Why Big Tax Cuts Are Essential

Posted by: Michael Mandel on January 10

Let’s get this straight right away. I’m not a dogmatic supply-sider, who believes that tax cuts are the solution to all economic ills.

But I believe that Obama’s $300 billion tax cut is essential to ‘recapitalize’ the American consumer, just like the banks are being recapitalized.

Think about it this way. This economic crisis consists of 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.

These three factors together are feeding on each other. Because banks are lending less, it’s harder for businesses and consumers to spend. Because businesses are cutting workers so quickly, loan defaults are rising and it’s harder for consumers to pay back debt. And because consumer debt has risen from 96% of disposable income in 2000 to 130% of disposable income today, Americans are completely maxed out. As a result, any job cuts immediately mean more loan defaults.

All three of these problems need to be addressed in order to keep the economy afloat. First, the purpose of the $700 billion in TARP money was to help ‘recapitalize’ the financial system, through injection of money directly into banks and other financial institutions. That must continue until it’s clear that defaults have peaked, which may not be until 2010.

Second, the rising unemployment rate can be directly addressed by government spending programs which create or preserve jobs. Giving money to hard-pressed state and local governments can avoid unnecessary job cuts in education and health care. Infrastructure programs can add construction jobs. And the variety of energy programs that Obama is proposing can goose up an essential sector.

That leaves the consumer. The conventional economic wisdom these days seems to be that tax cuts or tax credits are bad because people save the money, rather than spending it. For example, an article in today’s New York Times says:

But economists said the tax credit could have drawbacks as an economic stimulus measure, mainly because people usually save part of the money or use it to pay down debt. That makes good sense from an individual’s standpoint but does nothing to increase economic activity.

But this conventional argument misses the whole point. Consumers have a massive hole in their balance sheets these days. Home prices are plunging, incomes are slowing, and many families have huge debts. Americans are staggering.

From this perspective, the main purpose of the tax cuts and tax credits is to help repair consumer balance sheets, just like the TARP is helping repair bank balance sheets. I don’t want consumers to spend the tax cuts—I want them to save the money, as much as possible, and get their debt back to reasonable levels. That’s the only to ensure that consumers will be on solid ground when the recession is finally over.

Edmund Phelps, the Nobel Prize winner, made a similar point at his talk at the recent economics meeting in San Francisco. He said:

Stimulating household consumption is not the best remedy for the fallout of the financial crisis…Weren’t we all saying that households are overconsuming?

So the three prongs of the stimulus package serve distinctly different purposes. The TARP recapitalizes the banks, with $700 billion. The tax cut, at $300 billion, recapitalizes the consumer. And the government spending program—say, $500 billion—provides the missing demand and jobs.

Now, all of these numbers, though huge, are probably just a downpayment. My best guess is that we’ll have to do it at least one more time. But in any event, a tax cut—even if it is saved—is an essential part of any recovery package.

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Reader Comments

Phil

January 10, 2009 06:07 PM

And just how do we pay for this? Adding a tax cut (a good idea) to the bail-out bills (bad ideas) just put's the fed into more debt. How is that a good idea?

We need to suck it up now, help out those that are directly impacted by a lost job and let the economy straighten itself out. It'll do that without government help.

gberke

January 10, 2009 08:28 PM

A whole lot of our economy is built on making and buying things we really don't need. If we were measuring morality, we would say that some things are better than others, somethings are "good" and some are "bad": a lot of our economy is rooted in the "bad"... the things make money, but like the financial beasts that churn the stuff, it's a lot less good than it could be. It is stuff that we really really can do without. And we are going to... just watch what gets cut first.
Much as all suggest that the money given to the banks have strings on it, the money given to the consumer needs a couple of strings to... in the form of tax credits, education costs, energy conservation, energy innovation, and planetary husbandry. It's really not that complicated.
Of course, if your livelihood is tied to the sale of hula hoops, that's where your heart, and alas, your mind is going to go and you will cry loudly for the hula hoop as just as important as, say, wheat.

Zach

January 10, 2009 11:05 PM

He's going to give a tax cut to people that don't pay tax. That's not a tax cut; that's a handout.

Zach from Denver

Tracy Renning

January 10, 2009 11:11 PM

This whole "good" "bad" discussion is fruitless...

Tracy R.
Yoga Poses

Guy

January 11, 2009 01:18 AM

Thanks for finally pointing this out. The point everybody has been missing - Obama, all the economists, all the Republicans, etc. - is that the economy will not improve until consumers get back on their feet. Supplying more credit or lowering interest rates won't do it - this will just make irresponsible people take on more debt that they can't afford (which caused the whole problem in the first place), and responsible people don't take loans and credit to buy things they can't afford anyway. So, more credit will accomplish nothing. Businesses won't start re-hiring until consumers start spending again. Consumers won't start spending until they have jobs and more money. It's a vicious downward spiral until you help the consumers FIRST! Helping the banks or the automakers or any other part of Big Business does NOTHING to address this problem. All our policy "experts" have it completely backwards.

PacificGatePost

January 11, 2009 02:25 AM

TIME FOR BEHAVIOR MODIFICATION

MYTHS OF DEBT

Behavior modification requires acknowledging past mistakes.

What did we do for twenty years?
-
http://pacificgatepost.blogspot.com/2009/01/myths-of-debt-to-be-corrected-for-2009.html
-
Now let’s get on with the correction.

Jim

January 11, 2009 07:02 AM

At least from my own personal perspective, you've hit the nail on the head. My problem is debt debt debt. And it comes from those damn credit cards that we used to pay medical bills, special schooling costs and to maintain a lifestyle that we just couldn't afford. The low interest rate offers streamed in daily, our credit rating was excellent, money was easy to obtain. Of course it has to come to an end and now we are in gridlock. That's why I don't spend.

Enzo

January 11, 2009 07:27 AM

Obama's plan is flawed:

1.The tax cut should be only to companies that produce in the US, so we can bring all the outsourced jobs back. F you Wal-Mart.

