Wednesday, September 1, 2010

"Priming the Pump"---this ain't plumbing but we are trying to unclog the stagnant economy---see multipliers enclosed.

  A nice graphic  below showing the multiplier effects of various fiscal policies Congress could implement to move the economy forward.  In a recession, Congress would want to decrease taxes and/or increase direct government spending.  The goal is to increase the demand for goods and services so businesses will produce more goods and services. In turn businesses would need to hire additional workers to produce these goods and services (or at the minimum, not layoff people or close it doors).  This would serve to stabilize the economy until private demand returns and government could back off.   In theory and in practice (I say that with reservations), each dollar spent by the government yields MORE in terms of  goods/services purchased than a decrease in taxes because in the very first round of spending the government does not save a portion of the dollar and people tend to save a portion of the tax cut.  This is the foundation of John Maynard Keynes "Multiplier Effect" of a dollar spent by government versus by "people".  According to this theory, if you want to jump-start an economy, or as Keynes said "prime the pump", then government spending a dollar trumps people spending that same dollar.  The extent of the multiplier effect is STILL up for much debate in economics, but depending on the policy, it seems to bear out.  Judge for yourself...
Tax Cuts That Make a Difference

""...But the most effective tax cut for putting people back to work quickly is one that businesses and households get only if they spend money. Last year’s cash-for-clunkers program was an example. So was a recent bipartisan tax credit for businesses that hired workers who had been unemployed for months. Perhaps the broadest example is a temporary cut in the payroll tax for businesses, which reduces the cost of employing people.
Any of these steps would increase the budget deficit, obviously. But relative to the multitrillion-dollar, Medicare-driven, long-term deficit, a temporary tax cut costing a couple of hundred billion dollars isn’t significant. The more pressing problem today, by far, is the weak economy...""

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