Tor Dahl:So, is there a time when cutting taxes could increase the Gross Domestic Product? Anything is possible in economics if some wildly implausible things happen at the same time. For example, the people who receive the tax cuts spend it all. Since this is an upper tax bracket phenomenon these people are not known for spending--they are known for saving--and a tax cut is very unlikely to change what they are known for. They have what economists call a positive marginal propensity to save, and saving is what they like to do. That withdraws funds from what was previously spent, and some people will be fired--that withdraws more money from circulation, and the downward spiral continues. But what if people borrowed money and spent more than they earned? Yes, that could make it happen, and that was exactly what started the Great Recession. Americans wanted their families to have health care and their children to have education, so when prices rose for both, Americans borrowed money on the equity in their homes, and the housing bubble burst. We are still suffering the consequences of that decision. Economists would characterize the borrowers as a group having a negative propensity to save, more than offsetting the better off savers as a group. Anything else? Well, if productivity improved dramatically across the economy, and wage earners were fairly paid (that means that they were all paid the increase in their marginal revenue product, i.e. they received what could not have been added to the economy without them) then YES. Has this ever happened? Yes, it has. During World War 2 productivity increased 22% per year (US productivity improvement as a whole was NEGATIVE the first part of this year), which was an increase of a factor of ten. Is that likely to happen? No. The reason? No one in this country, except maybe Silicon Valley workers know how to increase productivity, and resist learning how to do it. Especially the two most important sectors in the US economy, education and health, both exhibit NEGATIVE productivity improvement, year in and year out, whereas China is now about to pass the US in GDP due to an average growth rate per year of 9.6% since 1989. The one thing that could justify tax cuts increasing the GDP is not mentioned by anyone among the prophets that proclaim it. For that reason economists have decided that tax cuts as a stimulus doesnt work. And the one thing that may make it work, is overlooked. Now lets take a look at Krugmans theory about tax cuts: nytimes/2014/06/30/opinion/paul-krugman-charlatans-cranks-and-kansas.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region®ion=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0
Posted on: Tue, 01 Jul 2014 00:52:08 +0000
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