2. There's no efficiency on infrastructure spending. Economics 101, hellooo? Nobody needs green stuff right now, nobody needs bridges to nowhere, nobody wants more roads, because we don't want to drive. Build some bullet trains instead.

3. Military spending should be cut by more than 50%. All bases overseas should be closed.

4. No more foreign aid until deficit disappears. F you Israel.

5. Tax cuts should be directly at payroll for immediate effect.

Sally in Chicago

January 11, 2009 07:34 AM

For years the Govt told us to "save", that we had the lowest savings rate. Now that we're saving, they tell us to spend. Frankly, I have too much stuff. Me and my friends are trying to sell our excess on Ebay. Or we're giving it away.

For years, the govt told us we needed fuel efficient cars. Now that people are driving less and have fuel efficient cars, they want to tax the gas because we're not buying enough gas.

You can take the govts and shove them down the drain. I think the American people are tapped out. We're spent out. We enjoyed our days of luxury and now it's back to simplicity. There are other factors involved such as savings for college and increased health benefits. We can't be taxed to death and then have stagnant incomes and higher benefits to pay for. It's all going to come crashing down.

Liz

January 11, 2009 07:44 AM

Tax cuts actually made sense back in the 70's, when the top marginal tax rate was NINETY PERCENT. Now that the top marginal tax rate is 33 percent, the GOP risks being seen as a party that is sealed in amber, utterly oblivious to the world around them.

Tony

January 11, 2009 09:51 AM

Isn't it time that the banks were more highly regulated? I don't mean that they should have their paperwork in order, I mean that their business decisions should be made on a holistic basis for the good of the population.

Inappropriate lending by banks has got us into this mess. Someone other than the current captains needs to get their hands on the wheel.

lake district

Anonymous

January 11, 2009 10:07 AM

Perhaps Obama should fund a "Let's Become Buddhist" inititative, which will solve America's problems and woes at the deepest psychological levels.

Economy, spending? Pshaw!

A newly (and fashionably) converted Buddhist nation will eschew possessions and become wholly comfortable with begging. Working and jobs are no longer a concern

The woes of the automobile industry will
become moot as the nation walks from temple to temple, banks will become holding funds for charitable organizations. Education will be streamlined to learning only the truths that lead to enlightnment.

Richard Gere could become Secretary of State and the Dalai Lama will head the Fed.

The mind reels with possibilities for a brave new, economy-free Buddhist nation.

The only fear might be that the Chinese would export Buddhist repression instead of hi def TV's and leaden playthings!

Rayman

January 11, 2009 10:48 AM

Enzo's comment of Wal-Mart, and outsourcing is the secondary evil behind this financial crises that is not getting enough play. Wal-Mart, a partner in crime with China has initiated and encouraged the de-industrialization and destruction of real jobs that produce real wealth in this country. OK, we consume too much and produce mountains of debt to do it, but then we add insult by creating a huge trade deficit which in turn creates a huge budget deficit. THIS is painfully obvious as to what's really wrong here. America is giving away it's wealth in the form of real assets to produce real products and the technology that goes with it. China is growing at 8% this year driven by Manufacturing.

i give up

January 11, 2009 11:03 AM

This stimulus package is looking very misdirected. Priming consumer spending is merely going to initiate a small spike in retail spending that will generate short lived, low end retail jobs.

What is needed is business investment in areas that are sustainable without government subsidies and tariffs...

I'm not confident green jobs have proven this. But a more efficient power grid should be good all around (just drop the CO2 rhetoric)

FBEye

January 11, 2009 11:10 AM

All Barack Obama needs to do is go on National television and inform all Americans to simply 'GOOGLE' this- AMERICA: FREEDOM TO FASCISM, and watch that documentary, and then Americans could see how an instant tax cut could be realized, correct? IF 'federal income tax' is a tax that only needs to be paid by companies & corporations on their PROFITS & GAINS, and is NOT a "required" tax for American workers, who earn a salary or wage on their LABOR, then ALL Americans would be able to REALIZE an instant TAX CUT, correct? So, all Mr. Obama would REALLY NEED TO DO is simply TELL THE AMERICAN PEOPLE the TRUTH, right? WOW! What a concept, huh? Simply telling the TRUTH could HELP every American out in these difficult economic times, correct? What a GREAT way to "CHANGE" things for the BETTER, once & for all, huh?!!!

Jenny

January 11, 2009 11:47 AM

Everyone has a different interest in this, that's what makes it so complex. My immediate concern is how college tuition is breaking the backs of the middle and upper middle classes. You don't qualify for aid, and you don't make enough to pay with savings and cash. And while I know they tell you the kids can do it with loans, graduating with even $50,000 in loans these days means living at home for a while. And with the starting salaries decreasing, it's just going to saddle these kids with depressing amounts of debt. I believe the professors at some of these colleges who are accountable to no one, need to take a great cut in pay. At some of the universities they rarely even teach a class. And the kids are paying for it. It just isn't right.

Susceptor

January 11, 2009 11:53 AM

More tax cuts? Let me get this straight, the US economy is collapsing because w overspent with money we ever had (and therefore borrowed). Now you want the US government to go even further into debt by borrowing more money from the Chinese, so that the money can be given to the rich in an attempt to fix a problem caused by excess credit to begin with. Forgive me if I say NO, NO and NO to that idea as a solution.

mark

January 11, 2009 11:58 AM

The answer is not a tax cut. If you're unemployed, making NO money, what good is a tax cut? Giving people a check for $1000 is useless, they'll just spend it on junk at Walmart. What we need are jobs. We need a government that stops wasting money on bombs and bullets, and starts investing it in America. Building a strong infrastructure, such as power, bridges, and roads does little if we hire illegals from Mexico to do the work, and use steel from China to build it. The Government needs to stop wasting money, and invest it in American companies that employ American workers, that use American resources.

