So I have this reader, he is very liberal and very concerned and a very dear friend, and we have been arguing about the solution to the current economic recession (I think I am going to stop using the term "crisis" because this country has weathered much, much worse.). Instead of continuing to back-and-forth with him in the comments section, I am just going to use this as a teachable moment for everyone.
He says…
But why do you believe that lowering taxes is going to help anyone that has actually been hurt by this economic downturn? And how long does your plan take? Years? And at what price? Bread lines and soup kitchens? Widespread bankruptcy and foreclosure? 20-30% unemployment? Do you really think the government should do nothing to create jobs, however temporary, including funding roads projects and other infrastructure projects? I just don't understand such a dogmatic approach that leaves no room for the possibility that another philosophy may work as well.
Here's why I know tax cuts work to really stimulate economies. This is going to be a little boring, but necessary.
--President's Harding and Coolidge passed the Revenue Acts of 1921,'24 and '26. The top marginal rates went from 73% to 58% in 1922, to 50% in 1923, to 46% in 1924, to 25% in 1925 and finally 24% in 1929.
*When taxes were reduced on top income earners, the actual taxes paid to the government increased from $300 Million to $700 Million.
*Also, top income earners went from shouldering 1/3 of all taxes paid in the early 1920’ to approximately 2/3 by the late 20’s
*Also, from 1922 to 1928 the average of those earning greater than $100,000 increased by 15%. BUT, those earning between $10,000 and $100,000 saw their incomes increase by 84%!!
--In 1962 John F Kennedy (a Democrat, by the way) leveled across the board tax cuts by 20%.
*From 1962 to 1966 employment grew by One Million jobs.
*The economic growth rate jumped from 4.3% to 6.6%
* And…federal taxes paid from 1964-68 grew from $48.7 Billion to $68.7 Billion
--In 1981, Reagan cut marginal tax rates across the board.
*Income taxes paid went from $500 million in 1983 to over $1 Billion per year, in 1989
Those are the reasons why cutting taxes work.
Here’s why the government pumping money into the economy won’t. (Borrowed from this article here.)
--[Under FDR] Unemployment remained very high, averaging more than 17 percent throughout the 1930s, and overall output did not get back to the 1929 level until World War II. According to recent research by economists at UCLA, New Deal policies extended the Depression by seven years.
-- Other Keynesian episodes generated similarly dismal results, though fortunately never as bad as the Great Depression. Gerald Ford did a Keynesian stimulus focused on tax rebates in the mid-1970s. The economy did not improve. But why would it? After all, borrowing money from one group and redistributing it to another does nothing to increase economic output. As mentioned above, George W. Bush gave out so-called rebate checks in 2001 and 2008, yet there was no positive effect either time.
-- International evidence also undermines the case for Keynesianism. The clearest example may be Japan, which throughout the 1990s tried to use so-called stimulus packages in an effort to jump-start a stagnant economy… The Japanese economy never recovered, and the 1990s are now known as the “lost decade” in Japan.
All of these numbers and such aside, the very logic of Keynesian economics seems false at its core. How can borrowing money or creating it out of thin air for the purpose of dumping it i anto the economy, be good? If it was good, why wouldn’t we just do it all the time? Why stop at a $789 Billion package? Why not $14 Trillion (the current US GDP)? Or hell, if we really can borrow our way out of this recession, why not just say an even $100 Trillion dollars and REALLY get the economy roaring?
And as far as the “bread lines” and “bankruptcy” and “people dying in a cardboard box”, those are all very bad things. No one wants to see that happen. But you dilute the argument into empty platitudes when you try and use hysterics to make your point.
And to your “Do you really think the government should do nothing to create jobs…?” My answer is… sure they could do some things, like lowering taxes or providing more low interest loans for small business entrepreneurs, or cutting some of the red tape at the Small Business Administration so that you could get help as a small businessperson. But ultimately, your question smacks of the misguided notion that it the government’s job to create jobs, last time I read the Constitution, job creation wasn’t on the list (and don’t try that “promote the general welfare” nonsense, that’s like saying your going to fix the economy with money you don’t ha… oh, wait, nevermind).
Anyway hope this has been helpful or entertaining. But given that it was about probably one of the most boring subjects (economics), it was probably neither. Sorry.
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