Sorry, but tax cuts don't stimulate the economy

Republicans have predicted that the just passed GOP tax cut bill will work like gangbusters on the economy.  And they are right, but for the wrong reason.  Tax cuts don’t stimulate the economy, but government deficits do, and the GOP tax cut bill promises to increase the federal deficit by around $1.1 trillion.

The same thing happened with the Reagan tax cuts in the 1980s.  People forget the bad economy during the first part of the Reagan administration and only remember the strong economy after the 1981 tax cuts were passed without any corresponding spending cuts.  The cuts were supposed to “pay for themselves” but when they didn’t, the deficit soared.  Reagan and the Congress then passed tax increases to control the deficit (no one remembers “Ronald Reagan, tax raiser”), but the initial stimulus created the “Reagan miracle” of an improved economy.

Why doesn’t a tax cut stimulate the economy?  Don’t tax cuts put more money in people’s wallets?  Let’s look at the impact of a state tax cut on a state economy, one where the state has to maintain a balanced budget since states can’t pay for tax cuts by printing money.  Every dollar of tax cuts must be accompanied by a dollar of lower state spending, whether it be on education, social services, or the proverbial waste, fraud and abuse.  So the economy is stimulated by greater private spending, but retarded by less public spending.  The economy can’t tell the difference between a dollar spent by the state or a dollar spent by a private citizen; the net effects cancel out.

But wait, there’s more (as the infomercials say)!  Under standard economic theory, people don’t spend every cent of every dollar they earn.  Most people, especially those who are not in poverty, save some of their income for the proverbial rainy day.  Let’s assume that the typical person saves 5% of their income and puts it under their mattress, or in a nice savings account.  That means that a dollar tax cut only produces 95 cents of actual stimulus.

The government, of course, does not save for a rainy day (at least, not usually; some states, like California, have a “rainy day fund” to help the state during economic downturns. But these funds are usually a small percentage of the budget and are quickly exhausted during an economic downturn).  So when a state cuts taxes, it forgoes spending 100 pennies in order to give a dollar to a taxpayer who will then spend 95 pennies.  Thus state tax cuts do not stimulate the economy, they actually make it less robust.

Federal tax cuts can stimulate the economy, but only when they are accompanied by increased deficits.  It is the deficit that improves the economy, not the tax cut.  Republicans claim they hate the federal deficit, but they love cutting taxes that makes the deficit bigger.

There is one possible rebuttal to this analysis, that tax cuts do increase savings but savings are used by banks to lend capital, and capital is used to build businesses up.  That is factually true, but the mechanism by which increased investment leads to economic growth is not well understood, and the benefit should be delayed by several years.  Also, increasing the deficit by printing money will affect both inflation and interest rates in ways that difficult to anticipate.  That spending (either private of governmental) stimulates the economy is straightforward and incontrovertible.

So the GOP tax bill might stimulate the economy in the short run, but eventually the deficit-hawks are going to start demanding spending cuts (or tax increases) to pay for them and when that happens the economy will dip into another recession.  Yes, Republicans may think that taking food stamps away from hungry children is a lot of fun, but the money in that social program (and others) goes to farmers who support their families by buying consumer goods, and it then is spent by providers of consumer goods on their families, and so on and so on ad infinitem.

The next stage in this pantomime is that after a slight boom the economy will start to lag, Republicans will say it is the deficit’s fault and urge spending cuts in social programs, Democrats will counter with proposals to pare back on the tax cuts, Republicans will accuse the Democrats of wanting to raise taxes yet again, and meanwhile the deficit will grow. 

The irony is that the Republicans are right to worry about the deficit, but will attempt to benefit politically from making the problem worse.  Will voters be smart enough to realize this?  That is what the 2018 midterm elections will show.

Sexual harassment is everywhere!

We are in the middle of a sexual harassment tsunami.  All over the place well-known producers, directors, actors and politicians are being accused of doing things that range from creepy to, well, really creepy, either to members of the opposite sex or, in some cases, members of the same sex. 

It is easy to believe these allegations when they are made against someone who looks like every wanted poster for a child molester ever made (Harvey Weinstein), or there is confirmatory evidence (Matt Lauer and his door that secretly locked), or are confirmed by photographic evidence (Al Franken).  With all these women coming forward under #metoo, what is next?

The next phase is inevitable: women with an axe to grind will start making false accusation against innocent people and hope to ride the coattails of outrage that accompany these revelations.  With all these seemingly credible accusations being made, it is easy to lose sight of the fact that we do live in a nation where the cornerstone of our legal system is innocent until proven guilty.  This is extremely inconvenient in the inevitable situation of “He said/She said.”

People tend to believe what they want to believe.  If you believe that all Hollywood producers have casting couches in their offices, then a wave of accusations vindicates your beliefs.  But the fact that evidence supports your pre-existing belief system does not make it more credible.  Creating a mentality where every woman’s accusation is accepted by a knee-jerk reaction as fact does not get to the truth.

Remember the security guard at the Atlanta Olympics in 1996 who found a bomb, and was then accused of planting the bomb?  There was never any evidence against him, but people thought the narrative would make a good movie-of-the-week and so tended to believe the story, even though it was fictional.  We are so accustomed to seeing fictional stories in movies and on TV that we start to evaluate all stories not by their plausibility but by whether the story is entertaining.

To take another example, remember the McMartin pre-school case in the 1980’s, when people were convinced that there was a vast underground conspiracy of Satan worshippers in America, and these cults were systematically abducting very young children and subjecting them to horrific rituals?  People believed it even though it made no sense and there was no evidence, just because it was an entertaining, if disturbing, story.  The folks that ran the McMartin pre-school who were accused of being the ringleaders of these cults were exonerated, but only after a lengthy trial and even then, many people probably dismissed the not guilty verdict as a product of the Devil’s handiwork.

Thus far, the accusations of sexual harassment (and worse) that have been made have at least had the appearance of credibility, and few accusers have categorically denied the allegations.  But at some point (it may already have happened) someone is going to make a false accusation, and when that time comes it is important that the accused be given every o0pportunity to respond, including the presumption of innocence.

You can look at the tidal wave of disclosures about sexual harassment as evidence of just how bad the problem has been in Hollywood and in politics, but at some point, the insatiable maw that is the internet and the news industry will demand more victims, and someone out there will be only too happy to offer up some more examples of male oppression, even if they have to fabricate them.  When that happens, I hope that people can stop surfing the wave of accusations and start to evaluate these claims with a critical eye and a little bit of reason.