Friday, July 02, 2004

Genuine Blogging for a Change

Today’s disappointing job report puzzled me a bit because I had expected more of a bounce off the bottom of the last recession granted what can be expected from a normal business cycle and the cumulative effective of massive deficit financing and ultra-low interest rates. Like many observers, I thought the tax cuts, overwhelmingly aimed at people in the upper brackets, were an inefficient way to stimulate the economy; but I thought they would provide some Keynesian stimulus if only as a side effect. At the recent rate, it will take years for employment to catch up with the population. In fact, at this month’s rate, it will never catch up. However you measure it, the current recovery is exceedingly sluggish, a fact somewhat obscured by the nonstop cheerleading of the financial press.

Even observers like Paul Krugman who are decidedly hostile to the administration’s economic policy tend to suggest that the price we pay for running enormous deficits in the federal budget and the balance of trade is mostly long term. Indeed, they imply that one of the structural problems with the nation’s real constitution is that there is no political cost for promoting bad economic policies since the public is too stupid or too distracted to register consequences that occur incrementally over a long time period. Opportunistic political economics such as unsustainable tax cuts are rational in the same sense that knowingly operating a polluting factory is rational. The malefactors get the benefits and leave everybody else with the costs. It may be, however, that the piper will have to be paid in real time on this go round.

One other economic thought, a question really: Critics of the Bush tax cuts have generally complained that drastically lowering the higher tax brackets was an inefficient way to stimulate the economy because well off people don’t spend as high a proportion of their income as poorer people. But doesn’t it also matter what the tax cut dollars are spent on? Less affluent people spend extra money on food, shelter, clothing, health care, and education. More affluent people spend extra money on recreation, prestige items, second homes, and fancy rides. Even if high bracket tax payers spent the same proportion of their tax cuts as the less well off, their dollars would be stimulating different segments of the economy. Doesn’t the quality as well as the quantity of effective demand have an effect? For example, doesn’t a pro-wealth policy result in more capital going into the development of gated communities rather than affordable housing? Just asking.

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