Ahhaha, I was looking for you reply on the MDD thread, what happened, they banned you?(G). Now to some specifics, On the impact of rate reduction on consumer demand, it is not directly through the increase in money supply that that happens, it is through the reduction on their interest charges, some slower (like variable loans), some faster via refinancing (which is picking up sharply), in total, a 1% rate cut, could probably provide about $100 Billions in stimulus per year.
As for the impact of a very large tax cut in conjunction with strong monetary stimulus, if it will bring about both budget deficits and pressure on prices. Budget deficits by themselves could force the feds to stop easing. You are right in that a fiscal stimulus (tax cut) would take until next year to be felt (unless a mechanism is put in place to reduce monthly payments at once, quite feasible for a good portion of the cut, depending how it is structured), but even if you are right, and the fiscal stimulus is slow, while the monetary stimulus is more rapid (it too can take a good six to 9 months before it has an impact), then you get a "continuum" of stimulus, first the monetary side kicks in, then the fiscal side. look at what happened when the fed panicked late in 1999 and flooded the system with liquidity, we got the March bubble.
If you think that the sudden addition of 2% of GDP is not going to be stimulative, I don't know how we managed to get stimuli and "breaking" of the economy with much smaller injections in the past. My point was very simple, get tax relief, but don't rock the boat, keep paying at a slow rate $50 to $150 B per year) the debt (until it gets to around 20% of GDP, not much more IMHO), and if indeed OBM is right about those future huge surpluses, avoid those surpluses by gradual tax reduction, don't put all of it in at once spread it over the next five years or so. I have not heard any democrats or republicans suggesting a gradual approach to tax changes, so I am not sure why you label me (a registered Republican) a "Democrat", as if Democrats are better (or worse?) than Republicans.
I am not sure why to seek to "define what causes inflation". You may want to determine "causes" of inflation, and indeed , wage pressures might be one of those causes, but there are a number of other causes, such as imbalances between supply and demand (often, but not always caused by excessive printing of money), or increases in raw material costs (also caused by such imbalances, natural or artificial), as well as permanently (or at least over long periods of time) declines in currencies. The hyper inflation in Europe, in the thirties was not cause by excessive wage demands, but overprinting of money and eventually, by engrained inflation expectations (mass psychology play an important role, as strangely as it sounds, in economic "machines").
As for "being" in a recession, I really do not know if we are, so far it looks like a massive inventory adjustment (your 10,000 acres of SUV, and how come their price is not coming down more?). Until we get two consecutive quarters of negative growth in GDP, we are not in a recession, at least by standard "measures".
We may see things somewhat differently on the issue of how much taxes and how big, when you fear that the taxation is taking too much money out of the economy (as evidently it is, if we are going to run gargantuan surpluses), you want to bring receipt and expenditures in balance. If you feel that what ails the economy is lack of investment capital, you try and direct those cut to those that mostly generate that Capital (but it does not necessarily the "Rich", a lot of investment capital is generated from pension money in all its forms). If you feel that the economy's week point is weakness in end demand and lack of consumer ability to buy (too much debt), you try and direct, more of the cut there. There are of course political issues involved as well, some will take the stand that those that are currently paying the largest share of the load should get a greater relief, or that the relief should be proportional to the current tax load, and there are those that take the position, that some sectors pay a much greater share of their income then they can really afford. As an example, Gate's actual tax rate, is really around 20% of all its income. A small business man that bring in some lousy $100,000 per year and is in the marginal bracket of 36%, has actually a marginal tax rate of 51% (not counting state taxes), that is because that small business man pays "payroll taxes" of 15% (SS and Medicare) on essentially all its income, but Gate gets to pay possibly 40% on his first "earned income" the rest he c;lasifies as long term capital gains and pays only 20% (and on some of his ventures which qualify as "small businesses" only 10%, up to $10 MM per year). You should also address the question of what happens when you have excess capital seeking investment, and you see that the market is very smart and capital which is wrongly invested gets written down (dot.com) and is wasted.
Finally, the purpose of tax cut is what politician decide it is, sometime they will decide it should go to reliquification of consumers, sometimes business and some time to capital formation, they may even be wise and apportion tax cutting exercise to all of the above.
Have a good day.
Zeev |
