Sunday, January 11, 2009

Why won't "Trickle Down" Economics Die?

I was watching "Meet the Press" this morning, and the first topic of the show was, of course, about the economy and Obama's stimulus package. David Gregory had a round table discussion with former Congressman David Bonior of Michigan; editorial page editor of The Wall Street Journal, Paul Gigot; chief Washington correspondent for CNBC and New York Times political writer John Harwood; Vanity Fair contributing editor Bethany McLean; and chief economist of Moody's Mark Zandi.

It was clear that Obama is already on the offensive, marketing his plan, and getting the public acclimated to this stimulus plan. The show didn't offer anything new in terms of analysis. The entire discussion can be summed up as follows:

1. We need to do this, otherwise the economy will be in bigger trouble
2. We need to do something, but we should do something else, like tax cuts
3. How will we pay for this ~ followed by requisite ringing of hands

MR. GREGORY: And what about--Paul, what about the idea of tax cuts as being as stimulative as infrastructure spending?
MR. GIGOT: Well, I think they're much more stimulative if they're the right tax cuts.
MR. GREGORY: Mm-hmm.
MR. GIGOT: I mean, we have a capital strike going on right now. Nobody wants to take any risks, nobody wants to make any investments. Part of it's the uncertainty about the damage that Congress might do, but part of it is also the fact that everybody's frozen. You need the incentives to invest, particularly in the private sector.
MR. GIGOT: I think a, a tax cut, a big corporate rate tax cut, for example, or an across the board tax cut would be a lot more stimulative than this public spending, which has to come from somewhere.

At what point will Conservatives wake up and smell the coffee - "Trickle Down" Economics is DEAD. The last 20 years of deficit spending and tax cuts under Republican Presidents do nothing but hamper the Government's ability to intervene in Economic downturns, and in fact do more to harm to the economy, causing false bubbles, uncontrollable greed, and recessions.

There continues to be this debate on what spurs the economy. It's a basic fundamental principle that the economy grows as a result of consumption and spending. Capital investments facilitate growth, but capital investments are worthless, if there is no growth or profit to be had.

We need to recognize that the key to growing the economy, is growing DEMAND. Demand for goods and services will continue to exist and grow, as long as people have real income keeping pace. Once Income falls or declines, so does the DEMAND, hence production also slows, continuing a spiral contracting of the economy.

So I don't care how much of a tax cut incentive the government gives, unless there is demand and organic market growth potential for the business, there won't be a need for that capital.

Tax cuts have one small benefit, in that they provide instant relief, and add income for consumption. However, most economists recognize that the dollar return on investments for tax cuts are less than the cost of the tax cuts themselves. It's also clear that Obama will need some tax cuts, to gain Republican support for his plan.

MR. GREGORY: Mark Zandi, as an economist, what's your big question about it?
MR. MARK ZANDI: Is it big enough? Is $750 billion, a trillion dollars enough? The economy is in great trouble. We lost 500,000 jobs in December, 2.6 million jobs in 2008. That's the most since 1945.
MR. GREGORY: Mm-hmm.
MR. ZANDI: Unemployment's 7.2 percent. So is 750 billion, a trillion going to be enough to jump-start the economy, to get the private sector back in the game?

MR. GREGORY: The issue of impact, Mark Zandi, speaks to some of the risk of how long it takes. This is how The New York Times reported it Saturday: "The risk is that Obama and the Congress will weigh down their effort with measures that cost many billions of dollars but may not have much impact on economic activity. Tax breaks, for example, usually produce less than $1" worth "of stimulus for every dollar they cost, economists say. Spending on public construction projects, like highways and bridges, produces the most economic activity--but there's a limit to how many projects are `shovel-ready,' and even those take time to generate jobs and ripple through the economy."

MR. ZANDI: But we, but we have no choice. We really don't. I mean, if we don't do something like this, a stimulus package, a foreclosure mitigation plan, the economy is going to slide away. Unemployment is going to rise into the double digits and we're going to lose tax revenues as a result and the deficit's going to be even larger than otherwise.
MR. GIGOT: But, Mark, don't you think that monetary policy is very powerful here? I mean, Christina Romer, who's the president's economic adviser now, she has written in 1994 that fiscal actions have relatively small effects. The big bang for the buck is monetary policy.
MR. ZANDI: In normal times I would agree with you, Paul, but this--the link between the Fed and the economy runs through the financial system. The financial system is literally broken. There--if--you can provide as much cash as you want; but you don't get credit, you don't get it done.

MR. GIGOT: I mean, if you're borrowing it for aircraft carriers like Reagan did to win the Cold War, you get a big payoff down the road. If you're doing it for tax cuts that really stimulate and drive private investment, and in two or three years' time bring the economy back, great. But if it goes to pork, if it goes to green jobs that may sound good in the short term but may not have a market response or a market for them, then it's a waste.

What still gets me is the ridiculous Republican Talking points that Paul Gigot continues to expound, that Monetary Policy is the answer, and that Tax Cuts (to the wealthy and Corporations) are more effective than any fiscal policy. The real gem was the Paul's glowing and inaccurate description of the benefits of Reagonomics. The fact that the WSJ editorial board seems to only regurgitate Republican ideas and principles, renders the paper virtually worthless, except as a birdcage liner.

Overall, my opinion is that I think Obama has shown his political savviness, in the fact that he already recognizes that most economists believe that the stimulus plan will have to be much bigger, hence it's much easier to start with something smaller and let it grow, as opposed to put something too big on the table that will have Republicans balking. What's ironic, is that after 8 years of deficit spending under a Republican President and a Republican controlled Congress, we suddenly have Republicans growing a conscious about the size of the deficit.
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