Monday, September 20, 2010

Republican Tax Cuts

Politicians and their economic policy analysts can engineer the economy. They are not always successful, but they attempt to engineer it.  The Republicans generally do it through tax cuts to stimulate consumption.  Democrats tend to emphasize government purchases.  Any entry-level college text in macroeconomics will say that the GDP is a combination of consumption, government purchases, investments, and expenditures by foreigners. 

Tax cuts have the advantage of working quickly and effectively.  The Bush tax cuts were very successful in stimulating consumption with an average 6.5% per year increase in GDP from 2002 to 2008.  Give people money to consume and they consume.  Unfortunately, a lot of what they consume is foreign.    In 2006, when the Federal Budget deficit was $247 B, the trade deficit was $235 B, and China bought $200 B in US Treasuries alone to finance our deficit.  Where did China get the money?   From us.  So, here are the connections.  The US Government cuts tax rates for people to spend, and they spend a lot of it on foreign goods that transfer wealth to foreign countries that buy up our debt.  This wealth then becomes a basis for them to build up their industries and eventually begin to buy our industries and our wealth creation capabilities.  A case in point is Ford selling Volvo to a Chinese car company. 

As Mr. Spock would say, “This is not logical.”  And I did not even begin to get into structural unemployment.

Next post - equal bashing for the Democrats. 

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