You (Don't) Gotta Believe
January 7th 2011 21:07
You’d think we’d learn by now – supply-side economics is nonsense, no matter how often the Republicans tout it. Giving more money and more tax breaks to wealthy people and businesses won’t improve the economy unless they use the money to expand, in the United States – and they don’t. Right wing economists get concerned about the money supply, the amount of cash that’s available to be spent, because an increase in the money supply leads to fears of inflation – but that doesn’t matter much if the cash is sitting in a safe deposit box or a Swiss account. Corporations are hoarding cash, as of last July they had $837 billion in cash reserves, but they weren’t hiring anybody. Keeping interest rates down and extending the tax cuts for rich people doesn’t mean they’ll spend any of the money. It seems as if the purpose of all the tax cuts for those who don’t need tax cuts are like building the cars they review on Top Gear or in Car & Driver - bragging rights. To stimulate the economy reliably, you have to stimulate demand, which means getting money to people who will be sure to spend it. According to USA Today, General Electric has $116 billion in cash and short term investments. But they’re sitting on it, waiting for somebody to order a new GE Evolution locomotive, or plan a solar energy source. Cisco Systems has $39 billion on hand and Microsoft about $37 billion, but in terms of hiring people and getting the economy moving, they’re not going to do anything until they see that they’ll have customers – in other words, waiting for somebody else to go first.
Unfortunately, this points out the flaw in all the economic planning, first by the Obama administration, and now by the Republican party. The Administration can be largely forgiven. When President Obama came into office, the United States was on the verge of a financial meltdown, and the approach of stabilizing the banks wasn’t unreasonable. You can make an excellent argument that it would have been more efficient to nationalize the whole mess,
Then there’s the claim that the current unemployment problem is structural, not cyclical. Cyclical unemployment means that when business is lousy, people get fired, but they get rehired when things pick up again. Structural unemployment means that there are people looking for work, but they have the wrong skills. There may be a little bit of truth to this – the boom in housing is over, and the number of people needed to build subdivisions in Phoenix won’t recover in the next few months. There are doctrinal advantages to belief in structural unemployment, since it means that repair is largely beyond the capability of government, and certainly not amenable to Keynesian remedies. Cyclic unemployment can be fixed with proper economic stimulation, but structural unemployment is the fault of people who made the wrong career choices, who studied brain surgery when the market is for rocket scientists. But structural unemployment would show major dips in specific industries when the rest of the economy is doing well. It would show intense hiring activity by industries which are unable to fill vacant positions, and rising salaries in those fields with high demand but severe shortages. A review by The Economist failed to show this sort of pattern – when the economy soured, businesses reduced staff, and have been slow to rehire. When they have rehired, it has been part-time or temporary workers to minimize expenses and avoid the cost of providing benefits.
There’s a third false claim making the rounds – that the inheritance tax represents double taxation. For people with small estates, which aren’t subject to the inheritance tax, the money in an account may well be composed of the money deposited from paychecks, along with interest and dividends. Taxing this money would be a form of double taxation since salaries, interest and dividends are taxed in the year of distribution. But larger estates commonly have a large proportion of unrealized capital gains. On March 2, 2009, the Dow Jones Industrial Average stood at 7,056. On December 2, 2010, the DJIA was at 11,655. Anybody who bought stock in 2009 and held onto it is probably showing a nice profit, but doesn’t have to pat taxes on the money until they sell. If they die and the money goes to their heirs, the capital gains may never be taxed. The larger the estate, the greater the likelihood that there are capital gains that haven’t been taxed.
Finally there’s the half-truth that the United States should lower its corporate tax rate because the US has the highest corporate taxes in the world. The Cato Institute reports that US corporate taxes are 40%, compared with Spain, New Zealand, and Mexico all at 30%, and Ireland at just 12.5%. What’s missing from this argument is a discussion of the tax loopholes available to corporations that bring down their United States taxes. According to a government report, More than 60% of all U.S. companies paid no federal tax at all during the boom years of 1996 to 2000.
Unfortunately, this points out the flaw in all the economic planning, first by the Obama administration, and now by the Republican party. The Administration can be largely forgiven. When President Obama came into office, the United States was on the verge of a financial meltdown, and the approach of stabilizing the banks wasn’t unreasonable. You can make an excellent argument that it would have been more efficient to nationalize the whole mess,
Then there’s the claim that the current unemployment problem is structural, not cyclical. Cyclical unemployment means that when business is lousy, people get fired, but they get rehired when things pick up again. Structural unemployment means that there are people looking for work, but they have the wrong skills. There may be a little bit of truth to this – the boom in housing is over, and the number of people needed to build subdivisions in Phoenix won’t recover in the next few months. There are doctrinal advantages to belief in structural unemployment, since it means that repair is largely beyond the capability of government, and certainly not amenable to Keynesian remedies. Cyclic unemployment can be fixed with proper economic stimulation, but structural unemployment is the fault of people who made the wrong career choices, who studied brain surgery when the market is for rocket scientists. But structural unemployment would show major dips in specific industries when the rest of the economy is doing well. It would show intense hiring activity by industries which are unable to fill vacant positions, and rising salaries in those fields with high demand but severe shortages. A review by The Economist failed to show this sort of pattern – when the economy soured, businesses reduced staff, and have been slow to rehire. When they have rehired, it has been part-time or temporary workers to minimize expenses and avoid the cost of providing benefits.
There’s a third false claim making the rounds – that the inheritance tax represents double taxation. For people with small estates, which aren’t subject to the inheritance tax, the money in an account may well be composed of the money deposited from paychecks, along with interest and dividends. Taxing this money would be a form of double taxation since salaries, interest and dividends are taxed in the year of distribution. But larger estates commonly have a large proportion of unrealized capital gains. On March 2, 2009, the Dow Jones Industrial Average stood at 7,056. On December 2, 2010, the DJIA was at 11,655. Anybody who bought stock in 2009 and held onto it is probably showing a nice profit, but doesn’t have to pat taxes on the money until they sell. If they die and the money goes to their heirs, the capital gains may never be taxed. The larger the estate, the greater the likelihood that there are capital gains that haven’t been taxed.
Finally there’s the half-truth that the United States should lower its corporate tax rate because the US has the highest corporate taxes in the world. The Cato Institute reports that US corporate taxes are 40%, compared with Spain, New Zealand, and Mexico all at 30%, and Ireland at just 12.5%. What’s missing from this argument is a discussion of the tax loopholes available to corporations that bring down their United States taxes. According to a government report, More than 60% of all U.S. companies paid no federal tax at all during the boom years of 1996 to 2000.
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