Why Middle Class Tax Cuts?

By Big Tent Democrat, Section Media
Posted on Fri Sep 17, 2010 at 09:20:34 AM EST
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Paul Krugman writes:

[B]ack in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. [. . .]

In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.

I think that is an accurate description of the state of play. But what is the policy rationale for tax cuts for the middle class? Krugman argues:

Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too. So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up.

This argument is rooted in the belief that, unlike the wealthy, who will save most of their tax relief, the middle class will spend (indeed have to spend), thus giving middle class tax cuts a stimulus force that tax cuts for the wealthy simply does not have. A Moody's study supports this argument:

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it. Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy. President Barack Obama wants to extend the cuts for individuals earning less than $200,000 and couples earning less than $250,000 while ending them for those who earn more.

“I would tend to wonder how much the tax cut actually influences spending behavior,” said Chris Cornell, an economist who mined government reports back to 1989 for West Chester, Pennsylvania-based Moody’s Analytics. “Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues.”

This finding also converges with common sense. There simply is no good economic reason (indeed, there was no good reason in 2001) to provide tax cuts for the wealthy. There were political reasons of course. But now the politics seems clear -- not giving tax cuts to the rich is the politically smart move. Good policy and good politics. Dems need to stand strong, as the President has.

Speaking for me only

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Why Middle Class Tax Cuts? | 84 comments (84 topical)

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Plunge (5.00 / 2) (#1)
by Ga6thDem on Fri Sep 17, 2010 at 09:26:32 AM EST

back into recession? I beg to differ with Krugman on that point. I don't think we've ever left the recession.

Other than that Krugman makes good points here.

I'm still not sure that anyone is standing strong on this issue yet. The only ones that seem to be holding their ground right now is the blue dogs. We shall see if they are willing to move on this issue or not. My prediction right now is that they get what they want because Obama always concedes the fight and they know it.

I have objections to arguing that keeping the tax (5.00 / 1) (#8)
by ruffian on Fri Sep 17, 2010 at 10:12:07 AM EST

cuts are part of stimulus. Further tax cuts did not have much of a stimulus effect last year. People are digging out of debt, not using their tax cuts to buy more stuff.

IMO it is better to argue that the middle class has seen their income shrink in the last x-many years and cannot afford a tax increase, whereas the top 2% can. Instead of a stimulus force it is more of a recession prevention force, which I think is where Krugman was going. (I'll read his whole post)

There were no tax cuts (none / 0) (#44)
by jimakaPPJ on Fri Sep 17, 2010 at 11:55:50 AM EST

There were selective tax credits for certain people doing certain things.

Problem is, all the cash for clunker and the first time home buyer tax credit did was move the deck chairs around on the Titanic.

Nothing "new" was created.


I thought there was also some kind of general cut (none / 0) (#51)
by ruffian on Fri Sep 17, 2010 at 12:32:41 PM EST

For some income levels. Could be wrong.


: There was the 'making work pay credit' ` (none / 0) (#84)
by Harry Saxon on Fri Sep 17, 2010 at 07:01:41 PM EST

Technically, it's a refundable credit, not a tax cut.

IRS Summertime Tax Tip 2010-06
Many working taxpayers may be eligible for the Making Work Pay Credit again this year. This credit, a provision of the American Recovery and Reinvestment Act of 2009, increased paychecks for millions of taxpayers starting in 2009.
Here are five things every taxpayer should know about the Making Work Pay tax credit:
1. This credit - still available for 2010 - equals 6.2 percent of a taxpayer's earned income. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.
Click Me
I must tell a funny story. My father is a retired teacher, and when he did his taxes he thought he wasn't eligible because he thought that "governmental pension" meant he had to have worked for the federal government to qualify for the payment.

The reason Krugman has it right about (5.00 / 3) (#14)
by Anne on Fri Sep 17, 2010 at 10:22:27 AM EST

the stupidity of raising taxes in the middle of a recession is because the current proposal won't give the middle class more than it has now - they aren't going to have more money to spend if the rates are extended - but raise taxes with the expiration of the rates, and I think it's a no-brainer that the middle class will be taking money out of the economy in order to meet the increased tax burden. While I don't think the cuts will have much upward economic effect, I think allowing them to expire for the middle class is the best way to keep the downward spiral going.

Extension of the middle-class rates really needs to be accompanied by real relief for those who never got much - if any - benefit from the rates to begin with: those who are out of work or making so little that they don't pay income tax.

I think someone needs to make the case that the wealthy aren't spending whatever it is they are saving under the about-to-expire rates; they've been sitting on their disposable income like everyone else who has any disposable income.

It really kind of bothers me that we are spending so much time debating this issue instead of coming up with a comprehensive plan to increase demand and get people working again; tax cuts just aren't the answer.

And neither are spending cuts for programs that are keep people from falling into the economic abyssgoing; the government needs to spend more in ways that put people back to work and get demand up - it's the only way that I see for the private sector to get to a point where it needs to start hiring and expanding.

