Comments on: The Trouble with Tax Cuts http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/ Politics, Religion, Science, Philosophy, Health Sun, 04 Jul 2010 20:42:20 +0000 hourly 1 http://wordpress.org/?v=3.0 By: Ryan http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-25 Ryan Sat, 21 Mar 2009 05:43:31 +0000 http://thefactofmyignorance.com/?p=171#comment-25 Well we have been in the negatives in the recent past, but the savings rate spikes in a recession.  We were up to 3.9 percent last december we're at 5.0% in January <a href="http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm" rel="nofollow">as you can see in this BEA report</a>, and I don't think the numbers are out for February yet but its likely much higher than that.  Plus tax returns and stimulus checks are treated very differently by the public than their normal expected income and a much higher percentage is saved. <div> </div><br> <div>Anyway, I do agree with the general sentiment of your comment.  I think the low savings rate in this country is certainly deplorable and in normal economic conditions I'm all for incentivizing savings.  And coincidentally President Obama has talked about that very subject pretty extensively.  He believes, and I agree on this point, that we need to move away from a consumption based economy entirely.  I think the money multiplier that Darryl referenced in his comment above is a better and more stable tool for economic stimulus than the "spending multiplier" I talk about in this post, when its working properly.  Unfortunately its not working properly at the moment (as I discussed in my response to his comment).  This article was meant to be a critique of the idea of using tax cuts for stimulus purposes in our current economic situation.<br /></div> <div> </div><br> <div>Like it or not we currently have a consumption-based economy, and our banking system is completely destroyed.  I think we have to pull our economy out before we can restructure it.  We can't ignore the data.  Incentivizing savings now may be an abstract moral victory, but we'd likely be throwing most of that money away.  Once things start looking up, I agree, we need to raise the federal funds rate, stop worrying so much about GDP growth as the sole measure of economic success, and shoot for a stabler, less consumption based economy.  Fortunately I think that is one of the lessons that will come out of all this.  At least I hope it will be.</div> Well we have been in the negatives in the recent past, but the savings rate spikes in a recession.  We were up to 3.9 percent last december we’re at 5.0% in January as you can see in this BEA report, and I don’t think the numbers are out for February yet but its likely much higher than that.  Plus tax returns and stimulus checks are treated very differently by the public than their normal expected income and a much higher percentage is saved.

Anyway, I do agree with the general sentiment of your comment.  I think the low savings rate in this country is certainly deplorable and in normal economic conditions I’m all for incentivizing savings.  And coincidentally President Obama has talked about that very subject pretty extensively.  He believes, and I agree on this point, that we need to move away from a consumption based economy entirely.  I think the money multiplier that Darryl referenced in his comment above is a better and more stable tool for economic stimulus than the “spending multiplier” I talk about in this post, when its working properly.  Unfortunately its not working properly at the moment (as I discussed in my response to his comment).  This article was meant to be a critique of the idea of using tax cuts for stimulus purposes in our current economic situation.

Like it or not we currently have a consumption-based economy, and our banking system is completely destroyed.  I think we have to pull our economy out before we can restructure it.  We can’t ignore the data.  Incentivizing savings now may be an abstract moral victory, but we’d likely be throwing most of that money away.  Once things start looking up, I agree, we need to raise the federal funds rate, stop worrying so much about GDP growth as the sole measure of economic success, and shoot for a stabler, less consumption based economy.  Fortunately I think that is one of the lessons that will come out of all this.  At least I hope it will be.
]]> By: December http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-24 December Fri, 20 Mar 2009 21:08:02 +0000 http://thefactofmyignorance.com/?p=171#comment-24 Where you aware that the savings rate in the US is negative? It's at its lowest rate in history. People aren't saving their money, they are spending it. Maybe if more people were saving money there wouldn't be so many people in foreclosures or on assistance from the government. Where you aware that the savings rate in the US is negative? It’s at its lowest rate in history. People aren’t saving their money, they are spending it. Maybe if more people were saving money there wouldn’t be so many people in foreclosures or on assistance from the government.

]]> By: Ryan http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-18 Ryan Wed, 11 Mar 2009 06:48:47 +0000 http://thefactofmyignorance.com/?p=171#comment-18 Darryl,  I was wondering if someone was going to bring up the money multiplier!  I would have liked to talk about it in the article since it is such an important element to consider here but it was already going to be so long as it is!  And just to make sure we're all using the same terms here by "money multiplier" I'm referring to the ratio that tells us the amount of money the banking system generates with each dollar of reserves.  Ordinarily I would agree with you because the money multiplier is normally quite significant.  But obviously the size of the money multiplier is determined by banks propensity to give out loans, and the recent credit crisis has had a significant negative impact on the money multiplier.  See this chart for recent statistics:  <a href="http://research.stlouisfed.org/fred2/series/MULT" rel="nofollow">http://research.stlouisfed.org/fred2/series/MULT.</a>   <div> </div> <div>As you can see the money multiplier is sitting at just below 1.0 right now, on its way back up from a low of somewhere around 0.8 (!).  <br> <div> </div> <div>Ordinarily, I think incentivizing savings is important and extremely stabilizing, but I think we have to realize that our banking system is broken right now, and waiting for it to fully recover before addressing these problems is probably not an option.  </div><br> <div> </div> <div>Also, while I added "(ie spending multiplier)" to the chart in my article, I did that only for simplicity.  In reality that number is just a straight calculation of overall impact of each of those options on GDP, so the tax cut calculations listed there include the effect of the money multiplier.  </div><br> <div> </div> <div>So I tried to emphasize in my article that I was talking about why tax cuts were not necessarily beneficial for stimulus purposes under our current circumstances.  Its not intended, of course, to be a sweeping condemnation of tax cuts generally.  And with the credit crisis in full swing, with the money multiplier where it is right now, it seems like incentivizing savings might not be in our best interests at the moment.</div> </div> Darryl,  I was wondering if someone was going to bring up the money multiplier!  I would have liked to talk about it in the article since it is such an important element to consider here but it was already going to be so long as it is!  And just to make sure we’re all using the same terms here by “money multiplier” I’m referring to the ratio that tells us the amount of money the banking system generates with each dollar of reserves.  Ordinarily I would agree with you because the money multiplier is normally quite significant.  But obviously the size of the money multiplier is determined by banks propensity to give out loans, and the recent credit crisis has had a significant negative impact on the money multiplier.  See this chart for recent statistics:  http://research.stlouisfed.org/fred2/series/MULT.  

