Guest Opinion: The problem with tax and spend theory

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Two Nobel laureate economists are stranded on a desert island.

Milton:  “So, Sir John, how are we gonna get off this miserable rock?”

John Maynard:  “No problem – I have a theory!  If it works, we’re home free!”

Milton: “Let’s have it then!  But first, what are the assumptions underlying your theory?”

John Maynard: “First: Assume there is a boat.”

Of course, it would be churlish to suggest that the economic theories underlying the Obama administration’s stimulus spending are based on such circular logic.  But here goes anyway:

According to theory, if the government spends more money buying things it doesn’t really need or digging holes for all those “shovel ready” projects with shiny new shovels with money it doesn’t really have, then people will have to make those shovels and dig those holes and businesses will have to hire people to do it. And so people will go back to work and earn more money to buy more things with the money the government spent that it didn’t really have to buy the things it didn’t really need from the companies that are only making them because the government will buy them.

As elections approach, certain elements of the government realize that all of those stimulating dollars they spent on all of those really stimulating roads and bridges and holes and things will have to be repaid, and they will have to get the money somewhere.  The nice Chinese people who lent it to them will want it back, and if we don’t pay them back, they might not be willing to lend more money later if we need more holes and roads and bridges.

Happily, there is an easy answer, and elected representatives love easy answers.  So, they say, solemnly and responsibly – let’s not continue the irresponsible policies of the last administration, we’ll just let those awful unfair tax cuts die and people will pay more taxes, especially those annoying rich people who pay most of the taxes anyway, and we don’t even have to vote for tax increases!  We can just let the cuts expire!  Brilliant!  That way we will get back all the money we paid to all those businesses who hired all those people – we’ll take some of it out of their paychecks, and the rest of it out of the bank accounts of the owners of the businesses who hired them!  They won’t feel a thing – and after all, it’s really for their own good.

So we borrow a trillion here, a trillion there, buy lots of things for lots of deserving people, and in theory, some jobs are created – at least until the roads and bridges are all repaved and repainted and the holes are all filled in.  Because the theory upon which the stimulus spending is based, sometimes known as Keynesian economics, assumes that spending creates jobs.  If the evidence does not bear this out – it’s easy enough to adjust the data or redefine our terms.  Jobs may not have been created, so they must have been “saved.”  We really can’t say created, because unemployment is still quite high – so therefore, it must be the case that many, many more jobs would have been lost had we not spent all that stimulating money.  And really, this just proves how bad the last administration was – if we had not borrowed and spent all that money, we’d be much worse off – so says the theory, anyway.

But what happens when those taxes rise?  If putting more money in people’s hands by buying things from them or the businesses that they work for is stimulating and creates jobs, how can it be that taking the same money back out of their paychecks and profits will not destroy jobs?  Well, the answer has to be that the government will take more of the money from the lazy rich people who don’t need jobs and would have just saved the money, and less from the hard working little people, because there are many more of them and that’s how to win elections.

Of course, the net of all of this clever policy is that now, instead of hundreds of millions of people, rich, not so rich and even poor, making trillions of decisions, large and small, how to spend save and invest their own money, the government is, in effect, telling them where to spend it and deciding how much money people should be allowed to keep.  The point is, some of those trillions of decisions may be wrong, but on average, they are pretty good, and the consequences are usually limited to the people who made them.  But when the government makes a bad decision – it’s a whopper, and we all pay.

What this cheerful little story also overlooks is that the money people pay in taxes would have either been spent or saved anyway – the government didn’t need to take it from them to make that happen.  It happens all the time all by itself.  And even when people save money instead of spend it, what they are really doing is investing – by lending it to businesses or buying their stock – and what do those businesses do?  They hire people and buy all kinds of things – computers, research labs, factories and so on. The difference is, these are good jobs that don’t go away when the government stops borrowing.  Jobs based on economic reality.  The kind of jobs that are created when individuals and businesses see a product or a service that can be created or improved, and invest their own money to make it happen.

That’s my theory, anyway.

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Steve
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Steve

Tom you are using logic…you must be racist

Ed Gooding
Guest

Another good one, Tom!

Maggie Thatcher said it best – “The problem with Socialism is that eventually, one runs out of other people’s money.”

David Goodwin
Guest
David Goodwin

Wow there’s a refreshing breath of air! Kudos to Tom for writing it and very special thanks to Biz Sense for allowing rational thought to finally make it’s way through the media.

