PSA: Basic economics, or how a tax cut can reduce unemployment

[MH1]

We are in a recession because the economy isn't growing*. Companies lay off workers because there is no demand for their product or service, and that is because nobody is buying. Why is nobody buying? Either they can't afford it, or they don't need it.

'Supply-side economics' (in quotes because it's bulls**t, aka voodoo 'economics'):

a. Give money back to the corporate owners and they will invest in making more things. (voodoo because: refer back to reason for the recession.)

or
b. Loosen regulations so companies can make things more cheaply. (Mostly voodoo but may have some effect because some people may now be able to afford the product. But unless it's a HUGE cost savings passed on to the consumer, it's not a big effect. And at what cost to society? If it's a stupid or ineffective regulation, none - hence why regulatory reform isn't necessarily always bad, but it's still only a small effect. If it's an important regulation, is the value of the tiny stimulus worth what is lost by giving up the regulation?)


Keynesian economics (aka, Economics 101)

Put money back in the pockets of people who are highly likely to spend it. This starts with, but is not limited to, those who are already spending everything they have and will spend every cent more they have, just to survive or meet a basic standard of living. It does not include people who already have lots and lots of money in the bank and probably don't even want that third yacht.

Increased spending drives demand, which in turn means producers will produce more. This is the opposite of voodoo economics, because in voodoo economics, producers were expected to make stuff that wasn't selling anyway, thus incurring additional production and inventory costs for no profit! In Keynesian economics, producers make more stuff because it's selling, and thus the producer makes more profit. Then the producer needs to hire more people in order to keep increasing output. In turn, those newly hired people have more money and more financial security, and they spend more, driving more demand, driving increased output by other producers, driving increasing hiring. (Positive feedback loop.)


~~~~~~~~~~~~~~~~~

The above is to address the many queries I see at DU that wonder how a payroll tax cut, or any tax cut, will help the unemployed. If demand increases enough, employers will hire more people so they can keep producing to meet demand. Also, with a better economy all around, those who can afford it will be more likely to contribute to organizations that help those remaining unemployed.


(* Fine print: of course this doesn't address the fact that permanent growth is unsustainable and will ultimately come up against the cold hard reality of limited resources. However we aren't there yet. It's going to get damned ugly when we do get there. But it's a ways away and hopefully humanity will voluntarily reduce its birthrate and take other necessary measures in time to avoid the worst of the looming destruction. Meanwhile, there is suffering now that needs to be addressed, and if we can't address it from a sustainability model (zero chance of that in this political climate, not to mention state of non-education of the masses concerning this stuff) then morality says we need to address it the best way we can, to reduce as much suffering as we can. IMHO anyway. The best way we currently know is Keynesian economics, unless you prefer to take over the military and redistribute wealth by force. Which ain't happening and if it did, you might be surprised how much you find you REALLY dislike the reality.)

I have to run out now. I can't promise I'll be back to address comments. I'm just putting this out there because it seems there's some confusion around the issue, and I genuinely want to help dispel any genuine confusion. I was lucky to get an Economics class in high school, but it was an elective and as far as I know, it's still not a mandatory class at any time in public education; I think it should be. (I also took a couple semesters of Econ in college, but these basics could have come from my high school class.) So I'm assuming that not everyone has been exposed to basic economic theory. I think it makes a lot of sense, but I wouldn't have known it if I hadn't been taught it. And of course there are finer points and parameters that I'm blowing past, but on a macro level, this is the gist, and it's held up well over the years. (Any actual Keynesian econ experts out there want to critique my presentation, go for it. I'm just trying to keep it simple.)

[JoePhilly]

1. Corrrect ... more money in the hands of the middle class, the more they

spend, increased demand for goods and services, more jobs.

[TheKentuckian]

2. You do realize that in terms of real dollars , the benefit goes to higher earners

that aren't going to spend and if they did you still have weak stimulus? So weak that the benefit doesn't offset the wage destruction and job losses built into the plan. Matters are made worse when you pay for the cuts by sucking it out of the programs the bottom of the shitpile need to get by even in the best of times.

Burning the seed corn is not stimulus, planting more corn is. He hope is that the extra stocks will get the community through a brutal winter and more able bodies will be available to do next seasons planting, care, and harvest to keep everything moving.

We are still using the voodoo economic model here but are just excluding the top 20% or so. The impact dollars are still going to higher earners and those at the bottom that would really spend are getting a nearly unnoticeable benefit that isn't enough to counter higher prices.

At best, this is a counter contraction effort.

[Warren Stupidity]

3. The payroll tax cut goes to everyone working and because of the cap

and the regressive structure of the tax, it goes disproportionately to lower income workers not higher income workers. (If you are over the cap you get NOTHING.)

There are other arguments against the payroll tax cut, but it is a good way to do stimulus spending.

[whosinpower]

7. He argues that it is a short term stop gap measure

And I see where he is coming from. Think of it this way....wages have declined over the years - and now the only way to increase those wages - is to cut payroll taxes...this is a short term measure - but that stimulus will eventually find its way to big business coffers to where it gets locked up on Wall Street.

America needs to grow small businesses that service the american main street economy. When there are trillions of dollars made through wall street speculating transactions - there is no longer any incentive to service main street. Until, that is, we get to this point - main street is gutted out, left to die while wall street still prospers.

If, however, the tax cut stimulus is combined with higher taxes to the wealthiest, there is a chance that the trend can change course. Government can and should spend where businesses will not invest. More infrastructure spending, investing in education, research and development - business will not spend on these because there is no immediate payoff.

[whosinpower]

6. And your solution would be?

I am not trying to be argumentative - just wondering what would be better stimulus.

The payroll tax cut directly puts more money into the hands of workers - who would, presumably spend it. You are saying that the wealthiest will eventually hoover that liquidity up and the stimulus will ultimately fail to stay liquid within the US economy. I get that.

There are other stimulus incentives that are directly targetting small business - 4000 tax cut per new employee (veteran?)

My thoughts on this are that in any "austere" environment, which is what we are seeing today - across the globe, is a psychological roadblock to confidence, optimism and thus spending. It dampens demand because folks are afraid of the economic future. It no longer matters that interest rates are and have been at historic low levels for almost a decade.

I am not sure this payroll tax cut will increase demand - because first of all - cost of living has NOT deflated, food and energy costs have increased. So, while consumers may welcome the extra few dollars on their paycheck - it will be sucked up by food and gas prices....thus just maintaining the status quo, instead of stimulus that would keep money liquid within the US economy to allow for increased growth and demand.

[Mr Deltoid]

4. Tax cuts are the least stimulative thing that can be done for an economy

According to the http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf">CBO

[MH1]

5. Not the best, I agree, BUT ...

1) it's easy, at least theoretically, because of the Republicans' no-tax pledge; so even if it's little it's something

2) if the current tax cuts on low wage earners is allowed to expire, that will not only be not a stimulus, but a drag. so even if this is needed to 'stand still' relative to the current situation, it is stimulatory relative to letting current cuts expire.

The point is that there is some stimulative effect of tax cuts, and CBO agrees. I think tinkering with regulations is even less stimulatory. I'm not sure CBO even addresses that. Probably because those would not be considered stimulatory at all in a rational economic model; but the republicans insist they are. My point is that in the rare instance that trimming regulations is stimulatory at all, it is very minor, and that case would be even less than tax cuts.

regardless, putting money back in the pockets of people who WILL spend it is stimulus 101. How it is done may make it more efficient or less efficient. But it is absolutely an economic stimulus.