just that at Joe's Bar, you're not dealing with policy wonks, but rather a couple dozen (at most) remembered bullet points heard from Sean Inanity and his ilk and virtually no understanding of economics)

[Sam1]

11. Tax Cuts do increase net government spending.

In the equation GDP = Government Spending + Consumption Spending + Investment Spending government spending is the difference between the the amount the government spends and the amount it collects in taxes. Therefore a tax cut does increase net government spending. It does increase the amount that the private sector has available to spend.

What about the bond sales? The bond sales will reduce not the money supply in the hands of the private sector but the amount of reserves held in the federal reserve system. At the present time there are reserves in excess of the amount necessary to support the money supply so the bond sales have at the present time no effect on the money supply.

However, at the present time tax cuts have little effect on economic activity because final consumers are using the cuts to clean up their balance sheets. Paying down debt has no stimulative effect on current economic activity. In effect the tax cuts are saved rather then spend and therefore have little effect.

[progree]

12. Yes, but I'm having trouble with your formula

sam1 } In the equation GDP = Government Spending + Consumption Spending + Investment Spending government spending is the difference between the the amount the government spends and the amount it collects in taxes. Therefore a tax cut does increase net government spending. It does increase the amount that the private sector has available to spend. {

Where did you get this formula? Are you sure that Government Spending in the above is actually Government Spending minus taxes (what you later then call net government spending)?

I'll use this terminology: if the government spends $100 billion and collects $80 billion in taxes, than gross government spending = $100 billion, and net government spending = 100-80 = $20 billion.

It doesn't make sense that GDP = Gross Government Spending - Taxes Collected + Consumption Spending + Investment Spending.

For example, what if my city government spends money repairing sidewalks and collects an assessment (tax) equal to what it spends. According to your interpretation of your formula (that Government Spending is really net government spending), there would be no increase in GDP.

However, what if instead, the city ordered homeowners to maintain their own sidewalks. If as a homeowner I spent $1,000 fixing my sidewalk, that would be Consumption Spending (and/or Investment Spending) and therefore add $1,000 to GDP.

I suspect that the correct formula is what you presented, but where "Government Spending" is gross government spending, not net government spending. Since a tax cut does not change gross government spending, GDP does not increase... (I know its more complicated than that)