Bob Snyder

January 11, 2009 12:39 PM

I'm not spending much time on this AGAIN but to FBEye, do you believe everything you hear you conspiracy nut? Does the government control everyone? Do they cover up alien crashes? Ever hear of the the Internal Revenue Code? The Supreme Court makes final decisions regarding all federal laws. United States federal laws are codified in the United States Code. Try Googling "Internal Revenue Code" and you'll find your law. Look, I didn't even need 2 hours to show you the Law requiring you to pay taxes. You are a joke. Taxes are the price we pay for civilization. Get a different hobby, try stamp collecting or maybe even bug collecting. It'll keep you off BusinessWeek with your absurd claims.

retiredtraveler

January 11, 2009 12:43 PM

All this is very interesting.That there are so many who know how to fix the economy.My wife now 78 yrs old spent all her life going to school,15 teaching business economics,going taking courses in other countries during summer recess. To learn what makes the economy work.
And I read these profectionest tell what we should do. More tax breaks to the rich and famous.While the poor get credit cards from the rich that only charge 25% interest and are open ended.And you republicans want to lower taxes and spend more money. That don't make sense. And the condition our country is in now proves it. My wife and I saw this coming so we paid off all our debt and credit cards.
Our 2 homes are paid for,our late model car is paid for.Our 3 late model laptops are paid for. And we throw away credit card offers we receive daily.
Barack Obama is the first person with any brains to take office in a long time. Lets give him a chance.We've had morons running the country into the ground for 8 years. Now lets see if someone with brains can dig it out without enterference for the next 8 yrs.

dw

January 11, 2009 02:25 PM

not sure how to take those advocate big tax cuts as a solution. seems like we tried their plan already last year. it was a dud. then we tried those who say just let it play out. and that plan also was a big dud. i could compare that plan to not using the brakes when a car pulls out in front of you. and i guess they think that plan works there to. might explain why we have so many wrecks. since we have tried their plans. with results that were to put mildly disastrous. maybe its time to try a different plan huh?

Yankee Skeptic

January 11, 2009 02:28 PM

In order to spur economic activity and growth, all tax RATES need to reduced permanently for individuals and corporations. A growing economy with an expanding tax base results in greater tax revenue. Obama is clueless and clings to his feel-good wealth redistribution. Remember his stupid debate position of raising the Capital Gains Tax (thinking it's for the rich only), even though a higher Capital Gains tax rate results in lower tax revenue and lower capital efficiency? His one-time $500 or $1000 refundable "tax rebate" to everyone essentially is a handout that takes from the richer and gives to poorer or more accurately borrows money from the future. As mentioned, it will do little to spur economic growth, but it is fairer in Obama-world.

loudpainting

January 11, 2009 02:37 PM

On a societal level, I view tax cuts/credits, paid for by public debt, as a refinancing of consumer credit. In effect, Uncle Sam has bought you a flat-screen tv.

Ken

January 11, 2009 04:18 PM

Let's look at our failures. Bush/Cheney gave the financial institutions new bankruptcy laws and a top interest rate on credit cards of 30%. After those handouts the financial institutions still needed a handout.

Let's repeal the bankruptcy law and cut the maximum interest rate on credit cards to a FED rate +12.5%. Then let's allow all interest paid by consumers earning under $100,000 to be deductible. Phase it out between $100,000 and $200,000.

That turns the focus on the individual and allows many to crawl out from under their debt load - a major need to turn the economy around.

The financial institutions had their opportunity and blew it. Now it's the middle class worker's turn.

bob searcy

January 11, 2009 05:14 PM

im single and self-employed and have a 30% tax rate. a total disencentive to make money.i try to live on 9-10k to keep the taxes down ?????

PB

January 11, 2009 05:30 PM

Hopefully it's another check for $600. First one came in handy on car repairs. Simple tax cut won't help, nobody will even notice. You can't go out and spend a tax cut. Just cut me a check.

Kartik

January 11, 2009 06:09 PM

"Just cut me a check."

Look at all these dumb socialists here. They don't understand economics, and thus are getting what they deserve.

Mike Mandel is right. Too bad the commenters here don't grasp what he says.

Cary Maultasch

January 11, 2009 06:18 PM

A simple RX for a Sustainable Economic Recovery

Eliminate all taxes on "long term capitalgains".
Re-define "long term" to mean a minimum of 18 months, instead of the current 12 months.

Eliminate all Federal, State and Local income taxes, on income derived from dividends and interest, from assets meeting the above description.

Instruct the Governors of the FED to stay out of the Economy's way!

Louisa

January 11, 2009 07:52 PM

We have been programed to believe Tax Cuts
are wrong and hurt the economy, Wrong!!!
Corporations go oversee because American
companies cannot compete with Foreign
Imports, for that we can thank our Congress and Senators. First we need term
limits on all of these Pompas leaders.
All this green stuff and infra structure
will Not return jobs.States are already given Federal Money for their bridges and
roads they choose to spend it someplace else.We Americans have to budget and careful spending of our money but all in
Washington spend and tax ours while we pay them another yearly raise of $4800.00 this year, For What telling us what to do with our hard earned money with no responsibility on their part.
How much would the Stimulus amount be without them adding payback dollars & projects we really do not need.
They know Americans do not pay attention would rather bury their heads and listen to the Un-Investigative Media who report only their opinion not
the whole real truth.Again we are to lazy to confirm or research any information on our own,we hold 2 minutes of news by biased TV anchors.We will Never be the Americans of our former parents or grandparents who Loved and Respected America for its Opportunities for all.Most Americans are in the middle of the road not leaning left or right but we let afew control it all. Easy, No Questions Asked! It will not be the Free America we grew up in if we let the control go to those slick Career Politicans.
Pay Attention and wake up it's your future at steak.

Jason

January 11, 2009 08:08 PM

We should just take all the bailout money and divide it up among the taxpayers. This would result in over $13,000 per household and people would pay off debt (whole cars even!) while not optimal from a fractional reserve perspective, it would allow banks to get liabilities off the books and put real cash on the balance sheets. The newly debt-free consumer could then consume again revitalizing industry and financing at lower rates. Bailing out banks only keep corrupt businesses in business. We need to fix the balance sheets of real families first.

Robert

January 11, 2009 09:07 PM

Cary - Just how the heck does that help the working poor and most of the middle class who have no investments? Sounds to me like you want more tax cuts for the well-off while the poor pay for it.