: Yes - this is how I see it too (5.00 / 2) (#19)
by ruffian on Fri Sep 17, 2010 at 10:29:38 AM EST

While I don't think the cuts will have much upward economic effect, I think allowing them to expire for the middle class is the best way to keep the downward spiral going.
I also think the more time spent debating it, the less political benefit it has. If they think stretching the debate until closer to November will help I strongly disagree. Take the votes and make it happen now, and brag about a real achievement for the next month.

: Timing of the vote (none / 0) (#47)
by christinep on Fri Sep 17, 2010 at 12:10:38 PM EST

Near as I can tell, Paul Krugman is urging the vote now as President Obama has suggested. While your broader point about more relief being needed in a comprehensive way has been clearly well taken, the issue for the vote is more limited...and, that is the issue where Krugman's column focuses. Also: The plain language used by Nobelist Krugman in today's NYTimes column is quite persuasive in its use of the vernacular...i.e., he recaps how it all came to be and, then, urges a vote to help the middle class by not "raising" taxes.
An article in the Denver Post this morning notes that there is indeed relief for the middle class if taxes are not allowed to rise at the beginning of next year. Examples: Savings for a family of 4 @$50K would be about $3,000; for same family @#100K would be about $4,500; etc. I'll be curious to see how the yearly savings info is disseminated in the coming weeks?

Banks (5.00 / 1) (#32)
by CST on Fri Sep 17, 2010 at 10:50:11 AM EST

with all their money are a huge part of what ruined the economy because they failed to spend it wisely.

I just wanted to point that out again because it seems like a lot of people are forgetting that right now.

Ya. I'm amazed that anyone is saying Hooray! (5.00 / 1) (#43)
by sarcastic unnamed one on Fri Sep 17, 2010 at 11:55:38 AM EST

about Obama's small biz loan push. Small biz doesn't need more frigging debt, they need more frigging customers.


Honestly (none / 0) (#48)
by CST on Fri Sep 17, 2010 at 12:12:28 PM EST

I haven't heard anyone say "hooray!" so much as "meh".

I was thinking more along the lines of the derivatives market than small business lending though.


The small business push (none / 0) (#54)
by christinep on Fri Sep 17, 2010 at 12:41:31 PM EST

is also being pushed heavily by former President Clinton as one of three key components to home in on in the coming days (the other two being increasing manufacturing and immediate funding for training--a very good presentation about that on Daily Show last night.) The small business push--as I recall--is job-centric in that sustainable, real increases are generated by small business, historically. Job health seems to be directly related to the health of small businesses...and, the argument is that small businesses need $$ in the form of loans, etc. to take on more employees.


Small biz's hire employees, (5.00 / 1) (#57)
by sarcastic unnamed one on Fri Sep 17, 2010 at 01:08:03 PM EST

especially when in a long, deep, recession like the one we're in right now, when the customer demand rises such that that demand cannot be met with the current employees.

If you think small biz owners are going to take on more debt and use the money to to hire unneeded employees I think you might want to rethink.


small business push (more) (none / 0) (#60)
by christinep on Fri Sep 17, 2010 at 01:20:19 PM EST

I am not an economist. And, you make a good point, steviez314.

Maybe it would have something to do with the structuring of the funds--Obama's proposed credits, for example???

Again, I don't know. But, I also think (very much) that Clinton's push in that area should not be gainsaid.


: Seriously, it's not rocket science. (5.00 / 1) (#65)
by sarcastic unnamed one on Fri Sep 17, 2010 at 01:33:18 PM EST

Every biz has income and expenses. No biz owner is going to borrow money and thereby increase their expenses unless they know there is going to be a corresponding increase in income to (at least) cover the increased expense.
Would take on a loan to buy a home that your income could not afford and there was no realistic expectation that your income would increase enough to afford? Of course not. But AFTER you got a raise or whatever and your income rose THEN you'd consider increasing your expenses by taking on a/more debt.
Simple common sense.

: Here is a good breakdown of the (none / 0) (#64)
by BTAL on Fri Sep 17, 2010 at 01:32:23 PM EST

small business bill elements. Some are just renewing items that were in the original stimulus bill.
thehill.com

There's got to be a good way to explicitly frame (none / 0) (#2)
by steviez314 on Fri Sep 17, 2010 at 09:41:56 AM EST

this, but I can't quite put my finger on it.

They should vote on tax cuts for the middle class before the election, and also somehow tie in the election result explicitly to the tax cuts for the rich.

Maybe something along the lines of the election being a choice between tax cuts for the rich and deficit reduction. That might get some independents in, but not really excite the base.

I don't think just a referendum on upper income tax cuts is enough to get the base excited.

Some positive proposal for that $700B would help--maybe make the election a choice between the tax cuts for the rich and a payroll tax credit for new hires.

I like the specificity of your last paragraph. (none / 0) (#3)
by Dr Molly on Fri Sep 17, 2010 at 09:57:34 AM EST

You receive 700B and it is your job to spend it wisely for the country. Should it be spent on making wealthy people wealthier or on creating jobs during an era of 10% unemployment?

It seems so simple....


But it just seems so crass and obvious. (none / 0) (#4)
by steviez314 on Fri Sep 17, 2010 at 10:01:38 AM EST

And I hate to have bad policy be so expicitly at the whim of a rather small electorate.

It's a fine needle to thread, but since that's what Obama's been doing for 2 years, maybe he can pull it off.


