Recently Alice Rivlin, ex-vice co-chair of the FED made some comments about FED policy and tax cutting. Some think what she says is "spot on". I think it's spot off.
Not surprisingly, Rivlin thinks the Fed shoulders some of the blame for the souring in the economy that followed. In hindsight, she tells us that the central bank's final half-point interest-rate hike last May "may have been too big." Nonetheless, Rivlin is quick to defend her ex-colleagues: "It didn't look too big at the time," she says.
This demonstrates that no one on the Board has the slightest idea about what action is right, so why do they pretend that they do? They all say they don't know, and so why do they and we believe we need government control over the free market for money? The answer is inheritance. We have inherited a false theory from the past that never has worked, yet has created nothing but problems. Why do we keep this bad approach? Fear.
If Rivlin isn't a fan of tight monetary policy, she has long been a voice for fiscal restraint. Hailed by former President Clinton for helping to usher in an era of budget surpluses, Rivlin opposes the use of changes in taxation to fine tune the economy. "Tax cuts should be defended on their merits, not as a stimulus of the economy," she says.
The only way tax cuts are a mild stimulus is if the cut is done where more of it goes to consumption. When tax cuts go to savings, that is, to investment, then they don't have any direct stimulus. The effect is too distributed in time to develop undesirable consequences and too weak to bail out erroneous former monetary policy.
(While she isn't against tax cuts per se, she favors smaller cuts aimed at those who earn less, as opposed to the Bush administration's broad $1.6 trillion tax-cut proposal.)
This is precisely what one could expect from liberals who have been taught the theory of demand management, and who actually have a hidden agenda of making sure the war on wealth continues unabated. People who earn less don't use tax cuts for investment. They use it for consumption and it is used frivolously, since there isn't enough there to make a difference. When you cut the taxes of the wealthy they are indifferent about the extra money as far as using it for consumption. The disutility of extra money to them causes them to invest it, since it can't be used effectively in other ways. You don't have to be wealthy to realize this.
Those who aren't wealthy look on the wealthy from their own position and conclude the wealthy spend like they do. They conclude the wealthy spend tax cutting dollars frivolously on yachts and more houses. They obviously don't know the habits of the wealthy or the reality of having money and the complications that arise by acting in frivolous ways.
Like many economists, Rivlin believes that management of the economy's cyclical fluctuations is best left to the Fed. The reason: Monetary policy can be changed at the drop of a hat, whereas fiscal policy — taxation and government spending — takes time to design and enact. This implementation lag often means that tax cuts take effect only after lower interest rates have already revitalized the economy. "My worry is that the economy will revive, and then [a large tax cut] becomes counterproductive," says Rivlin. That's because an inflation-wary Fed would feel pressured to make less of a rate cut — or to tighten rates again in order to avoid overstimulation of the economy. That, she says, would "not be good for private investment."
This is the remarkably stupid result of accepting a theory which is false and which is based on a hidden mistaken agenda. Rivlin first states that tax cuts are too gradual to have any immediate effect, but then bases other conclusions on the assumption that a tax cut suddenly becomes instantaneously effective. Either it gradually adds to prosperity or it doesn't, but it can't both add gradually and not add gradually.
The comment added by the interviewer:
That's because an inflation-wary Fed would feel pressured to make less of a rate cut — or to tighten rates again in order to avoid overstimulation of the economy.
is the bond market's favorite knee jerk theory and it's making the liberal rounds all as part of the secret agenda to continue the war on the rich. This theory begs the question because like Rivlin it assumes that the consequences of monetary policy and of fiscal policy are the same. And yet if you were to press Rivlin on the issue, she'd back off from that claim, but then as she has done above, inadvertently jumble the two consequences together and treat them as though they had the same consequences.
This occurs because she starts out with a prejudice. She starts out with the goal that tax cutting is bad somehow. It is bad somehow because it is "anti-Robin Hood", if I may use her own terminology. It is bad because she sees it as giving money to the rich when in fact it is only reducing the quantity of money taken from the rich, and in so doing, benefits everyone else far more because they are the beneficiaries of the disutility dollars the rich use for investment. But it is bad because anyone knows you shouldn't give anything to someone who doesn't need it, but you should steal from those who have, to give to those who don't. If you really want to take from the rich, then reduce their taxes, because then what isn't taken is returned to everyone else with leverage through the mechanism of investment.
That argument would seem to put Rivlin at odds with Greenspan, who testified Thursday that an immediate tax reduction would do "noticeable good" should "current economic weakness spread beyond what now appears likely." Although Greenspan didn't specifically endorse the Bush administration's $1.6 trillion proposal, his statements are sure to galvanize Republicans who have argued — to Rivlin's dismay — that a substantial tax plan is needed to help rescue the economy from potential recession.
If AG and Republicans think the way the interviewer believes, they're in for a big surprise. Tax cutting doesn't have much immediate effect and never enough to compensate for erroneous previous monetary policy. It takes more erroneous monetary policy to undo the previous errors, but since it is erroneous too, you end up with flat trend cyclicality.
"To make sure they(baby boomers) have a good standard of living, you need to have a bigger economy," says Rivlin. "We need to pay down the debt, so we can invest more and grow the economy for the future."
This is another series of remarkably contradictory statements. How does paying down the debt have anything to do with growth? It's all based on the assumption that growth only occurs under environments of low interest rates. Interest rates impact borrowing. Is that where growth is enabled? Borrowing? Or does growth come from risk capital? During the '80s interest rates persisted at high levels but growth expanded regardless due to the Reagan tax cuts.
There's always time for tax cuts later.
There won't be any bigger economy if tax cuts are put off for later. Tax cutting is the only way to constrain the Congress from launching on another Great Society spending spree. AG mentioned this in his recent testimony.
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