Robert

January 11, 2009 09:48 PM

Spend money wisely to bring us into the 21st century - but no more bridges and roads to nowhere. Build new bullet trains to connect communities and their work places, but refrain in wasteful spendings on so called pork barrel infrastructures.
Help the middle class deeply to rebuild their confidence in their country. Work to lower property taxes across the board, and lower insurances cost to the average American - there are too many hidden taxes before the average American.
Make law to severely limit CEOs salary and compensation. There are plenty of talents in this country willing to do for much less. If they don't like it send them to China...

silverfox

January 11, 2009 10:00 PM

Like it or not, eventually the government is going to have to be the"employer of last resort"! With factory automation, computers and robotics,as well as low cost foreign manufacture,the US just does not need a large number of production workers. In the past the 'make work' jobs generally consisted of inefficiently making things with preplanned short life spans to require rapid replacement. Corporations made money, people were employed, and local and federal tax collectors made income. Eveybody was happy, but no one bothered to notice that the customers of these products didn't have the money to buy them so they borrowed and borrowed and borrowed. Only now we just can't pay back any more so we have had to stop borrowing, and the economy is coming to a halt. So ultimately we will either create government service types jobs and fund them through tax increases, or accept that we will soon have 15 or 20 million permanently unemployed and living in abject poverty in this country. There are a not a lot of other options. The "good old days" are gone and there is absolutely nothing we can ever do to bring them back!

Strategery

January 11, 2009 10:03 PM

There are some good comments on here, including the one from FBEye. The supreme court ruled TWICE that the 16th amendment (which was never properly ratified) did NOT give the government power to tax wages. NO BAILOUT FOR BANKS. The investment banks artificially drove oil up this summer, they are hoarding government money and using it to pay executive bonuses and shareholder dividends and they are screwing consumers by raising interest rates, foreclosing on homes, opposing the so-called credit card bill of rights, and opposing bankruptcy changes that would benefit consumers. Consumer spending and infrastructure projects will not save our economy--we must rebuild our industrial base and rebuild our international balance sheets (reverse our huge trade deficit). Government spending must also be brought under control.

middle class poor

January 11, 2009 10:24 PM

It's obvious that the people complaining about Obama's tax cuts are in a higher income bracket than the middle class and the poor who will benefit from it. For the last eight years, about 75% of Americans have been nickel and dimed to death paying higher fees for everything from interest on credit cards to paying our share of income taxes while earning less money while the higher income people pay less taxes than ever. When Rupert Murdock stated in the Wall Street Journal that his secretary actually pays more income taxes than he does based on the percentage of both of their incomes, the truth is in his statement. This country cannot continue to thrive when most Americans continue to pay more then their fair share. The people who have posted such negative comments to this article are obviously selfish, greedy and self centered. This is not the 17th century, we no longer have rich land holders and slaves. To actually be a country that is supposed to be the most advanced in the world, we need to break the two class stereo type we continue to set and actually become a country where all men and women are treated equally. I think our new president will give the upper class a rude awakening which they have longed deserved. Welcome to the other side!!!

htikt htike

January 11, 2009 11:26 PM

i want to accept all news from the world

Gary Hynson

January 11, 2009 11:47 PM

Indeed, a great article, however, it can be looked at many different aspects of whether they should cut or not cut taxes and then if the consumers should spend to boost the economy or save.
I personally feel that the tax cuts are great if the consumer uses it wisely, such as saving or paying off debts.

For instance, if saving, it gives the banks more money to lend in order to boost the economy later. More importantly, if paying off debt, that is incredible, because the national savings rate is somewhere in the -2 percent - give or take.

With the low interest rate in play now, consumers should think about probably using that to their advantage to where they can pay off all their credit card debt and much more with a lower interest rate. They save tons on interest and can pay it off sooner.

Furthermore, if the consumer decides to spend that money on anything and everything without considering saving or paying off debt, though, this only hurts the economy more as the debt continues to increase substantially. In addition, when consumers are comfortable where they are with their financials, maybe this could boost the economy since they have more confidence and less debt.

sam

January 12, 2009 12:40 AM

Yes, cut taxes on the middle and lower classes, and raise them on the upper income class to pay for it.

TILLY

January 12, 2009 12:55 AM

At least for awhile, we need to have a guaranteed annual wage to foster consumption. Yup, we need to simply give money to the lower class in particular so they will spend it on goods and services. And we need to repeal the laws that foster off-shoring so that America turns back toward being an industrial powerhouse.

Yvonne

January 12, 2009 01:26 AM

A stimulas check will not do anything if the gas prices rise again keep the Fuel prices out of any other problems it just makes everything worse or didn't we already see that?

wetwash

January 12, 2009 01:41 AM

I agree with all those who say "Just send me the check" because I'll spend it. Just like the $25 checks I get from my credit card company as a reward, I am so dumb I think it is a gift, so I spend it. Who ever heard of saving a "rewards" check.
HEY, PREZ OBAMA, JUST PUT THE CHECK IN THE MAIL. THANKS.

JB

January 12, 2009 02:04 AM

I agree entirely with the writer-a tax cut should definitely be part of the recovery plan. People are so concerned about the national debt, yet in reality, it is well below dangerous levels. I am not at all suggesting that be begin getting into the red; however, at this point in time, it is prudent to begin taking on more debt to prevent a terrible scenario from becoming significantly worse.

Hugo van Randwyck

January 12, 2009 03:45 AM

The main cause of the economic problems, was/is the housing bubble - address that and the economy will start to recover. A massive increase in house prices is the same as a tax increase to a new home owner. So if you want to cut taxes, massively reduce the price of a house for new homeowners, e.g. only using 1 income for calculating a home, maximum loan 2.5 times earnings, minimum 10% deposit. Also allow all foreclosures to go ahead - so increasing housing supply. Tax cuts is a way to increase disposable income. Is there a way to do this for existing homeowners? Yes, massive, 50-90%, rebates on installing renewable energy systems - solar thermal/voltaic - this will allow a payback of months, so giving free energy after payback, and more disposable income. This will create 'green collar jobs'. There is also something to be said for people cleaning up their own greed and irresponsibility, and rewarding people who spent sensibly.