Yeah... (none / 0) (#42)
by jimakaPPJ on Fri Sep 17, 2010 at 11:52:52 AM EST

The City of LA just was audited and they spent $111,000,000 to create 55 jobs.

Yeah, wisely.

That would have given 1680 people approx $62,250....

Wisely...


Two things. (5.00 / 1) (#52)
by Dr Molly on Fri Sep 17, 2010 at 12:37:56 PM EST

You provide no evidence for that assertion.
Even if true, that's 1680 more people with jobs, and I'll take that over giving more money to those who are already wealthy.

I think you've misunderstood (5.00 / 1) (#77)
by hookfan on Fri Sep 17, 2010 at 03:30:29 PM EST

his point. I think the point is that the city gov't did not spend wisely (can't trust gov't) and only got 55 jobs. While a wiser use (perhaps private sector?) would have netted much more jobs at the same cost.
You're right, of course, about the lack of proof for the assertion. But why am I suspicious, after seeing the lack of results for main street in the larger "bailout" called stimulus in creating jobs/ reducing unemployment, that he just may be correct in this instance?
The government and spending effectively or wisely often do not follow each other. Especially when there is so much corruption and corporate control in our government. . .


: Here's the article (none / 0) (#83)
by hookfan on Fri Sep 17, 2010 at 06:09:41 PM EST

he was referring too: link

From FNC (none / 0) (#82)
by jimakaPPJ on Fri Sep 17, 2010 at 06:07:54 PM EST

More than a year after Congress
approved $800 billion in stimulus funds, the Los Angeles city controller has released a 40-page report on how the city spent its share, and the results are not living up to expectations.
"I'm disappointed that we've only created or retained 55 jobs after receiving $111 million," said Wendy Greuel, the city's controller. "With our local unemployment rate over 12 percent we need to do a better job cutting red tape and putting Angelenos back to work."
According to the audit, the Los Angeles Department of Public Works spent $70 million in stimulus funds -- in return, it created seven private sector jobs and saved seven workers from layoffs. Taxpayer cost per job: $1.5 million.
The Los Angeles Department of Transportation created even fewer jobs per dollar, spending $40 million but netting just nine jobs. Taxpayer cost per job: $4.4 million.

Small problem - the administration has (none / 0) (#6)
by BTAL on Fri Sep 17, 2010 at 10:08:00 AM EST

already baked that $700B into their long term deficit reduction budget projections.


Specificity and the $700B (none / 0) (#49)
by christinep on Fri Sep 17, 2010 at 12:20:40 PM EST

I think your last paragraph makes an excellent point, steviez314. It doesn't have to be "Here is precisely what we will do with the $700B" obviously; but, it translates to the practical to say "We could put that $700B to use right away in area A or area B and bring down the debt as well."
(That directness is the kind of thing that former President Clinton talked about last night on the Daily Show.)


As a political argument (none / 0) (#5)
by ruffian on Fri Sep 17, 2010 at 10:02:08 AM EST

Contrast that with the Boehner argument of'Nancy Pelosi won't allow an up or down vote on raising taxes for everyone'. I paraphrase from what I read in the paper this morning.

Few people have ever heard of Boehner, or so I'm told, so maybe it won't work, but I fear Dems have dithered their way into screwing this up.

Take a damn vote on something already.

There's that fuzzy math again (none / 0) (#7)
by BTAL on Fri Sep 17, 2010 at 10:11:28 AM EST

thus giving middle class tax cuts a stimulus force

Friday Dec 31, 2010 middle class take home pay amount $X

Friday Jan 7, 2011 middle class ("after" said tax cuts) take home pay amount $X

X - X = 0

Or.....? (none / 0) (#9)
by Dr Molly on Fri Sep 17, 2010 at 10:15:53 AM EST

Friday Dec 31, 2010 middle class tax home pay amount $X

Friday Jan 7, 2011 middle class ("after" middle class tax cuts expire) take home pay amount $X - $Y.

X - Y does not equal 0.


Y would be less than X making the result (none / 0) (#11)
by BTAL on Fri Sep 17, 2010 at 10:18:37 AM EST

a negative number which further debunks the "stimulative" impact.


Sorry, no clue at this point (none / 0) (#15)
by Dr Molly on Fri Sep 17, 2010 at 10:25:59 AM EST

what you are saying.

If the middle class tax cuts are allowed to expire, net pay will decrease. If not, it won't.


That is my point. This whole meme of (none / 0) (#17)
by BTAL on Fri Sep 17, 2010 at 10:28:45 AM EST

"Obama Tax Cuts" is a political smoke and mirrors game with the transparency of mud.


I don't see what's complicated at all. (none / 0) (#53)
by Dr Molly on Fri Sep 17, 2010 at 12:39:17 PM EST

The math is not at all fuzzy. It's a pretty simple choice.


: The item I quoted was from the OP comments (none / 0) (#67)
by BTAL on Fri Sep 17, 2010 at 01:35:28 PM EST

that maintaining the current middle class tax rates would be a stimulus. That is the fuzzy math. The rates won't change so there is no stimulus effect.

