Saturday, November 17, 2012

The Fiscal Cliff: Most Over Hyped Event Since Y2K?

    There's a good case to argue that it's not even a fiscal curb, it's not even much of a fiscal speed bump-provided it's just the tax cuts for the rich that expire:

    "The New York Times “Taking Note” blog (November 9, 2011) – Boehner’s Opening Gambit – said that Boehner:
… stated that raising the top rates would kill jobs, citing a widely discredited study by Ernst & Young, and “slow down our economy,” ignoring a new analysis by the Congressional Budget Office, which said it would reduce GDP growth by .1 percent – temporarily.

      Indeed, despite all the talk about the fiscal cliff, the relationship between tax rates on one hand and work, saving and investment on the other is not nearly as cut and dried as conservatives believe.

       "the effect of taxes on private saving is ambiguous. If taxes are reduced, the after-tax return on saving is larger; consequently, individuals may be able to maintain a target level of wealth and save less (wealth will grow due to the higher after-tax returns). This is the income effect and has lower taxes leading to less saving. However, the reduced after-tax return changes the relative price of consuming now (saving less) and future consumption (saving more) in favor of future consumption. This is the substitution effect and has lower taxes leading to more saving. The actual effect of a tax reduction depends on the relative magnitudes of the income and substitution effects."

        Ezra Klein also argues that "tax reform" won't do much for growth-though he seems to think it has some benefit even while treating it with skepticism.

         Bill Mitchell makes the same point Krugman has made-that when the GOP worries about the damage of sequesration-the hit to the economy from military cuts-they are already making a rather bastarderized Keynesian argument.

         They're admitting that cutting the deficit is actually bad for the economy. Indeed, the best argument against ending the Bush tax cuts for the rich right now would be that we don't want to cut the deficit right now-the opposite of what the conservatives argue.

          In truth, as we saw above ending the top tax cuts would have a neglible and temporary impact on growth.

          The argument for ending them is the need to restore equity to the tax system. As Mitchell tells us, mainstream economics has long made it seem that there is a tradeoff between economic equity and efficiency. In truth not only are they not mutually exlusive and in tenstion with each other but the drop in equity we've seen over the last 30 years has rendered the economy much less efficient.

          "Mainstream economists have long taught students (to their detriment) that there is a trade-off between efficiency and equity."

           "Efficiency, is narrowly defined as putting a “society’s resources to their highest use … [to] … ensure that the economic pie is as large as possible” (IFM working Paper, 08/168 – The Distributional Impact of Fiscal Policy in Honduras)."

           "Allegedly, equity interventions – that are designed to redistribute the economic pie – come at a costs – that is, they reduce the size of the pie. So the policy choice is always constructed as a trade-off, you cannot have one without damaging the other."

            "The problem is that there is little evidential basis for this assertion. Refer back to my blog yesterday – Republican agenda – simple and venal – where some of the myths about the negative impacts of taxation on growth were challenged."

            "There is a solid body of evidence that tells us that income inequality and economic growth are negatively related. Rising inequality probably undermines the growth potential of a nation."

             "Nations that enjoy the longest periods of growth are those that are also moving toward greater equality of income and wealth. The evidence is fairly clear that rising inequality undermines the capacity of nations to grow in sustainable ways."

          So clearly the President's call to end the tax rates for the rich is not only basic fairness, but will finally bring back some needed effiiency in our economy that has been going the wrong way for decades.


1 comment:

  1. Actually i am about to say that too. Everybody is ranting and raving about that thing including Ed Butowsky at Fox News.