As you can see the money multiplier is sitting at just below 1.0 right now, on its way back up from a low of somewhere around 0.8 (!).  

Ordinarily, I think incentivizing savings is important and extremely stabilizing, but I think we have to realize that our banking system is broken right now, and waiting for it to fully recover before addressing these problems is probably not an option.  

Also, while I added “(ie spending multiplier)” to the chart in my article, I did that only for simplicity.  In reality that number is just a straight calculation of overall impact of each of those options on GDP, so the tax cut calculations listed there include the effect of the money multiplier.  

So I tried to emphasize in my article that I was talking about why tax cuts were not necessarily beneficial for stimulus purposes under our current circumstances.  Its not intended, of course, to be a sweeping condemnation of tax cuts generally.  And with the credit crisis in full swing, with the money multiplier where it is right now, it seems like incentivizing savings might not be in our best interests at the moment.
]]> By: Darryl Pettersen http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-16 Darryl Pettersen Wed, 11 Mar 2009 05:55:46 +0000 http://thefactofmyignorance.com/?p=171#comment-16 Ryan, I understand the basis of your carefully thought out argument, but I don't think you have properly evaluated the importance of how increasing the savings rate will directly and indirectly give a boost to the econ0my.  Every dollar saved allows the banking industry to generate 3 to 8 times more dollars loaned (depending the fractional reserve requirements issued by the FED.)  These additional funds available for loans provide the capital for business expansion, residential loans, etc.  We need more saving incentives not less if we are to dig ourselves out of the mess we now find ourselves in.  I do agree that selective injections of government spending can have a positive impact.  For example, we are very close to some major breakthroughs with respect to super-conductivity.  If we (the government) can provide the R&D resources to make these breakthroughs commercially viable, we will be able to make every home an energy producer, rather than a user.  The solar power applications alone of super-conductivity should make the government sit up and take notice.  There are many other examples, too numerous to cite in this short comment, but I think you understand this approach very well.  Keep up the great commentary.  I enjoy your thoughts very much! Ryan, I understand the basis of your carefully thought out argument, but I don’t think you have properly evaluated the importance of how increasing the savings rate will directly and indirectly give a boost to the econ0my.  Every dollar saved allows the banking industry to generate 3 to 8 times more dollars loaned (depending the fractional reserve requirements issued by the FED.)  These additional funds available for loans provide the capital for business expansion, residential loans, etc.  We need more saving incentives not less if we are to dig ourselves out of the mess we now find ourselves in.  I do agree that selective injections of government spending can have a positive impact.  For example, we are very close to some major breakthroughs with respect to super-conductivity.  If we (the government) can provide the R&D resources to make these breakthroughs commercially viable, we will be able to make every home an energy producer, rather than a user.  The solar power applications alone of super-conductivity should make the government sit up and take notice.  There are many other examples, too numerous to cite in this short comment, but I think you understand this approach very well.  Keep up the great commentary.  I enjoy your thoughts very much!

]]> By: Eli Compton http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-14 Eli Compton Wed, 11 Mar 2009 05:09:16 +0000 http://thefactofmyignorance.com/?p=171#comment-14 I think I got stupider from reading that. I think I got stupider from reading that.

]]> By: Tom Humes http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-13 Tom Humes Wed, 11 Mar 2009 05:06:51 +0000 http://thefactofmyignorance.com/?p=171#comment-13 Nice Site layout for your blog. I am looking forward to reading more from you. Tom Humes Nice Site layout for your blog. I am looking forward to reading more from you.

Tom Humes

]]> By: Mike Harmon http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-12 Mike Harmon Wed, 11 Mar 2009 05:00:42 +0000 http://thefactofmyignorance.com/?p=171#comment-12 Hello. I would like to put a link to your site on my blog roll if you want to do the same for mine. It would be a good way to build up both of our readerships. thank you. Hello.

I would like to put a link to your site on my blog roll if you want to do the same for mine. It would be a good way to build up both of our readerships.

thank you.

]]> By: Stacey Derbinshire http://thefactofmyignorance.com/politics/the-trouble-with-tax-cuts/comment-page-1/#comment-11 Stacey Derbinshire Wed, 11 Mar 2009 05:00:39 +0000 http://thefactofmyignorance.com/?p=171#comment-11 Hi there, I looked over your blog and it looks really good. Do you ever do link exchanges on your blog roll? If you do, I'd like to exchange links with you. Let me know if you're interested. Thanks.. Hi there,

I looked over your blog and it looks really good. Do you ever do link exchanges on your blog roll? If you do, I’d like to exchange links with you.

Let me know if you’re interested.

Thanks..

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