Good article in the Denver Post today (none / 0) (#50)
by christinep on Fri Sep 17, 2010 at 12:24:36 PM EST

...about the tax rate rise (with specifics for middle class families) IF Congress doesn't vote to prevent that tax raise now. Perhaps, they will use Perot-like bright charts. I'm guessing we will see much more about the "savings" to the middle class.


Of course we at the bottom will spend it... (none / 0) (#10)
by kdog on Fri Sep 17, 2010 at 10:16:09 AM EST

it's what we do when circumstances give us a couple extra bucks...the normal routine of prioritizing and going without can wear on ya...find a couple hundred bucks in your pocket it's like you hit the daily number, you wanna celebrate! Buying your kid the new baseball mitt they've been asking for, take your significant other out to eat, take a little trip...feel good stuff.

I guarantee this is how it would go down....we're broke because we don't value money the way the uber-rich do, we value other things, some of which money can buy.

See post #7 (5.00 / 1) (#12)
by BTAL on Fri Sep 17, 2010 at 10:20:26 AM EST

Where is that couple extra bucks coming from on Jan 7th, 2011?


: You're right... (5.00 / 1) (#16)
by kdog on Fri Sep 17, 2010 at 10:27:36 AM EST

I was still kinda hoping the plan is to go beyond the Bush rate so wage earners actually see a higher net and more buying power...if it's a mere extension, we're gonna feel cheated and mislead by the re-branded "Obama tax cuts".

No one's giving you a couple extra bucks; (5.00 / 4) (#18)
by Anne on Fri Sep 17, 2010 at 10:28:48 AM EST

they are saving you from having to pay something more than a couple bucks that I'm pretty sure most people don't have much "extra" of.

If you have to take home less money because the tax rates go up, you will clearly have less to spend.

If I wanted to be cynical, I would say that 98% of people angry about paying more taxes will have a much greater impact at the ballot box than 2% - and that's what this is really all about.


: Unfortunately, it seems (5.00 / 2) (#26)
by gyrfalcon on Fri Sep 17, 2010 at 10:43:46 AM EST

that's not all it's about for the pols. Voters are obviously important, but so are those max donors. I'm quite certain there's been more than one phone call to congress members to the effect of, "If you vote to raise my taxes, that will deprive me of the money I would otherwise have given to your campaign."

: Of course... (none / 0) (#25)
by kdog on Fri Sep 17, 2010 at 10:42:54 AM EST

it's all your money, the fed will just be taking less, more, or the same depending on how this plays out.
I'm just saying if that first paycheck of 2011 has a higher net than the last of 2010, a working stiff feels like they hit the number...after saying "can't afford it" all through 2010, they'll go right out for a taste of what they've been missing.

: 98% of people angry about paying more taxes (none / 0) (#40)
by sarcastic unnamed one on Fri Sep 17, 2010 at 11:51:10 AM EST

98% of people angry about paying more taxes will have a much greater impact at the ballot b
Exactamundo. And THAT's the answer to the question "Why Middle Class Tax Cuts?"

Krugman Wrong (none / 0) (#13)
by coast on Fri Sep 17, 2010 at 10:20:27 AM EST

The sunset was not included to circumvent anything. In fact, the sunset was included in order to comply with the law. From the Joint Committee on Taxation report, "To ensure compliance with the Congressional Budget Act of 1974, the conference agreement provides that all provisions of the bill generally do not apply for taxable, plan or limitation years beginning after December 31, 2010."

As for the Moody's article and this notion that "savings' of the rich somehow disappears into a blackhole and does nothing to help the economy is a rather ludicrous argument. If it weren't for the rich "saving" their money the economy would essentially grind to a halt. Whether they place the money in a bank or invest it in someother fashion, it is still impacting our economy. The only way that it would not is if they either put the money under their mattress or moved the money offshore.

On the stimulative effect (5.00 / 1) (#24)
by Big Tent Democrat on Fri Sep 17, 2010 at 10:38:05 AM EST

of the wealthy saving their money in a recession, the issue is DEMAND. Savings does not raise demand.

If you are comfortable with 10% unemployment and slack demand and flirting with a depression, then you are happy with tax cuts for the wealthy as stimulus.

If you do care about the recession, then you would realize that tax cuts for the wealthy is lousy policy.

Look this is not rocket science. This is basic stuff.


12.4% in Ca (5.00 / 1) (#58)
by nycstray on Fri Sep 17, 2010 at 01:09:39 PM EST

lost 33,500 (iirc) non-farming jobs in Aug . . . my sister was 1 of those.


Demand is only good for the (none / 0) (#29)
by Slado on Fri Sep 17, 2010 at 10:47:03 AM EST

economy if it is backed up by wealth and savings.

Demand on credit is not good for the economy. That is what is so mind boggling in Krugmans position.

Demand for the sake of moving money around in circles, worse yet adding more debt to a debt ridden economy, does not help the economy in the long run. Simply kicks the can down the road.

Also Krugmans whole premise misses a big macro economic point, something that is all too common.

Why does the "Middle Class tax cut" have a $3 Trillion price tag versus the price tag of $700 Billion for the "tax cuts for the rich"?

I'll tell you the answer. Because the Bush tax cuts effected the middle class as well as the rich and its funny how dems choose this argument when it suites them and deny it when it doesn't.

