It's the Economy (I'm) Stupid!!

They are not both right. One is based on the principals of income redistribution and perceived views of social equity, while the other is based on sound financial and economic theory, independent of emotional influences. From an economic perspective, there truly is no comparison between the two parties' stances on the issues. As a veteran of Wall Street and someone who has studied economics in a formal setting, in my mind, the Republicans views on economic policy are right on the money.

 

giddyup, without spending an entire day debunking the gross stereotypes which you have just put forth, let me just remind you of a few things:

1) It is in no one's best interest to let the deficit 'run out of control'. This is not the Republicans objective by any stretch of the imagination. What *is* important is that we create economic growth. Optimizing the capital structure of America requires taking advantage of historically low interest rates to finance growth. To allow spending programs to continue at current levels, some form of debt financing makes complete sense, as it is a very cheap way to access capital. In a time of economic recovery, it is imperative not to choke growth through a high tax burden or decreased spending. Deficits make complete and total sense when the business cycle is in a trough. Be very wary of anyone who uses the deficit as a scare tactic, deficits can serve a constructive purpose, depending on where you are in the economic cycle.

2) 'Clinton' was the direct beneficiary of the hard work of millions of entrepreneurial Americans. Clinton was not responsible for the economic boom of the late 90's. What enabled that boom was access to cheap capital (equity capital was available through the stock market), a business environment that fostered growth by not restricting corporations, and a new capital gains tax policy that the Repulicans sponsored (along with a billion other variables). Don't confuse the *coincidence* of Clinton's presidency with any type of causal link to the bull market.

 

You are right. They aren't both right. One is based on the desire to redistribute income upward to the upper classes that contribute to his campaign. (Bush's plans. ) The other is based on trying to raise more people into the middle class.

Don't let Jorge fool you. Many economists don't follow the conservative economic theories that he espouses and apparently learned at the school he attended. Though Wall Street guys are not monoltihic their overall culture brought you Enron, Worldcom and the so called "research" about the dot com stocks. They have their own ulterior motives for urging such things as no tax on dividends and switching from social security to funds they can make a commission on.

 

Thank you glynch, for encapsulating the liberal left's approach to economic issues: Demagoguery, class warfare, and scare tactics. If you would ever like to argue the substance of any tax policy or economic policy, I'd be perfectly willing to give you the shout down of your life. Until the democrats start talking substance on the economy, they will continue to fail miserably in their efforts of inspiring trust in the American voter.

 

Probably the most key element of everything you said...and one of the biggest reasons why smart people like giddyup can think about this and end up with some confusion.

Socially, I'm pretty much all over the place, but fiscally, I'm definitely right of center.

Most of the left's ideas "sound nice" which certainly helps their existence, but I'm not too fond of redistribution of wealth plans that do nothing but give people on both ends of the wealth spectrum the incentive to be less productive and/or to try and "beat" the system.

Yes, there might be plenty of people who are willing to give the majority of their earnings away for the "greater good," and yes, there are plenty of people who just need that "extra bit of help" to get over the hump into a life of self-sufficiency.

Neverhtheless, it's simply human nature that the majority of the people will be asking themselves these kinds of questions:

Why should I work harder if the government is just going to take it away and give it someone who is lazy? If this is the kind of crap my government is going to pull, why should I be honest on my taxes?

or...

Why should I work harder if the government is already taking care of me? If I work harder, there might be less help and I'll be no better off?

 

I suspect that both overstate their case, for their own political gain.

I will say this. The country now needs a temporary economic stimulus. Bush is proposing a permanent tax cut, that plays out over many years. Of course this is no surprise, since tax cuts are the keystone to Bush's domestic policy.

The US tax code is a large steaming pile of crap (for which a Democratically controlled Congress over the years can take the blame.) We need to reform our tax code. This is worthy cause. But if we do reform taxes, we need to "measure twice and cut once". There should be public discussion and deliberation. Unfortunately, this is not Bush's style.

If during the course of tax reform we decide to reduce the overall taxes, we must in tandem reduce federal spending. This is another piece of the puzzle that Bush does not get. I suspect that Bush wants the political gain for his party by establishing the Republican Party as the party that does not raise taxes but actually lowers them. Reducing spending to match the tax cuts would cause political pain, but it is the right, responsible thing to do.

Lastly, federal spending each year continues to increase. In ten years, the bay boomers start to retire. The US needs to get its financial house in order before that happens. The only way that I see this happening is if we get better leadership in Washington, starting with president and working our way down.

