Barack Obama released an economic policy paper today that attempted to stimulate the economy by imposing a windfall profits tax on Oil Companies and then using that to provide an economic stimulus check to each family of $1000.
Of course, we just finished up a round of economic stimulus. The problem with a one time check is that it is like putting a band aid on a bullet wound. A one time stimulus check may in fact give a jolt to the economy but that jolt would be temporary. Once consumer received that check, they would likely spend some or all of it. That means for that particular quarter consumer spending would in fact increase. So what? A thriving economy is built on both consumer spending and capital investment. Businesses would likely see their own receipts jump, but that wouldn't translate into capital investment. That's because the business would know that their own business was only improving because of a one time stimulus check.
Any stimulus must have some sort of permanence in order to provide stability to the economy. Right now, business owners are facing the threat of increased taxes because the Bush tax cuts are set to expire. Facing extra costs as a result of higher taxes in the future, they are not very likely to engage in the sort of capital investment necessary to sustain a recovery. Furthermore, consumer spending would only increase in the immediate aftermath of the stimulus checks. All these stimulus checks would do is put off the inevitable of a shrinking economy for one more quarter. Unless these stimulus checks became a regular occurrence, they do very little to change around the long term momentum of a slowing economy. Obama's plan is further muddled with the so called windfall profits tax. By creating an extra tax on oil companies, he gives them even less incentive to do their own capital investment. Whatever stimulus he creates through the check, will be mostly off set by the lack of investment he creates through the windfall profits tax.
Economic principles are rather simple. If an economy is shrinking, then proper fiscal policy means tax cuts. It is that cut and dry. Stimulus checks are NOT tax cuts. They are a one time rebate. To have a permanent change in momentum, you need to create a permanent stimumus. A stimulus check is not permanent. A tax cut, on the other hand, is permanent or at least indefinite which serves the same purpose.
Getting cute with fiscal policy may make someone appear to be revolutionary and dynamic. It doesn't, however, actually make for good policy. The tax cuts President Bush signed into law in 2001 and 2003 are set to expire in 2010. That creates instability in the economy because tax payers are not sure how much their taxes will be in less than two years. That creates an indefinite instability in the market. A stimulus check is a one time jolt in the market. It doesn't overcome the instability felt by the looming presence of tax increases.
Once again, the only stimulus necessary is to make the tax cuts permanent.
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2 comments:
I agree with you that stimulus check is political and effectively economically useless. But I don't buy this "tax cut" theory. I think some people forget govt needs money to run the country, maintain the roads, pay teachers, pay policemen, pay for all sorts of democratic services that most people take for granted especially when they live in the middle of nowhere in Montana or Vermont. Try going to NYC and see how much needs to be done to maintain just one city.
Tax cuts almost always wind up increasing government revenue. That's one. More importantly, this idea that taxes are necessary to run government is nonsense. We didn't even have an income tax until the early 1900's. Somehow the government ran just fine without an income tax. What the government needs all of these taxes for is power.
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