Olga

January 12, 2009 04:24 AM

If America will be in sheet all the world will be.
Viva America.!!!Save yourself. Don't let repeat Russian crisis in 1991. We were in deep sheet my friends when I left country.
Otherwise we will travel back ,no choice.
At least we have some relatives there
Are there Harvard smarts in the government ???Where all anglo saks or WASPS??


Dr. Edwin Weave

January 12, 2009 05:49 AM

Tax cuts are nice, however the tax cuts will not resurrect the US Economy. MOre is needed. What god does a tax break do for a peson who is unemployed?

Resurrecting the US Economy
Or fighting the snowball effect
By Dr. Edwin Weaver
www.uniqueleaders.org
www.we-develop-leaders.com
www.edu-talk.info


The US is facing one of the worst crisis in over a century, not an attack from hostile forces outside the country, but an implosion of the economy. The problem; too much, too fast and in the hands of too few.

To add to this problem Mr. Obama’s advisors did not have a clue to what was happening or they were extremely optimistic. To give you an example; before Mr. Obama was elected he was going to create 1 million jobs, at the middle of December 2.5 to 3 million jobs, just before New Year’s 3.5 million jobs and today 4.1 million jobs.

It would appear that our new president’s advisors do not understand the economics of a depression or the consequences of it, even though they are economists. A recession or depression is like a snowball rolling downhill. It will continue to get bigger until something stops it. This snowball has gathered a lot of momentum. It would have been easier to stop 2 or 3 months ago, but no one was looking at the snowball at that time. Now, it is racing down on America and will do a lot of damage if it is not stopped within 12 weeks. I will present you with two scenarios – the good and the bad.

Scenario One – The Good

This scenario requires President Elect Obama to use all his charisma and leadership skills to push this through. It is similar to his current plan with only a few twists, but these twists are the parts that will stop the snowball.

With the remaining emergency funds, President Obama bails out the industries which employ the most Americans. Part the bailout for the industries carries the clause that no employees get laid-off. He also starts his reconstruction of the US infrastructure.

Not laying off employees is a two edged sword. First it keeps the morale of the US workers up and second if the people were laid-off they would be collecting unemployment benefits which the government has to pay out on top of the bailout. Therefore keeping the people working serves three purposes – morale stays up, less money out of the government, taxes still being paid into the government.

Of the 3 million unemployed American, Mr. Obama’s plan to reconstruct the infrastructure of the US would put many of them back to work. This should help to bring more money back into the government via income taxes and hopefully create some new ‘permanent’ jobs.

I am not addressing the banks because they are falling due to people not having money to pay their mortgages. If the people are working again, they will be able to pay their bills and the banks will not be in dire straits. Therefore further bank bailouts would be unnecessary.

Yes, this is a very simplified outline. I have a written a 20 page analysis of the situation using this scenario, however no one would want to sit on the internet and read 200 pages.


Scenario Two – The Bad

Now we look at the flip side of the coin. If the lay-offs are not stopped, there will be over 6 million Americans unemployed by the end of March 2009. Remember the snowball, as companies lay-off workers there are less people to purchase goods and more companies will lay-off workers and it continues to grow.

This high unemployment will mean the continued bailout of the banking system and other entities. More people unemployed means more defaults on loans. More defaults on loans means more banks going under.

Next stop, the US defaults on its loans. Yes, our country can default on its loans. With the government paying out to create jobs (not at the same speed as jobs are being lost) and paying out to bailout banks and other entities and having a severely depleted income tax base, it needs to get loans from other countries. All the other countries are in a recession / depression and do not have money to lend. Therefore the US would be forced to not pay back loans it has already taken out, leading to a default on its loans.

This would destroy the confidence in the US and lead to further the world economic crisis beyond the proportions of the Great Depression. The world is too interconnected today. In 1930 the countries were still basically independent. Today the economies are so intertwined that this would cause a collapses of the entire world economic system, leading to chaos.

If you would like to read the entire analysis, you may request either the GOOD SCENARIO or the BAD SCENARIO or both. The good scenario is approximately 20 pages and the bad scenario is approximately 27 pages.

SARAH LEE

January 12, 2009 06:06 AM

I very agree with Guy's standpoint.Yes,if govervment help the consumer who spent optionally their mony by buying something that they really don't need ,the result will just make irresponsible people take on more debt that they can't afford.Giving money or tax cut is not best way to help the people who are in the severe recession, the problem that cause the problem in the first place must be solved firstly.Or the government might prepare to support money to comsumer time of day.

Robert dCZ

January 12, 2009 08:02 AM

Most of the comments here are amazing in the simplicity of reasoning by those who posted them.
It wasn't Wall Mart that exported "good jobs", it was comsumers. Period. If you want to revitalise American manufacturing, buy American. And do it in droves. Simple as that. The consumer goes for the best deal, a good supplier, like Wall Mart, does what it can to provide the best deal. And if the best deal is found in China, then the question should be WHY American manufacturers can't compete with Chinese ones. And no, it's not the low labour costs, it's the low overheads in general. And high overheads come from a large variety of items, almost all of which lead back to government meddling in the economy.
You want jobs in manufacturing to return to the US? Dismantle the regulatory environment that stiffled US producers and made them unproductive, inefficient and uncompetative. THAT will fix the problem.

While Chinese electronics are much cheaper than US-made ones, they also become increasingly BETTER. That is the second crux of the matter - for lack of a better word. Why does the upper middle class in the rest of the world drive European and Japanese cars? It's not because they are cheaper, not anymore. They are WAY better.

Moaning about unfair systems never fixed anything. 100 years ago the UK and France lost their industrial supremacy to Germany and the US, because they were getting cocky and lazy.

Sound familiar?

Read history and you find the fixes for the present. Don't do it and you will repeat the mistakes others did before you.

