I was recently reading this article about the Obama tax cut and it really got me wondering if it is going to help us get out of our mess. Personally, I am a bit more on the side of letting the economy resolve it’s problems rather than having government intervene, but I do understand that we are currently at a critical point and Obama sees no other way to fix it than a tax cut.
In the article, the writer mentions that the current economic crisis is made up of these three parts…
- Mountains of bad loans, which are weighing down banks and other financial institutions
- Rapid retrenchment by businesses, which is causing them to cut jobs and investment
- Trillions of dollars in excess consumer debt, which is forcing households to cut back on spending.
He goes on to say that the $300 billion taxcut is essential to help the American consumer. Don’t get me wrong, for my own wallet I wouldn’t mind seeing a taxcut, but as far as helping the US economy from a longer-term perspective, I am not sure this is the answer.
My thoughts on US overspending
It seems to me that if we as a country are now in this mess as a result of overspending, that we can’t get out of it by spending more. It reminds me of a theory I heard in a past life that you should drink a beer to get over a hangover.
The obvious, yet terribly painful solution for lots of Americans would be to cut back even beyond appropriate spending.
I remember when I wanted to get out of debt, I had this sad realization that I needed to not only stop spending more than I made – which was difficult enough by itself. But I also had to spend a lot less than I was making in order to pay off some of the debt. If I would have just stopped overspending, I would have stopped the bleeding, but the wound (my debt load) would not have healed.
Isn’t this the same reality that we as Americans are going to have to face up to now?
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I too am skeptical about a tax policy that includes bailouts & ’stimulus’ checks. Your line about “drinking a beer to cure a hangover” is right on point!
Even with the Bush tax cuts, our gov’t has collected more revenue than ever before. It is the spending that is at issue here.
I don’t know enough about the plan to determine whether or not it will be affective. But it seems that he is putting together a crack team of economist aces together to try to put things back together. I don’t think the tax cuts will lead to more spending, but if his job creation plan works out over time it certainly will help confidence.
You’re totally right that we need to get out of this hole by doing the opposite of the thing that got us into it.
For this reason I was amused by a recent article that bemoaned the American public’s tendancy to use stimulus checks to save or reduce debt rather than spending… In other words, people did exactly the right thing, and the Keynesians-in-charge couldn’t handle it.
Anyhow, I’m actually posting to make a very minor complaint. In your post, you question the tax cut by saying: “…if we as a country are now in this mess as a result of overspending, that we can’t get out of it by spending more.”
A tax cut isn’t spending. It’s a reduction in intake. It’s like working fewer hours, not like buying something. The huge problem with confusing the two is that you (and by this I refer to your article specifically, as well as people in general) break an analogy. When you and I are in financial trouble, we (should) try to fix it by cutting spending. We don’t usually have the liberty of fixing it by ordering our paychecks to get larger — particularly if we can’t increase our work. Yet when our government gets in financial trouble, people start begging it to “get responsible” by raising taxes, usually along with a modest diet of reduced work. In other words, “get responsible” means doing something that would be grossly irresponsible for anyone else: demanding higher paychecks while doing less work.
What the government needs to focus on … well, it’s a list of things, of course. It needs to look at cutting spending and paying down debt (the responsible thing). It needs to axe policies (like inflation) that make getting into debt attractive for it and its citizens. It needs to consider how to balance a smaller paycheck (which is inevitable) with the work it performs — possibly reducing some of the work. It needs to think about how to collect its paycheck without hurting any of its more important goals.
One final point: I like the analogy between cutting taxes and working fewer hours. It’s fruitful, because in certain circumstances either one can earn you more money. If your salary is good but the economy is bad, asking your boss to cut your hours (and pay) can make the difference between keeping and losing your job; in a similar way, cutting taxes can make the difference between your best taxpaying corporations lasting or vanishing (especially in hard economic times).
I’m interested in the thought of cutting the payroll tax, which is half paid by the employee and half by the employer. Such a cut would balance between increasing takehome pay, or decreasing the cost of an employee, meaning that more people keep their jobs (and more new jobs can be created). Of course, one could also change the percentage that gets paid by either the employed or the employer.
i would not disagree with your principles, but one could argue that IF we don’t do something now (stimulus/taxcut/job creation, etc etc), we are headed for a depression, the likes of which we have never seen before. To follow with a medical analogy, it is a like being a heroin-addict (except this time we are addicted to debt and overspending) and stopping everything would give the body shock and potentially be life-threatening (or at least cause seizures or something as bad). The way to rehab this person out is to switch them to a more controlled narcotic (methadone is usually the drug of choice) and slowly taper the dose over a long period of time. Back to reality, the govt. would have give a controlled narcotic (stimulus etc.) and slowly wean off (cut deficit-spending) over time. The only problem is that we have other mid-long-term spending issues to worry about such as Soc Security, Medicare/medicaid, that are going to kill us down the road if we don’t get out of rehab soon enough. Thus, our heroin-addict not only has to get out of addiction but has heart disease and diabetes that will kill him down the line if those aren’t taken care of as well.
It’s even worse than just the tax cuts. Obama has already announced that the national budget will have a deficit of around a trillion dollars a year for as far into the future as we can see. What’s worse, he plans on paying for the bailouts and tax cuts by printing more money. This will devalue the dollar to an extreme. It reminds me of what Germany did after WW2 when people were burning their paper money to keep warm because it was cheaper than using it to buy firewood. As much as I’m for tax cuts, the problem is obviously spending. No one want’s a depression it’s part of the economic cycle. The economy has been growing exponentially for decades (even with the past recessions). If we don’t take our medicine and allow it to correct itself soon it will be far worse up the road.
Nice analogy pochax, I think you have a good point, but I think the problem is that most of our herion addicts don’t want to quit – so, I don’t know what the government should do, but individually, I think we need to WANT to quit – don’t you?
May not fix the mess, but it will personally help me clear off more debt!
I doubt that tax cuts will lead to more spending.
Bob, you ask aren’t Americans gonna have to face up to cutting their spending. And you would think yes. But this is America. People aren’t going to stop spending. Even if they get a tax cut or stimulus check, they may pay on some loans, but ultimately they’ll just spend more.
A few may wise up, but the people who will benefit from this the most, are the people who already take care of their money. So if the government wants to give me a tax cut or an extra check I’ll take it. I still have some debts that need to be paid.
yea, looking back at the post, it looks like I was talking about 2 separate issues – the taxcut and US spending… my mind was wandering, what can I say
While I agree that most of us need to drastically curb our spending (including the government), with all of the bailout money that had already gone out the door within the last Bush administration, I do not think that Obama could do nothing and just let things resolve themselves. (The game had already been put into play!) I would describe myself as a pretty middle of the road guy; therefore, it has astounded me that so many of my Christian friends (who would be described as leaning further to the right than myself) have commented that while they did NOT vote for President Obama–that as time goes on on, they think he’s doing a really great job–even on the economy. They are more and more coming around because they are seeing people put to work or kept at work in their own communities. Something had to be done–instead of just leaving individuals and families holding the bag. Furthermore, so little of of the stimilus funding and plans have yet to be put into effect. I think we’ll be alright. Let’s just PRAY and keep the faith!