RobinsonSt
Guest
RobinsonSt

Your theory is great, until you look at the human aspect of our recent recession. What’s worse: the government taking on $700+ Billion in additional debt or the amount of increased crime / starvation / grief / job loss that would have occurred otherwise? For example in Virginia, thousands of state workers and teachers would’ve been forced to be laid off had the stimulus money not paid the state’s portion of Medicare…Personally, I would’ve liked to see the stimulus funds be devoted to our failing infrastructure instead of propping up other areas that could have handled larger cuts. However, your… Read more »

Jeff H
Guest
Jeff H

And let’s not forget that the government knows how to run private sector business much better than the corporations themselves. Healthcare, Financial and Oil companies are beginning to be run by our elected politicians (most whom have never run a business and can’t read a balance sheet).

Yes, I’ll sleep much better at night knowing that my government officials have not only spent my tax dollars efficiently, but that the few remaining investment dollars I’d like to invest into corporate America – are now also being managed by the scholars on Capital Hill….

Irony
Guest
Irony

Logic and common sense…It’s like that perfect first cup of java in the morning.

Bo GRAY
Guest
Bo GRAY

Great article Tom. I hope one day common sense economic thinking will come back to rational minds and pull us out of this mess !

Tom Bowden
Guest

RobinsonSt – Point well taken, but I don’t say that all government spending is wasted – whatever the reason, when direct help is needed to solve immediate problems, sometimes there may be no other way But that’s not the stimulus spending I am talking about – I am talking about the part that is spending for the sake of spending because we have a theory that this will somehow turn us around. The indirect effects of higher taxation, higher borrowing costs and “crowding out” of private investment by government debt issues can easily outweigh the direct impact o f the… Read more »

jack kay
Guest
jack kay

Tom is RIGHT ON THE MONEY!!! Mr. Friedman and Mr. Keynes HAD it right….all they needed was a boat! This article puts our current debacle into terms most intelligent people can grasp and understand. Not to knock RobinsonSt’s comment, but he still doesn’t get it! It reads like Tommy Smother’s years ago losing the argument with his brother when all he could say was “Oh yea?…oh Yea? well mom always liked you best”. Supply side works! John Maynard’s theory is 1930’s thought. It sounds good, and works, until the teet dries up….then what? This current admin is locked into their… Read more »

anonymous
Guest
anonymous

Bring this down to the local level-

Now that Center Stage has been built despite citizen protest, will we see the unjust meals tax raise get rescinded?

Richard Freeman
Guest
Richard Freeman

Tom,

Funny openning! Only you forgot to add that Friedman asked, “What’s a boat?”

Some people believe that the solution is a combination of both schools of economic thought. Yes, the right tax cuts can help. And not all tax cuts are the same. And yes, government spending can generate jobs, save jobs and jump start the economy. But don’t you think that the solution might be a combination of the two? One without the other is like a sandwich without Miracle Whip!

Just a thought you might want to consider.

Bill
Guest
Bill

Great article. Simplified a bit, it should be required reading in our High Schools which could use a dose of reality.

But somehow I don’t see what relevance there is in tying logic and common sense (ironically missing) and a good cup of coffee with this well written article. Maybe I’ll find the answer tomorrow morning.

Bill
Guest
Bill

Good points, it’s a shame that the main stream media won’t run stories like this.

I tend to lurk more than I respond to sites like this, but in this instance I have to say to Bill that you do realize that on other sites and forums that your behavior, no matter how you spin it, is considered trolling and wiill usually get you banned. I’m surprised that you return after Irony and others here have given you some pretty serious smackdowns.

The Real Bill

Bill
Guest
Bill

The Real Bill…I’m thick skinned and don’t mind smackdowns if they make sense. I simply make informed judgments and resent the use of space to ask ridiculous or totally irrelevent questions or comments, especially from whomever “I’ is. Thank you for your opinion. I simply ask that you go back and look at what I’m having fun with, and which others seem to thoroughly enjoy. However, if you consider my comments as “trolling”, I’m lost. Please explain.

Tom Bowden
Guest

Bill and Real Bill – Please work out your private disagreements in another forum. Thanks.

30yearold
Guest
30yearold

Bill at 8:44 PM:

….and WE resent your “having fun with” this board. This isn’t your personal playground. And judging by the “others seem to thoroughly enjoy” comment, that is 100% wrong.

