This is no Way to Organize Chaos.

Now that the war is over, Bush has turned his attention to the economy, something he should have been doing since taking office. Again, there is this push for massive tax cuts which are supposed to stimulate the economy. Bush said today in Santa Clara, "the best way to create growth is to let people keep more of their own money" (NY Times). Bush is talking about ordinary people. Lets take two hypothetical individuals, Jack and John. Jack is employed, John is not. Tax cuts are passed and they each receive a small break on their taxes. This extra money is saved by Jack, because he may not have a job tomorrow. John, who is still unemployed and has spent all his savings, uses his tax break to pay off a credit card or pay next months rent. In each case, the overall economy has not been affected. The tax cut has not created jobs.

Of course, Bush needs to create this economic illusion to sell his tax cut to Congress. So he adopts his familiar populist stance, looking out for the common man. The real economics at work are at the higher levels of income. First of all, it is a simple matter to demonstrate that tax cuts are only going to benefit the wealthy, not the working and middle classes. If the tax break was, say, 10% across the board, then do the math. If Jack makes $100,000 and John makes $10,000, then Jack is going to get a break in the order of $10,000, whereas John will only get $1,000. And suppose the percentage is lower. Suppose its a 1% break. Then Jack gets a cool grand and John gets a hundred bucks. Right away the inequality of a simple tax break is obvious.

The argument for this line of thinking is an old one. It goes something like, "when the burden of tax is taken off the wealthy and corporations, then they feel more likely to invest that money in enterprise, which stimulates the economy". Hey, it sounds great in theory, but its not happening. I started thinking about economic theory and brushed up on Keynes. Prior to the Great Depression, it was thought that the economy teetered back and forth between prosperity and depression, automatically correcting itself over time. Certainly there was ample historical evidence that this was how modern economies operated. After the market crash of 1929 it became clear that there was no built-in mechanism to correct the waves of unemployed. A tax cut then would have done nothing, because too many were unemployed. They were simply removed from the economic equation. The economy, depressed as it was, was nonetheless in a state of equilibrium. How then to solve the problem of mass unemployment? Keynes realized that the economy was not a see-saw, but more like an elevator. It could be up, it could be down, but it could also stand still: regardless of whether it was riding high or sinking low. It was in a state of equilibrium, regardless of the level of prosperity. Clearly what was needed to get people working was investment. New business to create jobs and demand for goods and services. But business was too scared to invest, justifiably so. Keynes' radical proposal was that the government should step in as an investor, injecting the economy with money and creating work, until private enterprise was confident enough to start tossing around their own money. Keynes believed in the ability of the private sector to handle itself without government involvement, but he was wise enough to realize that in some situations, capitalism needed a little help. Not surprisingly, Keynes was right, and things began to improve via government spending. If they had spent more, recovery would have happened sooner. (WWII ended the depression precisely because wartime government spending was three times what was spent during the New Deal).

I can't help but notice the similarities between then and now. The economy is depressed, though it is not a crisis of the magnitude felt in the 1930s. Yet the Republican mindset, so terrified of government actually doing something to help it's citizens, believes the private sector will right itself because Joe Consumer has a few extra bucks in his pocket. The centerpiece of the Bush tax cut is an elimination of a tax on stock dividends. This clearly has nothing to do with people who don't own stock, or own very little. This only benefits the professional investor, and benefits them in a way that does not guarantee instant philanthropy.

I am not an economist. I understand much of how economics work, however, because much of it is common sense reasoning. It seems obvious that investment must occur again for jobs to be created. Whether that investment comes from the government or the private sector does not matter to me, but I know that it won't be coming from business anytime soon because of what happened at the end of the 90s. Thus, the government is the only entity able to throw some money around to stimulate the economy. Instead, the American people purchased an unnecessary war, an irrelevant instant tax refund, and now are about to watch $550 billion dollars spent--not on social services, public works or investments that would actually help people--on a tax cut that will offer no relief and simply make a few people slightly wealthier.

When are people going to wake up and realize what is going on?