Quote:
Originally Posted by xinpig
I heard on a radio talk show that to pay for all this they would have to raise income taxes from 25% to 75%.
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Wrong.
The idea is that deficit spending increases our national income, not debt or government spending in itself. If taxes are raised to compensate for increased spending, not much stimulus is going to go on because that will cut a huge chunk out of private sector spending. The Obama administration economists aren't stupid. Income taxes are not going to increase any time soon; in fact, part of the near-trillion dollar stimulus is a tax cut!
Imagine that each year, government spending is $3 trillion of our GDP. All things being equal, if all of a sudden all of that spending stops, GDP will go down by $3 trillion. However, if government spending goes up to $4 trillion, then GDP has risen $1 trillion– all things being equal, of course (including taxes). So it doesn’t matter how much government
spends, but how much government
adds to spending. This is why it is possible that Bush's spending was bad for the economy while Obama's spending will possibly be good: it will be those increases in government outlays that boost a shrinking economy, not government spending in itself. And it is deficits that add to government spending without cutting a lot out of private sector spending that stimulates the economy, not debt in itself.
Of course we are going to go into debt because of this. But we are not going to raise income taxes to 75%. This is not permanent spending.
As economist Paul Krugman points out, this better be temporary spending because that will help the economy:
Here’s the logic (which follows directly from Milton Friedman’s permanent income hypothesis, by the way): suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases.
But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.)
So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.
Quote:
Originally Posted by xinpig
The government is printing this money out of nowhere, which just raises our inflation and causes the dollar we have to be worth less and less.
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You're shouting "fire! fire!" on Noah's Ark.
Economists are afraid of
deflation, not inflation, as
this piece from CNN points out. The value of every dollar is not about to fall; in fact, it's probably about to increase. And this is very very bad.
First of all, the reason why there is going to be deflation is because there is a lack of demand. When demand for goods falls, the prices of goods drop. When the prices of all goods in the economy drops, then we have deflation, which means that each dollar is worth more and more.
So why is this bad? For one, it means that the costs of running a business will skyrocket. Prices and wages have a tendency to be "sticky"-- that is, they don't change every day. If wages weren't sticky, if all prices fell by 10%, then your paycheck would, too. But your wage is sticky-- very sticky-- so instead of falling by 10%, you or a few of your coworkers will get laid off. So while inflation means that the value of your paycheck will fall steadily, it also makes sure that you'll stay employed because you'll never become too costly for a business.
The second reason why deflation is bad is because it gives people even less of an incentive to invest their money: if their money is going to gain value by sitting stored away in a vault, why invest the money into an economy where it seems like every corporation is going out of business? This freezes the economy and gets nothing done.
For more evidence that deflation is bad, just look at the Great Depression. A big part of the reason why it was so severe was because of deflation.