When the US/EU will finally arrive with a manned mission on Mars, there will be no supply problems for the crews at all. They can just eat at the local Chinese near their landing spot.

Sohoo, to really, really fix US problems, start with fixing the education system. Reward and encourage excellence, DO LEAVE the less successful kids behind to flip burgers, rather than striving for everyone to comply by the lowest common denominator.

It will take a generation, but US glory can shine again. Right now the only proposals on the table are to give the shine a new coat of varnish.

OtisP

January 12, 2009 08:12 AM

The 3 parts that made up the crisis are correct.

The remedies are not.
First, on bad loans, it is not the loans but the ones who gave those loans. Instead of giving $700bn, spend $10bn and set up a few new banks that will start fresh and clean.

Second, These new banks will then lend to businesses that only have healthy balance sheets with real assets.

These businesses will then start expanding and hiring staff that bad companies will let go.

Third, the consumer should start paying up debt and saving with funds that do not come from tax cuts but from lower costs such as lower mortgage payments that have a lower rate,(say 4% instead of 8-12%)

More money into consumer's wallets will mean more spending at healthy companies which will generate more jobs.

Michelle

January 12, 2009 08:48 AM

In order for the tax cuts to make sense the government must trim down. It must cut programs and services. It must make sure that all existing programs and services deemed absolutely necessary must be running as efficiently as possible. I support the tax cuts and tax rebates. Consumers need more money in their pockets, not less. It's going to be painful but things will pick up once the consumer is in a better financial condition. We need to produce more here. Anything that we can produce here should be produced here. We need to scale back on the number of imports and start making more things here. We need to scale back demand, keeping in mind natural resources and the limitations. Too long we've had a very short term look and we need to transition to a longer term look. We the people need to FIGHT for that.

Hugo van Randwyck

January 12, 2009 08:53 AM

Housing bubbles or solar panels? Lower house prices will give new home buyers spare income to spend on renewable energy and create jobs.

Joseph T

January 12, 2009 09:39 AM

The problem we face today is not so much taxes but the imbalance between workers and owners. Back in 1980, labor was overindulged and business was in a straight jacket. Today business is overindulged and labor is marginalized. By labor I do not mean unions, but employees in general.

Business has had its way in excess. The labor pool has been flooded with illegal workers and visa holders. Government and technology has made it easy to offshore and outsource jobs. IN AN ECONOMY THAT IS 70% CONSUMER, SHRINKING MEDIAN INCOMES IS A RECIPE FOR DISASTER.

A WOW factor for Obama to shift the balance would be to crack down hard on currency manipulation/pegging by offshoring countries, change the corporate tax code to incent US based employment, implement mandatory E-Verify and ban visas for employment sectors were median wage increases lag the inflation rate. If wages are stagnating or declining, then there is no labor shortage in that sector (laws of supply and demand).

sam

January 12, 2009 09:43 AM

Many of the debts we have incurred in the last decade won't be paid. Consumers will balance their books by defaulting. We cannot consume if we don't produce. It's time to build a new-generation industrial base.

Zach

January 12, 2009 10:25 AM

We crticize the government for bailing out corporations who have over-indulged and "put themselves in this mess on their own" ... how many of us are in debt due to our own over-indulgence?! Are we any more deserving?

To spend, consumers need better paying jobs. For better paying jobs, businesses need investor confidence. For investor confidence, there must be capital in the big markets, even foreign. I know spending must be regulated heavily, but corporate America needs the money since it can make the quickest and biggest impact.

Trey

January 12, 2009 10:35 AM

Everyone who is bashing outsourcing needs to get up to speed. and please stop referencing Econ 101 in your argument, Econ 101 would say that production will always move to the most efficient and cheapeast place, i.e. China. Those jobs are gone, face it, Americans are going to have to learn to do something other than manufacturing. I will use the Auto industry as my argument, look at what happens when we try to subsidize jobs to keep them in America, you end up with a company that can no longer afford to make decent products and they end up getting spanked by foreign companies and going out of business, completely undoing the protectionist policy they set out for.

Said Edwards

January 12, 2009 10:41 AM

Sam,

I fully agree with you. How in the world can we generate incomes and thus pay taxes if most our jobs are exported under the treason of our so called CEOs and VPs. America! It is time we literally force our morbid corporations to keep the jobs at home. I work in the health industry which is supposed to be recession-free and even our technical procedures/radiological procedures are sent to India for interpretation. Can we now outsource our kids to other countries to be raised and educated. I say, "GIVE ME a BREAK!!!"

Said Edwards

January 12, 2009 10:43 AM

Sam,

I fully agree with you. How in the world can we generate incomes and thus pay taxes if most our jobs are exported under the treason of our so called CEOs and VPs. America! It is time we literally force our morbid corporations to keep the jobs at home. I work in the health industry which is supposed to be recession-free and even our technical procedures/radiological procedures are sent to India for interpretation. Can we now outsource our kids to other countries to be raised and educated. I say, "GIVE ME a BREAK!!!"

Roy G. Biv

January 12, 2009 10:52 AM

Why Big Tax INCREASES Are Essential

Corporate offshoring of their headquarters to avoid paying taxes, and making unethical us tax loopholes have caused the US NOT to receive $1 trillion over the last 6 years. This is a bigger scandal than the financial malaise of the last 6 months, yet is a very taboo issue to raise.