You can't have it both ways. Tax cuts work or they don't. The idea that some "rich" person hides their money under a mattress is a political ploy to hide the real issues. This is class warfare. Pure and simple and has nothing to do with economics.

Said rich person takes that money, gives it to a bank who then loans it to someone else or invests it int he market which means it goes straight into the economy.

The only explanation is the misguided belief in the multiplier effect which Barrow has proven to be incorrect because some how magically if the government uses other peoples money it's worth more.

Krugman is so wrong on this it defies belief.


: Wait (none / 0) (#56)
by Socraticsilence on Fri Sep 17, 2010 at 01:07:56 PM EST

do you not get that the middle class tax portions apply to the rich as well- they actually benefit them more (as they get the full effect) seriously there's like some sort of culture wide numerical illiteracy on how marginal tax rates work.

How does (none / 0) (#36)
by coast on Fri Sep 17, 2010 at 11:15:30 AM EST

"Obama's Tax Cut" spur demand or have any stimulas effect at all? It has none.

Demand is one side and supply the other. Most clients that I deal with have two problems. First, demand has dried up so they are carrying slim inventories. Secondly, all their short-term financing, which is typically used to fund inventory, has either been cut or is maxed out because they are using it to pay operating cost. For companies to meet any increase in demand they are going to need access to credit/capital. That is only going to come from either investors with liquid assets in the form of capital or debt or from banks, who need more capital (either thru deposits or capital) in order to meet the new regulation, in the form of a loan or short term financing.

Savings/investing is the backbone of our economy, it supplies the capital for businesses to run and for credit to be extended. Credit, especially short-term credit when talking about inventories, is the heart of the economy, without it business can't function. Demand is the legs of the economy. You need all for the economy to work.


How does increasing taxes on (5.00 / 1) (#38)
by Anne on Fri Sep 17, 2010 at 11:41:04 AM EST

98% of taxpayers stimulate anything but the downward spiral?

If Joe and Jane Smith are bringing home less money come January, that's money that won't get spent at the grocery store, or the mall or the fast-food place or the movies. It might mean that some people, who were barely making ends meet, will fall farther behind in their bills. What little demand there was is going to evaporate altogether when Joe and Jane and millions and millions of people like them can't spend in the private sector what will now be going for taxes.

I know the obvious - and easy - point here is that raising taxes on the other 2% is also going to take that money out of the economy too - but will it, really? Will Thurston and Buffy really stop buying beef tenderloin and cracked crab? Stop going out to dinner? Stop taking their clothes to the dry cleaner, or have to let the housekeeper go?

I kind of doubt it.

But this one-two punch of extending and expiring isn't the answer - it isn't going to boost demand one iota above where it is now.

What I would like to hear the president and his advisors and the Democratic Congress say is that the $700 billion that won't be extended to the wealthy is going to be used for infrastructure and other programs that will put people back to work, spur demand and get things moving up instead of down.

But I won't hold my breath.


Where did I say anything about (none / 0) (#73)
by coast on Fri Sep 17, 2010 at 02:19:49 PM EST

increasing taxes? Its not an either or situation as it is being sold.


: You didn't - you asked how the tax (5.00 / 2) (#76)
by Anne on Fri Sep 17, 2010 at 02:38:46 PM EST

cuts were stimulative, and I countered with how not extending them would be depressive; for what it's worth, I think holding off further depression in the economy is a better argument than any claim of stimulus.
If all they can manage to come up with is something that maintains the status quo and doesn't further depress demand, that's still better than failing to act, with the result being further downward movement.

except that (5.00 / 2) (#39)
by CST on Fri Sep 17, 2010 at 11:45:12 AM EST

banks are rolling in profits right now. But they are unwilling to take on risk.

It has nothing to do with a lack of savings or capital. It has everything to do with lack of good investment options right now due to lack of demand in the overall market.

The supply of credit is there, it's just not being used.


Gee coast, didn't you learn anything from (3.00 / 2) (#20)
by BTAL on Fri Sep 17, 2010 at 10:31:19 AM EST

yesterday's banking 101 discussions. It was "proven" that banks put depositor's money in their vaults and keep it there. In fact, if you put a secret mark on the bills you deposit, when you make a withdrawal you'll get your same bills back with the secret marks. ;-)


I don'rt knwo what you argued yesterday (none / 0) (#22)
by Big Tent Democrat on Fri Sep 17, 2010 at 10:35:49 AM EST

though I suspect it was stupid and wrong and related to bank lending practices in a recession (yes it is the DEMAND stupid), but here you are really stupid and wrong. The Byrd Rule.

Look it up.


Who is this directed towards? (none / 0) (#30)
by BTAL on Fri Sep 17, 2010 at 10:48:01 AM EST

The discussion yesterday had someone insisting to coast that banks don't lend deposited funds but only use monies borrowed from the fed to make loans.


Really off-base. (none / 0) (#41)
by sarcastic unnamed one on Fri Sep 17, 2010 at 11:52:45 AM EST

Nonsense (none / 0) (#46)
by Big Tent Democrat on Fri Sep 17, 2010 at 12:06:56 PM EST

It is actually undisputable fact that the Bush tax cuts were designed to skirt the Byrd Rule.

