|
The Iraq war and 2005 hurricane season (still 5 weeks to go) have made
fiscal issues topic one in politics. So far, Pres. Bush insists that he won’t
sacrifice tax cuts for the wealthy to finance these huge expenditures, but
public sentiment may not support his “whatever it takes” bravura. If the administration could prove that the Bush Tax cuts really
stimulated the economy, that Trickle Down Economics was more than fantasy, you’d
think they would have laid that out in great detail with as much fanfare and
promotion as they did the President’s nationwide tour selling Social Security
privatization…On the other hand, maybe they’ve hoped the public believed that
theory, assuming that the party of business knew what they were talking
about. Too late, the public has developed ‘buyer’s remorse’ and questions the
MBA president’s plans, strategies and delivery. Challenges to Bush Logic will increase, however, especially now that
Tom The Hammer DeLay has been dethroned. His supporters will retreat soon
enough, and those he abused will be glad to be rid of his despotic style. GOP
unity, already frayed, will weaken, and moderates may have greater say in the
legislative session ahead. Bush will need to respond to this, appear to be leading it, and
eventually, reality may reemerge in the autocratic Beloved Leader wing of the
GOP. The Tax Cuts will again be a significant issue for the 2006 elections,
this time not easily defended by spin and distraction. kwc Do Tax Cuts for the
Wealthy Stimulate Employment?
By Robert H. Frank, NYT Business, Thursday, July 07, 2005 The
centerpiece of the Bush administration's economic policy has been large federal
income tax cuts aimed mainly at top earners. These tax cuts account for much of
the $2 trillion increase in the national debt projected to occur during the
Bush presidency. They prompted a large group of Nobel laureates in economics to
issue a statement last year condemning the administration's "reckless and
extreme course that endangers the long-term economic health of our
nation." The question of whether to make the tax cuts permanent is
still on the Congressional agenda. So it is an opportune moment to examine the
president's argument in support of them. Mr. Bush never pretended that the tax cuts were needed to
make life more comfortable for the well to do. After all, with the bulk of all
pretax income gains having gone to top earners in recent years, this group has
prospered as never before. Rather,
the president portrayed his tax cuts as the linchpin of his economic stimulus
package. He
argued that because most new jobs are created by small businesses, tax cuts to
the owners of those businesses would stimulate robust employment growth. His
policy thus rests implicitly on the premise that if business owners could
afford to hire additional workers, they would. But whether owners can afford to hire is not
the issue. What matters is whether hiring will increase their profits. The basic hiring criterion, found in every introductory
textbook (including those written by the president's own economic advisers), is
straightforward: If the output of additional workers can be sold for at least
enough to cover their salaries, they should be hired; otherwise not. If this
criterion is met, hiring extra workers makes economic sense, no matter how poor
a business owner might be. Conversely, if the criterion is not satisfied,
hiring makes no economic sense, even for billionaire owners. The after-tax
personal incomes of business owners are irrelevant for hiring decisions. The president's defenders might respond that business owners
often need money up front to cover the hiring and training costs incurred
before new workers can effectively contribute to extra production. The tax cuts
put that money in their pockets. That is true but does nothing to alter the
basic hiring rule. Owners who used their tax cuts to finance the initial costs
of new hiring would be acting, in effect, as their own bankers, lending money
to themselves in the hope of future returns. The test for whether such internal
loans make economic sense is exactly the same as the test for external loans. A loan from a bank makes sense if the firm's ultimate gain
from hiring extra workers is enough to cover not only their salaries but also repayment
of the loan plus interest. Internal loans must meet the same standard. They are
justified only if the firm's gain from hiring extra workers is enough to cover
their salaries and repayment of the loan, including the interest that owners
could have earned had they left their tax cuts in the bank. In hiring
decisions, the implicit costs of internal loans have exactly the same economic
standing as the explicit costs of external loans. In
brief, the president's claim that tax cuts to the owners of small businesses
will stimulate them to hire more workers flies in the face of bedrock
principles outlined in every introductory economics textbook. A second way the Bush tax cuts might have stimulated
employment is by inducing the wealthy to spend more on consumption. But a large share of the tax windfalls
received by the wealthy are not spent in the short run. And even among those
who are induced to spend more, the main effect is not increased demand for
domestically produced goods and services, but rather increased bidding for
choice oceanfront property and longer waiting lists for the new Porsche Carrera
GT. Such spending does little to stimulate domestic employment. Had the dollars required to finance the president's tax cuts
been used in other ways, they would have made a real difference. Larger tax
cuts for middle- and low-income families, for example, would have stimulated
immediate new spending because the savings rates for most of these families are
low. And their additional spending would have been largely for products made by
domestic businesses - which would have led, in turn, to increased employment. Grants to cash-starved state and local governments would
have prevented layoffs of thousands of teachers and police officers. And many
useful jobs could have been created directly. For instance, people could have
been hired to scrutinize the cargo containers that currently enter the nation's
ports uninspected. Economists from both sides of the political aisle argued
from the beginning that tax cuts for the wealthy made no sense as a policy for
stimulating new jobs. And experience has proved them right. Total private
employment was actually lower in January 2005 than in January 2001, the first
time since the Great Depression that employment has fallen during a president's
term of office. Robert H. Frank, an economist at the Johnson Graduate School
of Management at Cornell University, is the author of "Luxury Fever." http://www.nytimes.com/2005/07/07/business/07scene.html |
_______________________________________________ Futurework mailing list [email protected] http://fes.uwaterloo.ca/mailman/listinfo/futurework
