Re: Budget deficits and GDP

On Nov 29, 1:17 am, The Trucker <mik...@xxxxxxxxxxx> wrote:
On Tue, 27 Nov 2007 22:14:48 -0800, Lysander wrote:
On Nov 26, 10:18 pm, dekka <eddiepy...@xxxxxxxxx> wrote:
Hope this is the right board:

True..... If you cut taxes on the low and moderate incomes then
consumption (demand) will rise. This does not hold true if you cut
taxes on the high incomes.


This is an assertion I have yet to see one shred of evidence to
support. The Bush tax cut didn't work likely because Freidman was
right about permanent income and the tax cut was temporary. Note it
did cut taxes for all taxpayers and removed more people from the tax
roles. I have seen some prominent economist make the same assertion of
who you cut taxes for matters. I have yet to see any data backing that
statement up. It assumes that MPC differs by income. I have yet to see
on a study on that. It may or may not hold. Until I see evidence I
will reach the conclusion that who gets the tax matters.

In an inflationary period you would want to cut deficits and run
surpluses. This deficits make inflation worse. The traditional
Keynesian view is run surpluses during inflation to pay for deficits
in recession so the budget is balanced over the cycle.

Tax collections are a direct cure for inflation in that money is removed
from the economy

Wrong. Taxes don't remove money from the economy. The government is
just another consumer and the money stays in circulation. Even if it
were true the effect would be negible at best because any surplus goes
to paying back bonds which puts the money right back in people's
hands. Paying taxes does not decrease teh money supply nor does the
treasury department issuing a bond increase the money supply.

The effect of taxes on demand is through less take home pay so
consumption drops. Ironically, those who argue that tax cuts for the
rich provide no stimulus are the same that argue raising taxes on the
rich fights inflation. Sorry if they have a lower MPC it has a small
effect on consumption both ways.

just as it would be if the Fed raised interest rates
and/or Treasury started selling bonds like crazy.

The effect on AD is the same but that does not mean that paying taxes
decreases the money supply. You can lower AD with higher taxes so
people consume less and invest less or you can lower AD by cutting the
money supply which drives interest rates up and people invest less.
The end result is the same but how we get to the end result is quite
different.

The difference is
that appropriate taxation need not curtail investment.

Perhaps but that is tough to do. If you are correct and tax cuts for
the rich mean little effect because their MPC to consume is low then
it implies that the MPS is high. So any straight income tax affects
savings greatly and affects investment.

The increased tax
collections must be in the middle income range as opposed to the high
range to achieve the opposite effect of the tax cuts that would have
stimulated consumption.


This again makes the assumption that MPC is low for the wealthy. If
true this would be accurate. However, as I have said before I have
never seen any evidence to support that statement. I must also note I
have never seen any evidence to contradict that statement. As far as I
know, there is a hole in the literature here. I could be wrong my
interest in business cycles ended around first year of grad school. So
I do not claim to have read the literature extensively.




Time for the major intrusion on this theoretical stuff: Increased
government spending is what stimulates the economy --- NOT DEFICITS.

This is not untrue but it misses an important point. Increased
government expenditures or decreasing taxes stimulate the economy but
increasing taxes or decreasing expenditures lowers AD. The point is
cutting taxes or increasing spending MUST lead to a deficit. If you
cut spending and raise taxes to balance the budget you offset the
effects and do nothing. If you cut taxes and lower spending to balance
the budget the two moves cancel out and you do nothing. Yes spending
or cutting taxes stimulates the economy but these must lead to
deficits because you have to leave the other variable, spending or
taxes, alone.

It is
entirely possible to increase government spending AND TAXES so as to spend
more and actually _cause_ more consumption and investment without ever
having a deficit.

Wrong. Increasing taxes will decrease the consumption caused from
expenditures. This is equivalent to saying I am giving you $100 to
spend and taking $100 from you.

The latter day neoconomist assumes that government must
increase or decrease taxes across the board as opposed to varying what or
who is taxed.

Wrong. Many of us have not seen the evidence that MPCs differ among
income groups. If the rich have similar MPC to the poor then
government expenditures for the poor and taxing the rich exactly
offsets both effects. If the MPC and MPS are reversed for the groups
then taxing the rich lowers investment by the same amount as
consumption increases for the poor having a 0 net effect on AD.

In order for this to work the assertion that the rich have a different
marginal propensity to consume must hold. Again, it might but I have
seen no evidence for or against that statement. It is not even a
theoretical statement because good theory has to be founded in facts
we know. If the assertion is right then you may be right. However, I
am not one to believe a course of action is correct based on an
assertion. Even Paul Samuelson is one of the people who have made this
assertion. I am way too well trained to accept it as fact just because
Samuelson said it. Many careers have been made pointing out that Noble
Laurettes made an assertion that once tested was not true.

As I said before, I can not say you are wrong here but I can't say you
are right either. Your whole argument rest on an assumption that I do
not believe has ever been tested. In essence this makes your
statements, statements of faith not science. Whereas I can not
outright dismiss the statement, I can't support it either.

It is an area that needs more study and it is unlikely to be done
anytime soon. Macro economist who study business cycles are still
trying to hammer out international effects and rebuild Keynes on
microeconomic foundations. Until the work on New Keynesian models is
more complete and the international components of the business cycle
are better understood, I highly doubt this type of research will be
done. Not that it is not important. Simply that it is a finer point
and you don't concentrate on finer points while you are still trying
to rebuild the framework. Maybe in a decade the question of how taxes
affect different groups may get some study but not until the New
Keynesian models have advanced enough to give us the micro foundations
to study heterogeneous groups. Just the international effects alone
are going to take some time. The Keynesian, and rational expectations,
notions of a closed economy as well as Mundell-Fleming are woefully
inadequate to model the open economies today. Open economy Macro
Economics is a big area with a lot of research being done but it is
far from finished.

This is the real problem with Macro. Micro dates back to at least Adam
Smith that was 231 years ago. Macro business cycle studies dates back
to Schumpter in the 1920's but really didn't much attention until
Keynes in 1936. So we have 71 years of work on the macro economy.
Micro models are good because there has been over 200 years of
discussion. Macro only has 70 years of discussion and really only
about 10-15 years of trying to build foundations to ask things like do
all groups have the same MPC. Honestly, business cycle theory is still
in the stone ages. 100 years from now people will look of some of the
prominent authors in the way we look at Munn today, one of the main
merchantilist writers. Which ones will they joke about and say this
guy thought this? I have no clue.
.

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