 

Yeah, that Robert Rubin, he's such an alarmist marxist demagogue.

Luckily we have bush admin syncophants around to tell us that everything is going to be cool.

 

Economics is really fairly simple if you understand the basics. You want money changing hands as often as possible.

The general Republican philosophy is supply-side economics; the general Democratic philosophy is demand-side economics. Both have some theoretical validity; neither is proven. Neither is going to work in all situations, though - and that's the problem both parties have. People on both sides (like Trader Jorge) don't seem to get that concept unfortunately.

Supply-side economics is the idea that putting money into the hands of businesses (or giving them easier access to money) will cause them to invest in new factories, technologies, etc. In turn, that will cause them to hire more people to develop those technologies or build and run the factories. That raises employment, which raises spending, which spurs the economy.

Demand-side economics is the idea that putting money into the hands of lower & middle class individuals will cause them to spend it. That in turn will spur a demand in more laborers to either provide the services or produce the goods that are now being bought. That raises employment, which raises spending even further, which spurs the economy.

So to spur economic growth, is it better to move money into the hands of the rich or the middle classes? This is simply my theory now, but I beleive you have to look at the current environment - which neither party does. If the current economic climate has lower consumer confidence, then putting money in the hands of business is NOT going to cause them to invest. They'll just sit on the cash (as many businesses are already doing) until its worth it. Why invest in a new factory to build more products when the products you already have aren't selling? That does no good, and that's why I don't think things like a dividend tax cut are well timed. In this scenario, you want to move money into the hands of the average person to get them to spend. If that happens, businesses will go out and get the capital (its already very cheap) to expand on their own.

On the other hand, if you have great economic times and people are spending like crazy (mid to late 90s), then that's the time to get money into the hands of the rich. In this scenario, you have inflation worries because people are buying and putting pressure on the businesses to either raise prices or increase production. By putting money into the hands of business, you give them incentive to increase production rather than raise prices. That spurs more employment, etc and keeps inflation low.

On tax cuts vs. deficit reduction, this is a bit of a con. When the government cuts taxes by $1 trillion but doesn't cut spending, the government now has to finance that $1 trillion in debt. Two problems here:

(1) You're going to be paying the interest on that debt. We now have accumulated about $70,000 in national debt for every family in America. 15% of your federal taxes go to paying off interest on the debt every year.

(2) The government has to get that money from somewhere. So they stuck $1 trillion into the economy (over 10 years), but have to take out $1 trillion from investors to finance the debt. Net result? All you did was shift money around. Sure, it's a bit more efficient but there's no more money in the system in the longrun.

There's the argument that money is cheap for the government to borrow right now and that would be nice if it was short-term debt with a plan to repay it in the long-run. The reality is that we all know that opportunities to pay down the debt come around maybe once in a generation when everyone is committed to it (Republicans and Democrats of the mid-to-late 1990s), so all we're doing is adding limitless debt that will be paid back forever. Each year, a larger percentage of your tax dollars will go towards paying interest on the debt. In other words, under the current scenario, you'll have to pay more taxes for the same level of services 5 years from now than you do today -- that's the danger of building debt.

Gotta go.. more later.

 

Unfortunately there really isn't much that separates the 2 sides. The only differences are on 1) tax cuts and 2) where and how to spend money.

But both parties would select Alan Greenspan and neither is really serious about cutting spending. The move towards free trade is also slowing down.

 

giddy...ever heard the phrase about 10 economists and 10 meteoroligists locked in a room?

The primary principle of conservative vs, liberal economic theories can be traced back to a few elemental economic theorists; Sey, Smith, Keynes, etc. The problem with debate, and why they all 'sound' right is that many of them have been constructed as rebuttles for other arguments; Smith advocates complete economic independance, as he says that any interference, however well motivated, will upset the 'invisible hand of God' which he ses as economic self determined balance. Keynes argues that Smith doesn't allow for extreme circumstances of wide-spread social insecurity with economy, ( Depression, ex.) and says that governemnt must get involved, even if it means going into debt, to stimulate economy...Which leads Wagner to conclude that government spending will always increase beyond it's benefit, etc.


It's a reactionary field, and you will be hard pressed to find people involved who do not give you a biased view; inevitably their 'side' of the argument will more accurately reflect what is 'best' for society...and this is the rub; They both have points.