And if you are lost as to the meaning of internet trolling, then that is proof positive that you have no business making any further comments on this or any other internet message board. Goodbye.

BobTheBuilder
Guest
BobTheBuilder

Good grief this article is starting to look like my mailbox…too many Bills.

Bill
Guest
Bill

Tom, I want to apologize for the comment you had to moderate. It was a personal attack and after reading your comment and going back over mine, I agree that this is no place for those remarks. I will admit that my growing frustration over members of this site got in the way of rational thought. Sadly I came to this site because I grow tired of the same irrational and ignorant comments (Like I just made.) on sites like RTD, 12 News and others. Feel free to edit, post or keep this message to yourself. As long as you… Read more »

Tom Bowden
Guest

Bill – No need to apologize – just setting ground rules

John
Guest
John

Tom, From this article it sounds like your basically arguing in favor of supply-side economics.That we should keep the Bush administrations tax cuts for the wealthy, who will in turn invest in jobs, companies, etc. and unemployment will go down. The problem is supply-side economics does not work and has never worked. Also you seem to be against excessive government spending. I assume you were against Bush running record deficits with the useless Iraq War, and the tax cuts…..oh wait you seem to be in favor of those hmm. You also ask about what happens if the Bush tax cuts… Read more »

Bill
Guest
Bill

Interesting point John. Let me ask you this; Do you believe that over 80% of federal income taxes are paid by the upper 25% (Wealthy) or do you think those figures are bunk? Don’t get me wrong this is not an arguement for how you feel about wealthy folk, it’s just a curiousity question.

John
Guest
John

Bill, I believe that figure is deceptive.If you combine federal, state and local taxes the reality is that the wealthy pay much less than 80% and the poor and middle class pay more. Warren Buffett, one of the richest men in the world famously said that he pays less taxes than his secretary. Don’t get me wrong I don’t believe in “soaking” the rich. However I believe that its only fair that if you earn more you should pay more and pay less if you earn less.

anonymous
Guest
anonymous

The quid pro quo: universal single payer health care for flat income tax.

You put the paper pushers out of work, and make the economy much, much more efficient.

Bill
Guest
Bill

Good Points John, personally I’m becoming a fan of the flat tax myself. Even though some opponents to the flat tax say that it will cause a class warfare issue, I see it more of a “spreading out” of the burden across all classes. Simplify the code, the poor pay less and the wealthy pay more with no loop holes to hide in. I realize it’s not quite as simple as that, but anything’s got to be better than what we dealing with now.

John
Guest
John

Bill, honestly I’m a bit wary of a “flat tax” though I wouldn’t mind a flat tax like the one you proposed if it meant getting universal health care like anonymous suggested. I’m mainly thinking of fairness. Neal Boortz so-called “Fair tax” and abolishing the income tax in favor of a national sales tax both place the tax burden on the poor and middle class.

RSweeney
Guest
RSweeney

The big thing is to STOP using the tax code as an enforcement method for societal/social/business change as managed by the government.

This distorts business decisioning and enormously raises the overhead costs for accounting.

Taxes are for essential gov’t revenues, not a carrot and stick.

John
Guest
John

Rsweeney, What are you talking about? Do you mean like taxing cigarettes?

Tom Bowden
Guest

Startups create 2/3 of NET new jobs. So says the New York Times. Start-ups are started by people who want to create wealth and funded by wealthy people who want to create more wealth. So increasing taxes on “profits” as if they were a bad thing only reduces the incentives for the most effective job creation process we have – start-ups. I don’t care where you come out on politics, class warfare, equality of outcome vs equality of opportunity, whatever – start-ups create more jobs so if it’s jobs you want, leave the start-ups alone.

http://tinyurl.com/29ney4p

John
Guest
John

Tom, Again you seem to be arguing for trickle down economics which does not work. Recently the non-partisan Congressional Budget Office analyzed 11 methods to jump start the economy.They found that out of all 11 methods cutting taxes for the wealthy was the least effective way to spur the economy. That the rich were most likely to save their money instead of investing in jobs (including startups).They also said while a plan to let small business write-off investment cost would help, the best way would be to reduce taxes for the poor and middle class. http://www.nytimes.com/2010/09/11/business/economy/11tax.html http://www.cbo.gov/ftpdocs/112xx/doc11255/Unemployment_Testimony.shtml PS – The… Read more »