Feb
4
Cars for everyone!
Filed Under Economics | 3 Comments
Now it appears that Washington will be subsidizing new cars:
WASHINGTON - The Senate voted Tuesday to give a tax break to new car buyers, setting aside bipartisan concerns over the size of an economic stimulus bill with a price tag edging above $900 billion. The 71-26 vote came as President Barack Obama said he lies awake nights worrying about the economy and signaled he’ll try to knock out “buy American” provisions in the legislation to avoid a possible trade war.
Sen. Barbara Mikulski led the successful effort to allow many car buyers to claim an income tax deduction for sales taxes paid on new autos and interest payments on car loans.
She said the plan would aid the beleaguered automobile industry as well as create jobs at a time the economy is losing them at a rapid rate. “I believe we can help by getting the consumer into the showroom,” she said.
The provision was attached to the economic stimulus bill at the heart of Obama’s economic recovery plan and is subject to change or even elimination as the measure makes its way toward final passage.
But wasn’t it not that long ago that liberals were claiming that tax incentives for specific purchases were fueling unsustainable bubbles?
Couldn’t the mechanism that leftists claim helped fuel the housing bubble also do the same thing to automobiles? Not only that, the argument once again comes up as to what degree the federal government should be subsidizing organizations (GM, Ford, UAW) that have proven incapable of handling basic economics. One Republican voiced concerns:
Sen. Charles Grassley, R-Iowa, sought unsuccessfully to derail the proposal, saying it would only increase consumer debt in a time of recession and adding that there were other provisions in the legislation to help the auto industry.
What is so hard about this, folks? The cause of this problem was too much debt and spending by businesses, individuals, and government. So why do we insist on increasing debt and spending by businesses, individuals, and government?
Here’s another conundrum for the liberal logic behind such a proposal: If tax cuts will aid the economy by reducing the burden to purchasing a vehicle, couldn’t that same logic be applied to the economy at large? Couldn’t we reduce burdens on working, saving, producing, hiring, and investing by cutting income, payroll, estate and capital gains taxes across the board?
Also, I think it may be the less-than-adoration that President Obama is getting from the World Community that he so wants to be a part of that is “keeping him up at night”.
For some crazy reason, the EU is not taking kindly to Obama’s open detest for international trade. But I thought that this guy was supposed to bring the entire globe to one big rendition of Kumbaya?! And they said George Bush was the Herbert Hoover of our generation.
As Ed Morrissey points out, Obama is much closer to Hoover than Dubya ever was. For it was the disastrous Smoot-Hawley tariffs that made protectionism official national policy and initiated a global trade war that made a recession into the Great Depression. From the post:
Instead of working cooperatively, the major trading nations had to respond to American penalties with more penalties, and the Buy American provisions of the New Deal entrenched those divisions, making recovery impossible. The rest of the world — Europe, Asia, Latin America — would likely shut out the US and trade amongst themselves, and we would lose decades of work in building American economic strength abroad.
These actions by the President and Congress are only to give the appearance of action on our behalf. The real goals of the Democrat party are to use the recession as an excuse to consolidate power by the state and gain ground on causes they have been harping on for decades. To be honest, I am very, very worried about the next four years.
Jan
29
Thoughts on the Stimulus
Filed Under Economics | 5 Comments
Yesterday the House passed an $819 billion ’stimulus’ bill, with 11 Democrats and all Republicans (way to go folks!) voting against it. I detailed some of my thoughts on an economic stimulus in an earlier post, and two inimitable conservative thinkers had their say on a possible stimulus. From Thomas Sowell:
Out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010.
Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.
If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand.If all this sound and fury in Washington was about getting an economic crisis behind us, tax cuts could do that a lot faster.
As Mr. Sowell illustrates, if this crisis is so ‘dire,’ why not do that which puts money into the economy faster? It would be a lot more justifiable to rush a tax cut bill through congress. Not that I support any legislation being rushed through without its consequences studied. But if it has to be done this way, a tax cut bill is preferential. But, Sowell goes on to illustrate the Democrat Party’s real motives at the fast action. In the vein of Rahm Emmanuel’s quote, “”A crisis is a terrible thing to waste.” Adds Sowell:
This administration and Congress are now in a position to do what Franklin D. Roosevelt did during the Great Depression of the 1930s— use a crisis of the times to create new institutions that will last for generations.
To this day, we are still subsidizing millionaires in agriculture because farmers were having a tough time in the 1930s. We have the Federal National Mortgage Association (”Fannie Mae”) taking reckless chances in the housing market that have blown up in our faces today, because FDR decided to create a new federal housing agency in 1938.
