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The Trickle-Down Theory of Stimulus

just what we need, more tax cuts (photo: Steve Rhodes via Flickr)

With the Great Bipartisan Tax Cut Compromise, President Obama has officially adopted the world view of Republicans.

1. No matter what the problem is, tax cuts are the solution.
2. Government cannot solve people’s problems.

Our current problem is massive unemployment, so the President and his team of bank-loving economic officials preach that tax cuts are stimulus. No matter that tax cuts for the rich have a poor payoff in stimulus. No matter that we are adding massive national debt. No matter that we are endangering Social Security. Tax cuts are the answer.

Stimulus that has real bang for the buck comes from direct government spending. Paul Krugman estimated that direct spending might have a three to one increase in GDP per dollar of added debt. And when we spend it on infrastructure projects, we have something of long-term value to show for it. The lowest bang for the buck comes from tax cuts. Obama ignores this fact in his explanations for his Great Bipartisan Tax Cut Compromise, and argues against all logic that this tax cut is necessary to prevent a double dip recession.

Let’s hope it does, because it comes at a very high cost. Obama is admitting that government cannot do anything useful to solve people’s problems, so it outsources the entire stimulus to individuals and corporations. It’s trickle-down stimulus: give the average family a couple of thousand dollars, give rich people massive tax cuts, and hope they’ll spend it on stuff and maybe that will encourage businesses to hire people, and maybe people will go back to work. I didn’t understand trickle-down economics when it meant that giving hundreds of billions of dollars in tax cuts to the top 2% of Americans, and I don’t understand it when it means giving small amounts of money to lots of people on top of hundreds of billions to rich people.

Let’s review. If a family making $75,000 gets a $2,000 one-time payroll tax cut, how likely is it to spend the money in a way that will increase employment? One likely step is to use it to pay down debt, as households have done for the last 10 quarters. The Fed estimates total household debt at the end of October at $13.4 trillion, of which $10.1 trillion was mortgage debt, and $2.4 trillion was other consumer debt. Paying down this massive debt load is a priority for families. Paying down debt doesn’t hire people. Instead, it increases the amount of cash on hand at banks and other lenders, and puts downward pressure on interest rates paid to small savers.

The second likely step is increased accumulation of savings for retirement and other major expenses. Household net worth was estimated at $54.9 trillion, up in the third quarter, but down from its pre-crash high of $65.9 trillion. Households are looking at threats to Social Security and Medicare, increases in costs of education, and economic uncertainty, both as to job security and taxes, housing values and just about everything else. Of course they will try to save. And that will increase the amount of money at banks and brokerages too.

The third possibility is purchases of goods. That might be nice for retailers, but a significant part of the money will go overseas, where many products are manufactured, and where US companies shift their profits to avoid US taxes. Buying an iPad might help Apple’s bottom line, but the iPad isn’t made here, it’s made in Taiwan, and you can bet that the profits aren’t repatriated. Taiwan’s tax rate was recently cut to 17% to compete with Hong Kong and Singapore. Apple will leave its profits there to build new plants and take advantage of cheaper labor.

The Administration has one more place to go begging: it plans to convene a CEO summit:

The administration wants to persuade U.S. companies to unleash some of the $1.93 trillion in cash and other liquid assets they’re hoarding in their treasuries. Cash as a share of total assets is at the highest level it’s been in a half-century, the Federal Reserve said last week. Mr. Obama wants the nation’s biggest companies to invest that money in expansion and new hires in the U.S.

This is pathetic. The most powerful country on the planet cannot do anything itself. It outsources everything, including job creation. It can’t rebuild infrastructure, which would create jobs. It can’t improve education, which creates jobs. It can’t improve our electric grid or invest in solar farms or wind farms, which would create jobs. It can’t do anything.

In other news, 20% of Tennessee families get food stamps, and the Republicans now control State government.

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