Those we call 'conservative' favor less government interference, and have no problem with flat or even bottom heavy tax yields, the implication being that those with the most money, U-M class, upper class, wealthy, and industry generate more economic activity in their society, thereby benefiting all memebers of the society they inhabit, not out of virtue, but as an inevitable side effect. This essentially reflects Simth's view of things. There is also the contention that those with the money will take their money elsewhere, thereby benefiting other less 'liberal' regions of they are 'penalized' for their wealth.

There is accuracy here...Those in possesion of most of the money are inherantly able to contribute the most to their societies, even if they don't want to. And industry is increasingly non geo-centric, and will take their money and spend it elsewhere if they feel threatened by economic changes. Were this to happen we would, as a nation, suffer both in specific and in general cases.

Those we call 'liberal' favor more government involvment in order to activate what they feel is a more socially beneficial distribution of excess wealth. Reasoning for this is legion; That most of the excess wealth in our society isn't 'earned', but inhereted, and therefore not a reflection of the possesors contributions, that beyond a roughly 20% above necessity spending, the vast majority of excess wealth is used very ineffectivley for the society as a whole ( saved at low/no risk ) rather than put into circulation, and that there is an increasing disparity between the 'haves' and 'have-nots' which has never, ever lead to positive social environments...Depending on the study you cite, something like 85-95% of the wealth in our society belongs to somewhere between 5 and 3% of our society, and most of that is used for nothing other than increasing it's holdings.

There is also the myth of the American Dream; that we live in a land of opportunity. That despite the fact that a large portion of our society is born without any real chance to rise much higher than their present state by virtue of educational, health, and social constraints whose entire origin is economic disparity..The exceptions to the rule keep the myth going. While there is some blurring of class lines, outside of one growth industry ( computer technology) those in North America are showing a general and increasing tendancy to remain within the class into which they were born, and this can be viewed as a troubling trend.

There is truth in this side too....They both have merit, and each usually portrays the other in sophmoric terms; Liberals see conservatives as either being part of the Rich ger Richer system, or accuse them of naive boot-liking and over credulity. Conservatives see the liberals as being without fiscal understanding, but representing some vague but unrealistic social agenda which merely sloes the process down to salve thier consciences.

Problem is, both are right in some respects, but moreover, beyond almost any other filed, economics is a series of arguments built on diverging 'sides' of the issue contructing refutations of the other 'side's' position...which then responds by rebutting that refutation, etc. In order to really understand the different arguments, you have to clear away the rheoric and ask yourself a few basic questions about what you feel the role and responsibility is of the individual and governement in an economic system; Is their a social responsibility to improve the whole, or are we ultimately only accountable to our own wants and needs? Do we trust our government enough to give them more power over our financial lives in oreder to achieve social goods? etc...Once you figure out where you stand on this issue, you can then read the early economic theorists which were largely independant arguments rather than part of the current melange of counter arguments, and make your decisions.

This argument is as old as the hills, or at least as old as 'democracy'..In ancient Athens, there was not ax, but the wealthiest citizens were 'expected' to contribute to the city ( funding public works, paying for naval ships to be built, etc.) as much as asked by their fellow citizens. If a wealthy citizen felt that too much was being asked of him, any other citizen was entitled to take on that responsibility....and that man's wealth/income. Effectively, they could 'switch' places...This was law. This was a reflection of the societal belief that wealth isn't an independant state; that a society makes certain choices which benefit certain types of people, and that those who benefit the most from those choices have a greater responsibility to sustain the society that favors them than those who benefit less.

It's an endless argument, and you come back to the weathermen and the economists locked in a room...

 

Economic amateurism at its finest, ladies and gentlemen. Major, you do not understand the simplest tenets of corporate finance. The reason capitalism is far and away the most efficient economic system is because it is the perfect mechanism in which to channel capital towards its most efficient use. Corporations operate on these principles as well. As a member of the management team at my current organization, I help tackle this dilemma on a daily basis. Dividend policy, cash flow reinvestment policy, and allocation of free cash flow are issues that I am paid to analyze. Companies will allocate free cash flow in a manner that provides them the highest return on invested capital. Independent of the current distortions in the tax system (which Bush is trying to fix if the Democrats would stop being obstructionists), a company will always behave in this manner. If they do not, shareholders and boards of directors alike will work to fix the problem. (there exist certain exceptions like MSFT and ORCL that sit on cash hoards, but this is more of an effort to prevent competition than it is a counter-example of my theory -- remember these are *exceptions* and the vast majority of companies do not behave in this manner, as you foolishly imply). Because 99% of companies behave rationally and invest their money at the highest rate of return possible, putting additional money in their hands will *absolutely* spur investment. Sitting on a cash hoard is very rare, especially given today's interest rate environment. Capital investment by corporations was *the* most important driver of the tech boom in the late 90's. The increased productivity that this investment fueled created never-before-seen levels of profitability.