That you deny this undisputable truth demonstrates again that you are simply a joke on this issue.


Really off-base. (none / 0) (#55)
by sarcastic unnamed one on Fri Sep 17, 2010 at 12:55:17 PM EST

You, literally, don't know what BTAL is talking about here.

When you start with this:

I don'rt knwo what you argued yesterday

and then lambaste that argument which you just admitted you don't know even know what it was about, you are doomed to be clueless. And you are clueless on this.

Hint: BTAL's comment had nothing to do with Bush's tax cuts and/or the Byrd Rule.

Don't be a punchline on your own blog.

I'm done.


: You can't read a thread (none / 0) (#70)
by Big Tent Democrat on Fri Sep 17, 2010 at 01:40:55 PM EST

Here is the parent comment -
" Krugman Wrong (none / 0) (#13)
by coast on Fri Sep 17, 2010 at 10:20:27 AM EST
The sunset was not included to circumvent anything."
It was. It was structured to circumvent the Byrd Rule.
That you continue to deny this says all that need be said about your argument - ill informed and inaccurate.

Debated including that part. n/t (none / 0) (#23)
by coast on Fri Sep 17, 2010 at 10:36:18 AM EST

: I know, that's why the ;-) n/t (none / 0) (#28)
by BTAL on Fri Sep 17, 2010 at 10:46:06 AM EST

It was done to skirt the Seante filibuster (none / 0) (#21)
by Big Tent Democrat on Fri Sep 17, 2010 at 10:34:21 AM EST

which would have required 60 votes for the tax cuts, in light of the Byrd rule.

This is not a controversial assertion.


investing in companies (none / 0) (#27)
by CST on Fri Sep 17, 2010 at 10:44:55 AM EST

is great, but it's not the driver of the economy right now. The problem is that there is no demand for services because people are broke and aren't spending, so companies can't make money.

Will some investment help in innovation? Sure. But it doesn't matter if you make a better product that no one can afford to buy. You're still not making any money.

And in any event, people aren't exactly throwing their money into the market or businesses. Banks aren't lending money to businesses right now. Not because they don't have money, but because there is no confidence in business.

Banks impact the economy alright. I still remember that they were largely responsible for driving it into the ground.


There is no demand because people (none / 0) (#31)
by Slado on Fri Sep 17, 2010 at 10:48:52 AM EST

have no wealth or savings.

Until real wealth is created all this "demand" your begging for will be credit driven and that is exactly how we got in this mess in the first place.

SEE GRAPH

Unitl it comes down any "demand" driven by credit is fools gold.


rich people (5.00 / 3) (#33)
by CST on Fri Sep 17, 2010 at 10:51:10 AM EST

have plenty of wealth and savings.

You're right, the middle class does not. They need it. The rich do not.


Rich people will always have money (none / 0) (#59)
by Slado on Fri Sep 17, 2010 at 01:11:42 PM EST

That's why they're rich.

The problem is do we all have money collectively. Government, middle class, buisness, rich etc...

Right now collectively we don't. We are all broke collectively and that is why our debt ratio compared to GDP is 396%.

The biggest driver of this is government largess. It is sucking the collective credit out of the economy. until Government promises in the form of spending is reduced we will never recover.

But don't tell that to Krugman. He thinks we need more empty promises in the from of government spending and then magically the multiplier effect will kick in and we'll all be rich.

It's worked great so far.


What (5.00 / 1) (#62)
by Socraticsilence on Fri Sep 17, 2010 at 01:24:53 PM EST

I'm sorry, what? When exactly did the deficit start "sucking credit out of the economy" was it when we blew a trillion for nothing in the middle east? Was it when we were wasting hundreds of billions of "missle defense" was it when the GOP passed a non-funded giveaway of tens of billions to HMOs on a partyline vote in 2003? When was it, because I have a strange feeling the debt only became an issue when a Democrat was using it to attempt to give healthcare to poor people- I mean we can't afford that- bombing an contained autocracy and creating a natural ally for a theocratic state now that's worth 700 billion- but American Citizens not hardworking enough to have healthcare- screw 'em.


your confusion (none / 0) (#61)
by CST on Fri Sep 17, 2010 at 01:21:26 PM EST

is thinking we have collective money.

We don't. 2% of this country has most of the money. The other 98% doesn't have enough. The government needs money from that 2% in order to help out that 98% because right now the 2% sure isn't doing it on their own.

And in turn, if that 98% has enough money to function that 2% ends up doing better in the long run anyway.

Money that the government spends does not just disappear into the abyss. It goes back into the system.


: Income distribution is a freakishly exponential (none / 0) (#68)
by Socraticsilence on Fri Sep 17, 2010 at 01:35:53 PM EST

thing- 1 percent of all households make 23% of all income, 0.1% make 11 percent of all income- think about that for a second that means if 1000 people make 1 million dollars- 990 of them split 770,000, 9 of them split 120,000 and one lucky guy gets 110,000 often simply because his ancestors worked hard, stole well, or got lucky- literally nothing to do with his own labor.