Who knows what bright ideas this administration will turn into permanent institutions for our children and grandchildren to try to cope with?
Another way to slow the recession would be the Obama-Limbaugh Stimulus Plan of 2009:
Fifty-three percent of American voters voted for Barack Obama; 46% voted for John McCain, and 1% voted for wackos. Give that 1% to President Obama. Let’s say the vote was 54% to 46%. As a way to bring the country together and at the same time determine the most effective way to deal with recessions, under the Obama-Limbaugh Stimulus Plan of 2009: 54% of the $900 billion — $486 billion — will be spent on infrastructure and pork as defined by Mr. Obama and the Democrats; 46% — $414 billion — will be directed toward tax cuts, as determined by me [Limbaugh].
El Rushbo added:
I say, cut the U.S. corporate tax rate — at 35%, among the highest of all industrialized nations — in half. Suspend the capital gains tax for a year to incentivize new investment, after which it would be reimposed at 10%. Then get out of the way! Once Wall Street starts ticking up 500 points a day, the rest of the private sector will follow. There’s no reason to tell the American people their future is bleak. There’s no reason, as the administration is doing, to depress their hopes. There’s no reason to insist that recovery can’t happen quickly, because it can.
In this new era of responsibility, let’s use both Keynesians and supply-siders to responsibly determine which theory best stimulates our economy — and if elements of both work, so much the better. The American people are made up of Republicans, Democrats, independents and moderates, but our economy doesn’t know the difference. This is about jobs now.
The economic crisis is an opportunity to unify people, if we set aside the politics. The leader of the Democrats and the leader of the Republicans (me, according to Mr. Obama) can get it done. This will have the overwhelming support of the American people. Let’s stop the acrimony. Let’s start solving our problems, together. Why wait one more day?
Sounds bi-partisan and non-divisive to me!
Jan
26
A Stimulus Bill, Wal-Mart Style
Filed Under Economics | 4 Comments
Currently our politicians in Washington are debating how to pass a “stimulus” to help the economy. The main debate seems to be whether government spending (proposed by Democrats) or tax cuts (proposed by Republicans) will do the job better. The secondary concern is how such action will affect the budget deficit of the federal government, which is slated to be over $1 trillion in 2009.
Tax cuts are the only way to improve both situations.
Let’s start with the budget deficit. In case you don’t know, the U.S. federal deficit is the difference between what the federal government takes in and what it spends. If spending is higher, it is a deficit. If revenues are higher, then we have a surplus. It really is not very complicated, folks. The government acts pretty much like a regular person when it comes to money (with the exception of the ability to create money, but that would be a whole other post). If you don’t make enough money to cover your expenses, you either dip into savings (like the Social Security Trust Fund) or you use a credit card (like borrowing from investors and foreign governments though treasury securities, basically a government I.O.U.). So, just like anybody looking at their finances and seeing that they have a deficit, the culprit either has to be spending or revenue. Well, take a look at this chart detailing government revenue (income taxes only):
Let’s assume you were at your kitchen table going over your finances and you had a ton of credit card debt, just like the federal government. If the above chart were your personal income, what would you conclude your problem was? Spending! That kitchen table of yours would probably be mahogany wood, and your house would be full of all sorts of expensive stuff. In addition, you probably had kept making financial commitments you couldn’t afford, such as expensive car and house payments, whose payment obligations stretched far into the future.
Well this is pretty much the story of the federal government. We’ve spent money on everything including the military, infrastructure, health care, government employees to enforce regulations, clean-energy subsidies, NASA, law enforcement, scientific research and lots of other things. We’ve also made commitments on Medicare, Medicaid, and other programs stretching infinitely into the future absent significant reform (Social Security is not included in the chart above so I’m not including it here, as it operates slightly differently, but with much the same success).
Only a Democrat could look at the above chart and attribute the deficit to decreased revenue. I can’t help but laugh when big-government Democrats harp about “fiscal responsibility” and “tax-cuts we can’t afford,” thinking that nesecarrily cuts revenue.
That mentality is wrong because tax cuts help the economy by encouraging producers to create more wealth, therefore increasing the tax base. The government will get more revenue by taxing a large economy at a small rate than a small economy at a large rate.
