Sep 19, 2010 2
More from Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth. For a bit about Roy’s experience see The Great Debate Part I
You ask, “By the way, how long does it take for the trickle to trickle down to the point where millions of jobs are created or brought back home (HA!HA!).”
Answer: In Reagan’s case, about 1 month before the recovery began in earnest after the 20% tax cut effectively on Jan 1, 1983. GDP growth went from negative in Q4 1982 to about 5% in Q1 1983 and up to around 9% in Q2 1983, continuing an unprecedented pace until Bush 41′s tax increases.
A more important question: “how long does it take before government stimulus programs begin producing jobs?” Answer: No one knows, because it has never happened. Never. Ever. You see, Keynes was absolutely correct that there is a money multiplier when the government spends money. The actual multiplier is debatable. Tabloid economists like Krugman claim it is somewhere north of 3. Conservative economist agree that it is closer to 1.1. The problem is that government spending works like a T account. Sure, when Uncle Sam spends a buck (or drops it from a helicopter), some portion of that dollar is spent. Depending on where the helicopter drops the money, it might be spent on the lottery, a new car, a house, a TV, etc. When that dollar is spent, the business that sold the rims now has a portion of that dollar to spend on something himself, and so on, and so on. The problem is that the same buck is taken from someone else in the same economy with an inverse multiplier. In a perfect world, every dollar spent by the government is netted out by the dollar it took from someone else in the same economy. When Uncle Sam took that dollar from Henry, that was a dollar less that he had to spend. The difference is that we are fairly certain that the dollar Uncle Sam took was from a productive source. After all, it was taken in the form of income taxes (a tax on production, not consumption). What we don’t know with any certainty is whether the dollar that is given to someone is going to be spent on productive activity. It might be spent on a new computer, but it is equally likely to be spent on crack. It is amazing to me that despite the fact that there has never ever ever been an example of Keynesian spending increasing GDP for more than 1 quarter, governments all over the world keep trying it. The examples are endless. Roosevelt tried it, Johnson tried it, Nixon tried it, Carter tried it, Bush tried it, Blair tried it, the Netherlands tried it, Greece tried it, Japan tried it for 10 years for heaven sakes. It hasn’t worked yet. Geez, even Europe has given up on government “stimulus”.
Henry is right. Short term tax incentives don’t work. I sit on the board of a biopharmaceutical company headquartered in SF. I promise you that we will not spend an extra dime on R&D because of a short-term tax incentive. We will spend money on R&D because we think it will produce profits in the future. In my company, I will not hire a single new employee because of a “new hire tax incentive”. Not one. I will hire a new employee when I believe the marginal work product of that employee will produce enough revenue to justify the hire. At our car dealership, we enjoyed an incredible two months during “cash for clunkers” the following dismal months more than offset the temporary gain. By the way, do you know that for every $4,000 the government paid for the clunkers, it actually cost taxpayers $24,000? Now that is government efficiency at its finest! At my real estate company, we enjoyed nice sales increases during the “home buyers incentive program” only to be followed by the worst two months since records were kept.