How much does the middle class tax cut cost? (none / 0) (#34)
by abdiel on Fri Sep 17, 2010 at 10:55:10 AM EST

Don't feel like anyone has mentioned that. Is it merely $1.3 trillion - $700 billion = $600 billion?

there is no middle class (none / 0) (#37)
by the capstan on Fri Sep 17, 2010 at 11:17:57 AM EST

tax cut. There is an effort to prevent middle class taxes from going up automatically. Do you mean how much money would the government be 'giving up' by not allowing the increase? In actual fact, maybe none: I have read that allowing the middle class to spend its own money is more effective than having the government do the spending. (Amounts have been quoted on this blog.)


I don't know if it's right but I've seen (none / 0) (#63)
by Slado on Fri Sep 17, 2010 at 01:30:17 PM EST

repeatedly that the estimates are this way....

Over ten years the Obama plan will cost 3 Trillion.

Over ten years the Republican plan will cost 3.9 Trillion. I've seen $3.7 and $4 Trillion in other places.

This of course is based on an estimated growth rate etc... and all sorts of otehr assumptions.

What confuses this is when Bush cuts where originally put in place tax receipts went up. That is a classic republican talking point but the problem is spending went up more and we where left with a huge deficit (see famous Cheney quote).

Point being is it's a delicate balance between tax rate, government spending and economic growth. In the short term a tax cut has a negative impact in the long term all sorts of factors play in.

I am firmly in the belief that at some point the tax rate is negative on the economy because the government spends money less efficiently then the private sector. Also any government that continually promises more money then it can collect will turn into Greece. We are well on our way to being Greece. Our collective debt level is well beyond what is sustainable and we keep adding more spending and arguing about tax cuts and keep wondering why our economy refuses to keep going.

Once again I give you the debt graph. It's hard to argue with.


The last two paraghraps of this link are quite (none / 0) (#69)
by Slado on Fri Sep 17, 2010 at 01:40:31 PM EST

ominous and show how frivolous and pointless this whole debate is...

In conclusion, we cannot emphasize enough that the total debt to GDP is so onerous for the economies of most mature countries as well as China, that the global economy will suffer tremendously over the next few years. We have discussed this over and over again and, in fact, with a little "tongue in cheek" stated in many comments and "special reports" that when Obama realizes what he inherited he will "demand a recount" of the 2008 election. The masses don't trust the liberals and they don't trust the conservatives -they don't like Democrats and they don't like Republicans-they don't like any institution be it government, journalism, or anything else-they just want things to CHANGE. The regulation of the banking industry, the tea parties, the populist demands, the election in Massachusetts, the healthcare reform, even the employment situation all take a back seat to the enormous amount of debt relative to GDP. The masses want a change because of the pain they are going through presently and just don't understand the invisible hand of the interest on the debt absorbing so many dollars that could have been used to support the economy.
This invisible hand is causing the masses to want change even though they don't understand why they feel so uncomfortable and don't know who is to blame. They are just "mad as hell and can't take it anymore" (from the movie, "Network"). All of this causes the deleveraging as shown in our Cycle of Deflation as the private sector pays down debt or defaults. This process is very painful while taking many years to resolve. The process has already started as business loans and consumer credit are shrinking at record rates while the government debt is expanding at record rates. This deleveraging we expect will take place on a global scale and will take many years to resolve. Japan has already suffered two "lost decades" and has still not solved its problem. We expect this to take place globally and will continue to be painful. We honestly don't want to be correct in this assessment for the global economy, but we can't see how this deleveraging process and the consequences of the process be avoided.

I think the last few years has shown (none / 0) (#71)
by CST on Fri Sep 17, 2010 at 01:42:03 PM EST

that the private sector does not always spend money more efficiently.

I agree there has to be a balance between government and private sector. But when the private sector fails so miserably the government has to pick up the slack because no one else can. Until the private sector turns around, at which time the government can ease off spending.

Debt is a concern. But in the short term I think there are larger issues at play. In any event, raising taxes on the rich will help the debt situation with limited impact to the overall economy.


We actually agree (none / 0) (#72)
by Slado on Fri Sep 17, 2010 at 01:53:03 PM EST

I have to not get bogged down in my long term pessimism which I think is well founded.

As for today you are right. The private sector is 51% or 49% to blame for the housing crisis and economic collapse. The actions of most on Wall Street where utterly criminal and they played loose and fast with other peoples money and drove the economy into a ditch.

However where did that money come from? Who allowed rates to be so low and for laws to push people into risky borrowing and lending practices? That's where the other 49% or 51% comes into play. Good old Uncle Sam was right there with his cronies on Wall Street and anyone who chooses to ignore the Ying and support the Yang is a partisan missing the big picture who should be discounted.

We all collectively drove this car into the ditch and we all must sacrifice together in the form of higher taxes and much fewer benefits if we want any long term economic salvation.

In the short term I think all the tax cuts should expire if we aren't going to reduce spending. In fact I'd let them expire and cut all spending by 20%. None of those options are on the table so instead give me my money back and I'll keep it and buy gold bars.


the money did not come (none / 0) (#74)
by CST on Fri Sep 17, 2010 at 02:21:25 PM EST

from the government. Unless you mean that the government allowing them to keep all that money is the same as giving it to them...