FBEye

January 12, 2009 11:05 AM

Bob Snyder, Did you watch '60 Minutes' last night? It seems as though Morgan Stanley, & Goldman Sachs, and OTHERS were involved in the MANIPULATION of OIL last year! Hmm, Don't they also "manage" people's RETIREMENTS & INVESTMENTS??? I wonder WHOSE MONEY was being used in the MANIPULATION of OIL which caused all kinds of problems all over the world last year, including STARVATION in counties where the food supply was severely impacted because it was contingent upon OIL for its ultimate arrival & transportation to those countries where people's LIVES DEPEND upon the food? Bob, You can keep paying YOUR federal income taxes, O.K.? Since it's on a "voluntary compliance", maybe YOU can voluntarily pay DOUBLE, or TRIPLE, O.K.? I still can't find the "Law" that requires an American worker who earns a wage on their labor to pay federal income taxes. Please direct me to the "Law", O.K.? You might want to WATCH Aaron Russo's documentary too! And then 'GOOGLE' this- DR MANDELSTAMM OF KIEFF, and read his quote in its entirety that's on 'Page 94' of that passage that starts on 'Page 88'. Hmm, WHO are the ones that CONTROL Morgan Stanley & Goldman Sachs? WHAT A COINCIDENCE, huh? "Only a PAWN in their GAME." - Dylan

FBEye

January 12, 2009 11:18 AM

Hugo is correct! The HOUSING BUBBLE has created problems beyond ANYONE'S wildest imagination, right? So, WHO is at the "ROOT" of the HOUSING BUBBLE PROBLEM that we have? Answer: The ONES that set the interest rate at 1% back in 2003, correct? That's what enabled ARM's to flourish in the USA, right? WHO are the ones that made all this possible? The FED, right? WHO is the FED? Answer: A private corporation owned by a "cartel" of Bankers, right? WHO are these "Bankers"? Hmm, Maybe- Morgan Stanley, Goldman Sachs, Citigroup, Bank of America, BlackRock Inc., Blackstone Group.......the now DEFUNKED Lehman, Bear Stearns, & others, right? Hmm, What did DR MANDELSTAMM OF KIEFF (you can 'GOOGLE' it!) say again back in 1898? Oh, I guess I'll 'GOOGLE' this- DR MANDELSTAMM OF KIEFF, and read his quote in its entirety that's on 'Page 94' of that passage that starts on 'Page 88' again, O.K. Bob Snyder? Happy New Year from the FBEye! Go Steelers!!!!!

Richard Starr

January 12, 2009 11:51 AM

I'm the first to admit I don't understand how the ecconomy works. That said, when I said derivatives in the 80's looked bad I was told they know better. When the dot com explosion was in full bloom and I said that I don't understand how it can work, I was told that they knew better. When the housing market looked inflated to me and I said it looked bad, I was told they knew better.
Truthfully I was predicting doom and gloom years before the collapses of each of these. I stayed away and missed both the risk and the profit.
I look at the bailout proposed and I think it looks bad, well, you know what they are saying...

So, what needs to be done?
Fix the next problem before it reaches fruition, which will be the credit cards. What needs to be done, needs to be done now not years from now. Closing the barn doors after the cows are out do no good.

1) Limit interest rates to no more than 10% above prime. This is more than generous and far below what is being charged.

2) Interest rates on existing purchases can not rise but must be frozen.

3) Fees and Penalities should not be allowed to accrue interest.

4) Rates must not change based on activity with other people.

Does this mean some credit will be tighted? Yes. But it also means that
some people will be able to get back on their feet much, much sooner.

On a different front.
Loans were made to people with the people making the loans knowing that there was no way for those people to pay once the interest rates were reset. The loans were made because the people making the loans would offload them onto a third party and not be libel for them a set duration past, which happened to coinside with rate readjustments. This is fraud and there are people that really, really, need to have their assets seized and then jailed for an appropriate term.


Follow the money, recover what we can.

FBEye

January 12, 2009 12:01 PM

QUESTION: WHO made money, LOTS of money, while the "housing boom" took place over the past 5 years? ANSWER: Investment Bankers, correct? The TOP EXECUTIVES made tens, & even HUNDREDS OF MILLIONS of dollars, right? How were they able to do this? By simply cashing-in their stock options when the stock was HIGH, correct? They gave themselves big BONUSES too, right? Many 'cashed-in' before all the POOP hit the fan, correct? Warren Spector of Bear Stearns cashed-in for $91 MILLION before Bear went "belly-up", didn't he? You see, while the "GAME" played out, and people were buying HOMES, & cars, & everything else, the TOP EXECUTIVES made all the MONEY which was a result of the STOCK MARKET being at "artificially" inflated highs due to an "artificial economy", correct? They KNEW, in my opinion, that it WOULDN'T last, and they "tricked" the PEOPLE of the USA, & the PEOPLE, & countries, of the WORLD to put their money in the USA so they could TAKE IT AWAY!!! Guess what? It WORKED! It can't be denied! "Only a PAWN in their GAME!" - Dylan

Eric

January 12, 2009 12:44 PM

Throughout U.S. history higher taxes have gone hand in hand with growth. Taxes have no bearing on what people bring home. People calculate that when they negotiate their pay. So if you cut taxes and are making more eventually employers will cut your pay because they know what you or someone like you is willing to work for. We need to increase wages by helping people unionize. If all the people at Wal-Mart were able to unionize and make a few more dollars an hour they would spend that money because poor people don't save.

Manuel J.

January 12, 2009 12:55 PM

Enzo,
Your rude language just illustrates your lack of knowledge. The last time we had a huge cut in defense spending (i.e. Clinton), we reduced our intelligence gathering, tactical, and other capabilities. Lack of intelligence gathering capabilities was a key factor in 9/11 coming about.

James

January 12, 2009 01:15 PM

Okay, so the cat is out of the bag. We need to help the consumer, not the big fat corporation. Enough of this supply-side Economics policy. Say's Law sucks and so does Milton Friedman and is flawed economic policies! Everybody talks about Economics 101 here but it doesn't look like there is much understanding of it. Let me give you guys a breather. When an entity, whether it be a person, a company, or a government, is going through a period of easy money (like the 90's), you put away cash for when times are bad (like right now). When times are bad (like right now) you diligently spend the money that you saved (spend, not splurge) in order to support your needs until the good times comes again. History shows that periods of good are more common and longer than periods of bad, you will have more money saved than what you saved (if you didn't splurge the money mind you...). If you never saved in the first place when times are good and are in an unfortunate situation when times are bad, there are only 2 options you can do. The first option is to borrow the money from someone who did follow the rules until you get back on your feet and pay off the loan when times are good, or two; deal with it. If you live, great. If you die, well, that's capitalism. Sorry. For the government, raising taxes during bad times like these will only hurt us and keep us in this horrible situation. We need to lower taxes and fill the jobs needed that would help us get us out of this hole of debt whatever that might be.

