The Tax cut... why should it work now

[Almighty Colin]

Originally posted by wig@Jun 9 2003, 07:26 AM
The question then becomes.... Does this increase in GDP actually have a positive effect on the taxpayer??

Good question. No one knows. (Back to JR).

I think we've come a long way towards knowing how to minimize the damaging effects of economic cycles. Ever since Keynes, depressions have been much less frequent and much less damaging than the ones of the late 19th and early 20th centuries.

Deficit spending is an interesting success story. During the depression the paradigm was to balance the budget and a difficult lesson was learned from that. Tax revenues continually decreased because incomes dropped and so tax rates were raised every year in order to balance the budget. Rising taxes cut consumer spending and investment and it was a real ugly loop that resulted.

Lesson learned. Deficit spend during recessions. A completely laissez-faire economy sounds so beautiful and elegant in practice but as you alluded to people and markets are not rational and as you flat out out stated "the market and the economy do not always respond to the stimulus or news they way they are supposed to."

So deficit spend during economic downturns seems the reasonable way to play the game. One could adopt the laissez-faire doctrine and wait for the markets and economy to 'correct themselves" but who thinks a generation should suffer through a depression-like economy waiting for the inevitable correction? Not me.

What should economic policy be during good times then? Are we doing it right? Who knows? Maybe we've found the right balance now. US federal debt is about 62% of GDP (I thinks an updated figure or close enough) . In the mid-1990's it was 74%.