I agree that the government was complicit. But it wasn't government money that caused it. That money was largely being spent blowing up Iraqis.

Reducing spending hurts demand right now. I agree that in the long term that is the solution. But right now we are in the abyss, and in order for the economy to function we need someone to spend. And that's not coming from the private sector. Once things pick up and the economy bounces back, then the government can raise taxes and cut spending. Doing it now would be another nail in the coffin of the middle class.


: Small point (none / 0) (#78)
by Slado on Fri Sep 17, 2010 at 03:59:00 PM EST

The money did come from the government in a way in the form of insanely low interest rates for way too long. The government then guaranteed all these baseless loans and claims in the form of mortgages on values of homes that where artificially inflated by the market and now a house in Arizona is worth half of what it was artificially worth 2 years ago and the gov't is keeping the bank from losing its bet.
It would be one thing if the government let businesses absorb their losses. But they didn't. They backed them up with debt and so they are just as guilty for the mess.
Can't have one without the other is all I'm saying.
I disagree that somehow more government supported demand is required for now. It is artificially keeping us from the inevitable. Just as it did when it helped the private sector create the housing bubble in the first place. All this so called "demand" was fake, worthless and a gold rush. It was based on almost zero wealth creation and now we are left with more promises then we have cash in the bank to pay.
Look at all the home tricks, stimulus rebates, cash for clunkers etc...that we've been trying for almost 2 years. We got a quick bump up in the economy and now where right back where we started and there is even more debt then before.
At what point do we say enough? The government can't create wealth. It can redistribute it and sometimes I admit more effectively and fairly then the private sector but it can't do so on its own and too many are demanding just that.
At some point we need to pay our debts as any household would if they where in the same situation.

This is really messed up as far (none / 0) (#35)
by oculus on Fri Sep 17, 2010 at 11:12:32 AM EST

as a clear message which will attract voters.

I think so too (none / 0) (#45)
by ruffian on Fri Sep 17, 2010 at 12:03:51 PM EST

That is why I fear Boehner's clearer 'let's not raise taxes on anyone' message,


It's much cleaner (none / 0) (#66)
by Slado on Fri Sep 17, 2010 at 01:33:37 PM EST

Especially whent hey throw in that government spends too much. See Chris Christie, Mitch Daniels for the application of tax cutting and spending cutting.

Obama's message is lets cut taxes about 75% of what the other guy wants to get the economy going and lets keep spending more then the other guy wants to get the economy going.

Huh? Republicans tried that in the 2000's. Worked great.


What specific spending cuts is the GOP proposing? (5.00 / 1) (#80)
by ruffian on Fri Sep 17, 2010 at 04:07:18 PM EST

You do know its a lot easier to cut spending (none / 0) (#75)
by Socraticsilence on Fri Sep 17, 2010 at 02:32:51 PM EST

when you have the federal government to pick up the slack right? Daniels much like Bush in Texas is sitting on a house of cards- he's slashed infrastructure spending to the point that his successor will have to spend a ton to bring things back up to snuff, as for Christie- well he's basically a one term Governor- his pointless spiteful feud with the teachers Union just cost his state 100s of millions and theres literally no indication that his proposed cuts will do anything beneficial in the long run. In a sense the cut spending and cut taxes governance is almost easier than the cut taxes and raise spending approach of course both require you to get out of dodge before the eventual bill comes due- Daniels basically has to get elected President in 2012 or he's finished (see Bobby Jindal's approval now that his budget's actually been applied for a couple of years).

Finally, applying your approach to the federal government is almost impossible- 70% of the annual budget is locked up in the 3 things Voters don't want touched (Defense, Medicare, Social Security) while the things they think need slashed (arts funding, foriegn aid, etc) account for basically 1% of the budget.


: So if I get your point (none / 0) (#79)
by Slado on Fri Sep 17, 2010 at 04:06:23 PM EST

its that our mess is too messy to clean up so lets pretend we can't?
You're right. Daniels took the money but it's money he can't afford not to take. How about Illinois or Ohio. They're broke and they took federal money. Who should we choose to follow.
As for Christie would you content Corzine was doing a better job?
I am talking about all spending. Not the usual republican whipping posts.
I'd be the first to bring every troop home from every foreign port if it would help slash the deficit. We don't need troops in Korea. I don't care who says we do.
All programs should be on the table because an economy with 8% growth could barely keep up with the federal promises we're making and that is simply a fact.

this isn't exactly new economics. (none / 0) (#81)
by cpinva on Fri Sep 17, 2010 at 05:26:57 PM EST

dr. krugman (and other economists) have been making this argument for years. it's the same argument made for a larger stimulus package in 2009, with more going to the middle and lower classes: they will actually spend it, increasing demand, which is the primer for a free market economy.

as to the argument that no, the middle class will use it to pay off debt, probably not. they may use some of it, but the bulk of it will be used to purchase consumer goods, mostly necessities. why do i think that? good question. because, at this point, the middle class has watched as its median income has dropped, its unemployment rate has skyrocketed and its savings have been ravished, by both the market, and having to draw on them to pay bills.

as a consequence, they (the middle class) are just as likely, as a group, to use any extra funds for normal, every-day purchases.