American Recovery and Reinvestment Act

[xinpig]

The bill currently stands at 838 billion dollars. What does everyone think of this? I also know that the head of the treasury department has now called for at least another 2 TRILLION dollars to aid in recovery. I know that people believe that this is all for a good cause, but I think that this is just going to push our country further into debt. I heard on a radio talk show that to pay for all this they would have to raise income taxes from 25% to 75%. 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. I dont want to push a whole anti-obama opinion like some may think this sounds like, but spending all this money we dont have is not in the best interests of our country.

Does this make for a good topic? I did read the guidelines and this is the best i could do with my understanding of the rules.

Discuss the bill and possible repercussions/benefits

[funmonkey54]

I agree completely that this is not in the best interest of our country. I think that America is going to have to look at longer term payment plans, as opposed to paying it off immediately as they keep trying to do. If we could hold off on all our spending for 10-20 years we could easily pay off what we owe. Once all that is payed off, we can focus the money into recovery and into the American business. But for now, paying off debts is key.

[lord_carbo]

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%.

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.

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.

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.

[slipstrike0159]

Also something to consider about what was said in the address to congress, Obama said that part of this plan includes the idea that for anyones yearly income is less than $250,000 their taxes will not increase (income tax, from what i understood).