This principle is illustrated by the Laffer Curve:
Basically it illustrates the taxation rate’s effect on government revenue. Two universal truths can be gained from the Laffer Curve: first, that a taxation rate of 0% will obviously result in no revenue, and second, that a rate of 100% will also result in no revenue because producers will have no incentive to work. The key contention about the Laffer Curve is where the peak is, or at what rate of taxation begins to harm the economy. Note: the above chart would make 50% appear to be the peak, but this is not known. The chart is for illustration purposes only. Lest anyone think I support the government confiscating half of your paycheck!
To illustrate why tax cuts can both help the economy and lower budget deficits (as long as spending is decreased), I’d like to make a little retail-sector analogy.
Let’s say that there is a big store, Wal-Mart perhaps. Except instead of selling goods like shirts and food and cheaply-glued furniture, they sell income. The store is a metaphor for the market at large. So the customers (us) go into the store (the market), find the goods (income) using our shopping carts (our labor, capital, innovation), and go to the checkout (the government), where we pay for the goods at the price (rate of taxation) determined by the store.
So what are the goals of Wal-Mart if they are in the business of selling income? Well, because they want the consumers to be happy, they want them to have as much goods (income) as possible. That’s what we’re trying to do with a “stimulus” bill, right? Improve the economy and raise incomes. Now Wal-Mart also has to remain profitable and not have deficits like the government currently has.
Now, if the liberals get in charge of the store, they would make the asinine proposition of just raising the prices of the goods (raising taxes on income). If we’re running a deficit when the shirts are priced for $15, we should raise it to $20. Hell, if this logic works, why not raise it to $100?! $1000!
That is ridiculous because of supply and demand. Higher prices result in lower demand, whether Wal-Mart is selling shirts or income. So what should Wal-Mart do in this case to achieve its goals of increasing the amount of goods for the consumers and remaining solvent? Have a sale!
The income store can have a sale by lowering the prices (taxes) on the goods (income). Therefore more consumers will pick up their idle shopping carts (labor, capital, innovation) to go get the goods. The income store benefits because even though their prices and profit margins are slightly lower, there are more gross sales and therefore more revenue.
If things are really dire, as it appears right now, maybe the income store should have a clearance sale, where the prices are really low.
This is exactly how the real Wal-Mart is so successful. It is more profitable to sell 20 shirts at $10 than 5 shirts at $20. Budgets will remain balanced -unless the store spends a whole bunch of money on plush new offices, company cars, and exorbitant benefits.
Unfortunately, the stimulus bill currently being debated doesn’t include a clearance sale. In fact, I wouldn’t even really consider this pork monster Keynesian. It is just one big Liberal wish list.
Keynesian economics basically says that the consumers are hoarding their shopping carts because they’re too scared, which makes sense. But, as a solution, Keynesians say we should borrow their carts (at interest) and do their shopping for them. Then, presto! The store has more revenue. But obviously then the store just has to recoup the money they spent borrowing the shopping carts, and the only way to do that is to raise prices, meaning the consumers won’t buy as many goods. Everyone loses.
So how do we get all of those scared consumers to use their carts? It is obvious in the private sector - by going on sale. Everyone wins.
But, as I said earlier, the stimulus bill is just a bunch of boondoggles. It is not even Keynesian. In our store metaphor, the board of directors is basically saying we’re going to raise the goods to the consumers (individual incomes) and the store’s revenues by painting the offices, hiring more employees, and making sure the shopping carts are fuel efficient.
This won’t work because not only will it cost too much, but it will do nothing to get the consumers to buy more income.
However, this is exactly why government does such a poor job compared to the private sector. They are not subject to the same rules. Where a business like Wal-Mart is bound by budgets and the laws of supply and demand and makes decisions based on cost, government can demand more funds at will (until the economy collapses) and makes decisions based on what sounds good.
Example: Only at the government-run income store do those who buy in bulk (high earners) pay a higher price (because of progressive taxation). You wanna buy three shirts? $30. Six shirts? $100. If you support charging those who buy in bulk the same price as everyone else, you support “tax cuts for the rich.” That’s liberal logic for you.
A spending stimulus bill will not work because we cannot afford to exacerbate the federal budget deficit, it will take too long to reach people, and it will do nothing to incentivize producers to create more wealth.
Cutting both taxes and spending will work because it will improve the fiscal health of the federal government, reach people’s pockets immediately, and encourage growth of the economy at large.
Donald Luskin had a piece refuting the current stimulus here.
Maybe later I’ll use my Wal-Mart metaphor to tackle regulation, where the cashiers leave their registers and dictate to the customers how they should shop……
But this is enough for now. Enjoy!