Putting money in the average person's hands does very little to channel money towards it most efficient use. The average person will spend they money they are given, in ways that do not optimize a dollar of investment. A dollar saved by a rich person is infinitely more valuable to the economy than a dollar spent by a poor person. Why? Because that dollar that is saved by the rich person is put in a financial institution, where it is then channeled to its most efficient use. That use may be a debt offering, a public equity offering, a small business loan, etc. This has a multiplier effect that a dollar spent at a quicky-mart simply does not have. Such a basic principle of economics is conveniently ignored by the liberal left due in large part to the fact that it doesn't suit their constituency of largely lower-income voters.

This is perhaps the most ridiculous logic and spurious argument I have ever witnessed. EVER. This is beyond ludicrous. Businesses *always* attempt to operate on their most efficient production/price frontier. This is the point at which a market-clearing equilibrium is reached, and is also the point at which profits are maximized (marginal revenue = marginal cost). Attempting to manipulate this decision, a decision which is dictated purely by market forces, by your un-named 'put the money in the hands of the rich' policy does not address the fundamental decision. Your liberal tendencies are showing, Major, as you are unable to leave class warfare out of the equation here (equating 'hands of the rich' with businesses). For some odd reason, Greenspan disagrees mightily with your little theory on inflation suppression. Monetary policy continues to be the preferred method of fighting inflation, to be in opposition to this is to argue directly with Greenspan's logic. You sir, are in no position to do that.

But the vital part of this equation which you have chosen to exclude is that this money is not evaporating into thin air. The vast majority of the debt that the US issues to finance the deficit is purchased by US citizens. These interest payments go right back into our economy as they are paid to the bond/note/bill holders. Nice try though.

But the key here is that you get the proceeds in a time when you need it most -- a time when you have spending needs to be met. These proceeds, when invested properly, will generate income to pay both interest and principal in future years. Again, nice try.

"Limitless debt that will be paid back forever". Sigh. If you really wanted to be a good liberal and use demagoguery, you should have mentioned that our grandchildren will be stuck with the bill. Yawn. Any efficient capital structure will always employ an optimal amount of leverage. When money is as cheap as it is today, it makes perfect sense to *lock in low rates for a very long period of time*. This provides proceeds from the issuance *today* and allows us to continue to emerge from this economic downturn. Not providing stimulus to the economy today could lead to a prolonged period of dampened consumer demand and reduced capital investment at the corporate level. These are the building blocks of deflation and stagnation. Your analogy regarding 'more taxes for the same level of services in 5 years' is also wrong. The key input that you are leaving out of this analogy is what you do with the proceeds of the debt issuance. These proceeds, when invested, will generate returns which can be applied to debt service. Assuming these proceeds are invested at rates higher than the rate of interest on the debt, then you have sufficient funds to cover your debt service, with *additional* money left over to provide for a *higher* level of services.

CASE CLOSED

 

If you would ever like to argue the substance of any tax policy or economic policy, I'd be perfectly willing to give you the shout down of your life.

I'm game. Put up or shut up. You start since you are the self proclaimed expert.

Perhaps you can start with why Supply side economics will work this time? or why the US economy was so strong back in the 1960's when the tax rates were so much higher on individuals and corporations. If you would rather start somewhere else, you pick a starting point.

BTW others should feel free to jump in as I will have to do some research and am relying on my economics courses from over 20 years ago on a half completed MBA.

Time to show your cards. Note I won't be like Bush who wimped out on the UN security vote after challeging the others to show up and play their cards. Hopefully you won't be like Bush either when it comes to this showdown.

 

We're arguing tax policy and monetary policy right here, glynch. Jump in if you think you can. I've got a multitude of points in here for you to 'attack'. Go for it big boy.

 

You remembered to include my pet peeve!

 

Putting money in the average person's hands does very little to channel money towards it most efficient use.

2/3 of our economy is consumer driven. Nice theory, though.

 

What you meant to say is that two-thirds of GDP is comprised of consumer spending. My point stands, however. *At the margin*, putting moeny in the average person's hands does very little to channel money towards is most efficient use, particularly when compared to putting money in rich people's hands.