Economic benefits of major tax cuts: explaining the myth

I never thought I would say this, but I am loving me econ class right now. The topic we are discussing in class right now is fiscal policy. Being a democrat, I always felt like big tax cuts and less government spending was not the best answer to reducing our deficit, but now I feel like I actually have a proven, statistical reason to support my "hunch."

I've learned that there are two major actions the government can take to boost spending or "jump start" the economy. It can either enact tax cuts (supply-side economics) or increase spending (demand-side economics).  However, according to my econ book, tax cuts will always have less of an impact than increasing governmental spending, because tax cuts indirectly affect the economy (b/c this affects people's income, and people most likely won't spend their complete income - some of it hopefully goes to savings. This does not affect GDP).  Governmental spending, on the other hand, is a direct injection of money into the economy resulting in increased demand, and increased GDP.

I think that reasoning is right. =/ If I explained this wrong, please help me!

Our optional reading included an article by Alan Murray, "'Dynamic' Scoring Ends Debate on Taxes, Revenue" (from 2003!). Now this article broke it DOWN.

It explained why so many people were arguing that tax cuts will be majorly beneficial to the economy (even though basic economics, as I just explained, already knows it isn't). There was this guy, Art Laffer, who met with Dick Cheney and Donald Rumsfeld in 1974 and "sketched a curve on a cocktail napkin suggesting that a cut in income taxes could provide such a spark to the economy that government revenues would rise, not fall" (Murray). This graph, however, did not have any numbers on either axes. Murray does a really nice summary of the debacle, but it comes down to this: the Congressional Budget Office (CBO) did an extensive study and used dynamic scoring (which was invented to figure out the "numbers" for the graph), but unfortunately those "numbers" did not prove anything. 

Murray says, "using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit. But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years."

On top of that, the two "models" that did show an improvement in the deficit as a result of the supply side (tax cut) strategy were models that assumed "that after 2013, taxes would be raised to eliminate the remaining deficit."

His conclusion:
"Certainly, tax cuts can improve overall economic growth. And certainly, revenues may rise as a result. But at current levels of taxation, those effects are relatively small. There is no free lunch."

My conclusion
So, if we care about reducing the deficit, it looks like at some point we will have to start PAYING TAXES.

3 yrs later: I finally understand the housing crisis

The “Return to the Giant Pool of Money” radio show from This American Life was really interesting and insightful. I am a little embarrassed to have to admit that I never really understood the “housing crisis” completely. I knew big banks and greedy investors were at fault and that they were giving people bad loans, but I had no idea how complex the whole system had gotten and how many players were actually involved. This radio show definitely cleared a lot of things up for me!

Two things that really suck out to me (that I didn’t know before):

1. The Wall Street people were looking at BAD DATA. No wonder this practice of giving NINAs, creating CDOs, etc., went on for so long. The data was telling them it was a good idea. This was a triumph of data over common sense. 
2. No one was looking at the big picture and thinking about the long term effects to the economy. There were lots of players in the game, from mortgage brokers, to banks, to investors and no one took responsibility, because everyone thought it was not their problem. 
3. These players were earning A LOT of money to make this system work. A ridiculous amount of money on commissions. These high commissions and high ROIs definitely propelled the problem and encouraged the loosening of the rules.

The show included the story of two people who started at the complete opposite ends of the spectrum and ended up in similar situations: Richard Campbell, the Marine facing foreclosure, and Glen Pizzolorusso, the sales manager making a lot of money selling bad loans/mortgages (and ending up losing everything).

I liked how they started with Glen and his lifestyle before the housing crisis and then transitioned to Richard and the beginning of the crisis and finally, back to Glen and the outcome of the crisis. Through interjecting these personal stories throughout the show in between the technical talk, it was really easy to understand how the mix of personal behavior, bad banking products, and loss of oversight lead to such a severe economic downturn.

I realize now that from the outside it’s very easy to point fingers and blame all the people who made lots of money from taking advantage of low-income individuals and families. But, really, we need to look at the whole financial system and the governmental laws put in place to support these risky actions if we really want to change things.

Go ahead, listen to it! "Return to the Giant Pool of Money"

a little update on last year's retirement obsession

Almost a year ago now, I wrote a couple blog posts on retirement, because for some reason I was a little obsessed with it. Well I'm not that excited about it anymore.

Your retirement is FRAGILE! 

I did a lot of research and invested about $1750...now I have $1535, which is not that bad since we had a major downturn in the stock market about two months ago. But, still! I'm down $200...when I wanted to be making money. This really makes me question the whole system. I can't believe people rely on the this type of income to fund their retirement.  It seems absolutely crazy and risky.  Yet, it's the norm.

When I saw my account decrease I was sad, but I wasn't worried.  My retirement is many, many years away. This account is a good start, but if I loose most of my money I can always start from scratch again.  But, what about those individuals who are in their 50s. They only have a couple more years until they will need that money to live off of.  I cannot imagine what they are feeling watching the stock market crash the way it did this summer.

There's got to be a better way to save for retirement!

Social Security barely covers living expenses and it's complicated.  I tried calculating how much money I would get on their wesbite (http://www.ssa.gov/retire2/) and didn't get very far.

I say we bring pensions back for everybody! Why should government bureaucrats & public service people be the only ones who get them?