Stimulate This

Does cutting interest or tax rates actually stimulate the economy? They’re supposed to make it more favorable for businesses and investors to borrow and invest, which then “stimulates investment.”

Let me offer an alternative viewpoint — I think that having something worth investing in “stimulates investment” and it DOESN’T MATTER what the tax and interest situation is!

My experience from business is that if you have a hot product or service that people want, you won’t have any trouble finding investment capital NO MATTER WHAT the tax or interest rates might be. And if you don’t have a product or service that people want, people are not going to invest NO MATTER WHAT the tax or interest rates might be.

What cutting tax rates for certain kinds of investment accomplishes is that it moves money into that kind of investment AND OUT OF other kinds of investment. It upsets the balance of a marketplace. For example, if you cut tax rates for capital gains, it changes the ROI calculation — so you might want to move money out of interest-bearing or rent-producing investments, and into equities. Cutting interest rates makes it cheaper to borrow money, thereby increasing your debt. Neither affects the value or wisdom of the investment.

I think the effect of cutting interest and certain tax rates might be worse than just ineffective — I think the current housing price bubble is about to demonstrate that cutting interest rates too low encourages people to pay too much, and get themselves in a lot of trouble. I think we also learned in the 80’s that tax favoritism can cause similar trouble, when Reagan’s accelerated depreciation tax deduction encouraged the investments that led to the S&L bailout.

One place where cutting interest rates has an effect is by reducing the incomes of retired people trying to live off of their savings, and lowering the growth rate in savings accounts of people trying to save for their retirement. Reducing consumer demand, certainly hurts the economy.

Cutting taxes for the rich does nothing to stimulate consumer demand. The idea that cutting taxes “creates jobs” or “stimulates the economy” is a trick. It is a lie. It is false. It is the result of decades of messaging blasted at us from the right’s think tanks, repeated endlessly until people just accept it as “conventional wisdom” without thinking about it.

The resulting reduction in government revenue forces spending cuts — which means laying people off or cutting back what is spent on goods which results in laying people off. And the tax cuts cause government borrowing, which increases our debt, which means we all must pay higher taxes to cover the interest on that debt forever or pay extra taxes to pay down that debt. And THAT spending does NOT increase jobs in any way. Worse, what we’re doing is borrowing money to give money to rich people, who use the money to buy government bonds — loaning the money back to the government! Think about the circular logic of this. We’re borrowing money from rich people to GIVE THE MONEY WE BORROW FROM THE RICH BACK TO THE RICH! And forever after paying them interest on the money we borrowed from them! It’s like giving your house to someone, then borrowing the money from them to pay for the house you gave them! Since Reagan this tax cut process has shifted our economy to an economy where most of us work harder and harder just to pay taxes that go out as interest payments to the rich! (And don’t forget that the money we’re giving to the rich is OUR SOCIAL SECURITY MONEY! Jeeze, don’t even get me started on that!)

It seems to me that this idea that cutting tax and interest rates is good for investment comes from an “investor class” viewpoint. “I’m an investor, and I’m certainly a wiser and better type of person than my stupid employees, so it is certainly better to give me breaks for what I do for a living, and not the stupid workers.” And look how it plays out — more and more money flowing from the people who work to the people who collect interest.

I Got Yer Stimulation Right Here – I Been Keepin’ It Wam Fa Ya

Well here’s a “consumer class” viewpoint: If you have customers breaking down your door, trying to give you their money because they want to purchase what you offer, only an idiot is going to pass up the opportunity to get a piece of your business. If they have to borrow at 20%, and they’re going to make 50% by owning a piece of your business, they’re going to borrow at 20%. If they’re going to have to pay 40% taxes on the profits they make from owning a piece of your business, they’re going to jump at the chance! And if they don’t think they’re going to make money by owning a piece of your business they’re not going to do it, even if the tax rate is 0%, and they’re not going to borrow money to put into your business, even at 1% interest.

This investor class way of thinking is ideologically driven, not based on scientific analysis. Science says that theories should be DEscriptive rather than PREscriptive. They’re supposed to explain what happens instead of say “great things would happen if only people would do so-and-so like they are supposed to.”

History demonstrates that regular people having more money to spend stimulates the economy, and concentrating income at the top hurts the economy. Policies that reduce the share of the wealth held by people at the top, and distribute that money among the people at the bottom and in the middle boosts the economy. Times of higher tax rates at the top have been more prosperous. Times when unions are stronger, resulting in wages being higher are better economic times. Periods after minimum wage increases have been better economically than periods when the minimum wage is lower. And all the crap you have been told over and over about lower wages being better for businesses, and giving tax cuts to the rich being better for the economy, and giving special breaks to investors helping the economy — it’s crap, and just crap, and they’re telling you to believe them rather than what you can see in front of your face.

Previously in Voodo Economics I wrote about how tax cuts for the rich “take money out of the economy.” In Stimulation I wrote about how giving money to the rich does not create jobs – customers with money to spend creates jobs. In Taxing Businesses I pointed out that taxes are not a cost. Profits are taxed, so businesses can not pass taxes on to their customers.

Later let’s talk about whether increasing the minimum wage “costs jobs” or actually increases demand — more customers with money to spend — which INCREASES jobs?