One of the widely held beliefs among Obama apologists and congressional Democrats is that a policy of massive federal spending (stimulus, Keynesian policy…call it what you want) is more effective than tax reductions to reverse negative economic growth (recession). A subject that has been broached on this blog before is the question of motive. What motivates Democrats to promulgate these policies? Implicit in this question is the fact that tax reductions create a more direct and more efficient stimulative effect on the economy than any form of federal spending. Why? Because the tax savings find their way into the consumer’s pockets in about, oh, two weeks, after which they arrive with amazing regularity. Compare this to a government stimulus scheme that requires layer after layer of bureaucratic oversight and months (if not years) to deploy.
Tax reductions for the demographic which pays the most taxes proportionately have the greatest impact on job creation and growth (see the recoveries in 1983 and 2003 that followed tax reductions). The liberal argument against this position has mostly centered on the concept that government (in the absence of consumer spending) must spend money during a recession to stimulate growth. Another argument against lower tax policy is that tax cuts don’t necessarily translate into spending. The recipient may do something else with the money, like pay off debt. That is a valid point only to the extent that it might accurately describe what happens to the money created by the lower taxes. It does not validate higher government spending.
One unavoidable aspect of the current economic situation is that American consumers in all tax brackets are paying off debt at a record pace, a reality that differentiates the current recession from prior recoveries. The economy is deleveraging from a consumer borrowing binge of epic proportions that has spanned three decades. This is happening not only by individual choice but also out of necessity, as banks restrict every form of consumer credit from credit cards to mortgages. The deleveraging is going to happen and it is going to take a long time. The only question is how best to allow the consumer to deleverage: tax cuts or government spending? The answer is obvious that tax cuts are a more efficient conduit to put more money in consumer pockets. The Fed can mitigate some of the more severe symptoms of the recession by ensuring that the monetary system remains liquid (by expanding the monetary base) but the only way out of the current dilemma is to increase take home pay for all Americans, including the rich.
Which brings us back to the original question: what motivates Democrats to promulgate a policy that hinders American’s ability to pay off debt, increase savings and create jobs? Any thoughts on that this weekend?