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Wait: Tax Cuts are Keynesian?

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January 29, 2009 – Comments (3)

I was reading an older tract about economic policy, when I ran into this bit of trivia. OK, this is how I understand it. GNP = C + I + G. So, if GNP is below full employment, increase to G (gov’t spending) to increase total output. It was pointed out that cutting taxes, while keeping G constant, had the same effect. Taxpayers, with their increase $$$, will either save/invest (increase I) and/or increase spending/consumption (increase C). So, if tax cuts work (there has to be something wrong with this logic), the “stimulus” package will also increase economic output by increasing G, just not as efficiently. Huh?

 

3 Comments – Post Your Own

#1) On January 29, 2009 at 10:05 PM, SuperPicks (29.10) wrote:

silly Keynesians ignore the principles of reality, mainly science/mathematics.

in that happy equation above, the perfect thing to do would be to continue to increase government spending forever. 

where is debt in that equation?

there's nothing more powerful in this world than than the power function in mathematics.  or more simply put the power of compounding.  

the power of compounding cannot work for economic growth because there a wall that is hit eventually, and this wall is restricted by natural (real world) constraints

these natural constraints are:

population growth (which is why % wise it is slowing),

an upper threshold for demand (cannot continue building 5% more TVs/cars/homes every year if everyone already has TVs,cars,home),

and, time available for labor (we cannot increase the time available in one day to work...we may increase our work hours to 8 hours, we may ask our spouse to work, we may both begin to work overtime...but that's it)

conversely the power function works fine on the flip side, on debt that is...

the money owed grows at such a massive, parasitic pace that it demands that the natural constraints listed above hit its limits and beyond.  Debt levels grow without being properly paid down. Hitting the limits of the natural constraints would mean population would have to grow beyond sustainable/natural levels, demand would have to continue for things that are not needed, and each person would have to work well above full time schedules. Hmmm....wait, the power of compounding means even the above would not be enough, you would need to go beyond this to atleast match the rate of debt growth.

Why do all the economic/business/MBA textbooks not teach this?

Why did my honors economic curriculum at the University of California not teach this earlier this decade?  Why did my other friends at other UC schools get the same non-exposure? 

Why are there generations graduating without being taught the simple linkage between mathematics (or common sense for that matter) and economics?

Why was there no mention of other foundations of economic teachings (such as Austrian School of Economics) not even mentioned?

Why are central banks and each political presense in the world so bent on increasing debt levels (more govt spending)?

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#2) On January 29, 2009 at 10:19 PM, SuperPicks (29.10) wrote:

inflation today guarantees deflation tomorrow.

=

rise in prices today guarantees fall in prices tomorrow

this is talking about inflation or rise in prices of anything beyond natural demand.  just about everything in this country has gone beyond natural demand for many many decades that it has guaranteed a more and more massive decline in prices "tomorrow".  That tomorrow part has begun in 2007, but it seems like the govt. is trying to postpone that more.  

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#3) On January 30, 2009 at 9:17 PM, StockSpreadsheet (71.86) wrote:

Jerry,

Haven't studied economics in years, but from what I remember, simplistically stated, Keynes stated that in times of recession, the government should run a deficit to help spur the economy.  Most often, from what I remember, he talked about the government doing this by increased spending, (building infrastructure, rebate checks, increased weapons purchases for the military, etc.).  I feel that a tax cut would be very Keynesian in that respect, since it just transfers the onus of spending from the government to the people, (where they can go out and buy consumer goods, which could lead to increased business spending on new plants and equipment, etc.).

The flip side of what I remember of my Keynesian is that in times of prosperity, (such as 2005 through 2007), then the government is supposed to run a surplus and use the surplus to pay off that debt that was incurred in the lean years.  This is the part of Keynesianism that we have not followed for decades.  I would not mind so much if the government pumped money into the economy during a recession/depression as long as they paid off that debt during an expansion.  To run deficits in both good times and bad is just stupid, and will eventually lead to bankruptcy, wealth distruction, depressions, monetary collapse, etc..  (Basically, a lot of what we are seeing going on right now.)

Craig 

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