Robert Laughing

January 12, 2009 01:32 PM

Cut taxes? WHO will pay for Govt? Fortune did a piece on the taxes paid by all: the BILLIONAIRES paid at most 20%! 20 LOUSEY percent!!! You, a middle class (and nearly extinct worker) paid more like 25-35%. I just LOVE the equity and fairness of our Congressionally inspired tax code. Congress steals more in Social Security Trust Funds, then squanders it in pork. WHEN someone like say, Rube Rubin makes his $17 million for aiding and abetting, don't you THINK he should be PAYING 35-38%??? Same for ALL those folks....but no, they pay just 20%. Of course, if you simple whine, and continue to REWARD the 20, 30, 40 year CAREER THIEVES in Congress, we all GET, what we so richly DESERVE!

Mark

January 12, 2009 01:42 PM

A tax cut will give people more money to spend thus boosting the economy. Reagan cut taxes in the 80's and resurrected the dying economy that Carter created. If we are going to get out of our economic crisis, we need to cut taxes for the people that pay taxes. We do not need to redistribute wealth.

Government spending is never the answer. FDR's policies extended the great depression according to UCLA economists. Obama's economic plan greatly resembles FDR's New Deal. If this is implemented we could experience another great depression.

FBEye

January 12, 2009 01:43 PM

Eric, Higher TAXES will not work! Higher TAXES will only work to keep the government going, and the government has completely FAILED in its MAIN GOAL, hasn't it? The government is supposed to "protect the people", right? Well, look what's happened right here in the USA since 2003. Our economy is on the brink of a total COLLAPSE, isn't it? Just today there was an Article on the web that said 9,000 homes PER DAY continue to go into FORECLOSURE! It's NOT stopping! It's actually getting WORSE! More expensive homes are now the ones going into foreclosure! The government got WAY TOO BIG, and they DIDN'T see what was happening RIGHT HERE in the USA! FORGET about the "terrorists" over in the Mideast for a moment, and consider the TERRORISTS right here in the USA! The $700 Billion "bail-out" will NOT WORK! Raising TAXES will NOT WORK! Just watch. P.S. If Wal-mart unionized, then they'd have to RAISE their prices, correct? HOW would they pay for the increase in wages? You see, RAISING PRICES, & RAISING TAXES, will NOT WORK! Also, WHERE are most of Wal-mart's products made? Answer: China, Japan, Korea, Mexico....... The USA is in DEEP "doo-doo" right now!!! The government needs to shrink by about 65%. That would help all Americans! Guess what? They don't care about YOU & ME!!!!! They'll "SAY" that they do care, but it doesn't matter what they "SAY", it matters what they DO! Watch the rest of American's RETIREMENTS, 401K's, IRA's, & PENSIONS, DISAPPEAR in 2009.

PJs of Economic Comeback

January 12, 2009 01:44 PM

Very well written, excellent reading, the article definitely addresses the basic broad angles necessary before breaking it all down before picking at everything, lifting it up to see what's underneath, trying it in another position, this really is a very perilous recession this time around, one wonders what takes it to a full blown depression. FYI AT&T has just raised its basic local calling plan from $5 to $7.95 a month, almost a $3 per household hike. That negates anyone's plans at throwing out $25 basic DSL with the new local calling at $7.95 for a total cost of $32.95 a month, with a long distance calling card, v. replacing it with $6.95 dial up internet service. With the new unlimited local calling to get you unlimited time on the internet with the dial up, it's now $32.95 to stay w/ AT&T v. $19.95 to go to dialup with unlimited local, the savings would have been around $6 a week, a pork shoulder roast, and now the savings is $3 as of today, a bag of spaghetti noodles and a jar of spaghetti sauce. The other surprise hit over the last pay period was Citi, who almost doubled their once a year optional finance charge, taking on average $250 extra from our checking accounts on average per household.

John

January 12, 2009 02:01 PM

Couldn't we just give more money to rich people? I thought that was the way to improve the economy. Giving money to poor people is the absolute opposite of Reganomics. Or are we ready to admit that doesn't work?

FBEye

January 12, 2009 02:37 PM

In my opinion, the FEDERAL RESERVE needs to be ABOLISHED now!!!! In my opinion, Wall Street, along with every PUBLICLY HELD Company, needs to go NOW! We MUST change EVERYTHING in the USA before we build it back to a true power again! Our government is NO LONGER on the side of the PEOPLE! It's part of the big "GAME", and that "GAME" needs to end, NOW!!!!!! Taxing the PEOPLE to death is NOT the way to go! If you like taxes, then send in ALL OF YOUR MONEY to the government! Watch what they do with it! It'll be STUFFED right in their POCKETS! Maybe Governor Rod Blagojevich can go to Washington and ADVISE the new administration as to HOW they can DEFRAUD the PEOPLE of the USA? WHY NOT! He's PERFECTLY cut out to be a POLITICIAN, isn't he? "Only a PAWN in their GAME!" - Dylan

FBEye

January 12, 2009 02:56 PM

Bob Snyder, If there's a CODE that says people should NOT pick their noses while they're driving their cars, but there's NO LAW that states picking one's nose while driving a car is illegal or against the LAW, which one should we trust to be ENFORCED? Guess what, Bob? There's a CODE that's been around in America which implied that Americans should keep to themselves, and NOT speak-out, over the last 100 years or so! But there ISN'T a LAW against SPEAKING-OUT, is there? Happy New Year, Bob!

Leslie Schwartz

January 12, 2009 03:16 PM

Tax cuts will do nothing to address the root problem.

It will not create jobs and neither will a cash rebate create jobs when everything is imported.

It will increase or maintain jobs in China though.

The root problem is that for the past 30 years the people who get to make policy decision became convinced that exporting jobs would not harm the economy.

But prosperity does not trickle down, it bubbles up.

When you impoverish the middle and working class you ultimately will ruin the investment climate in the US and that is now what has become the huge problem, along with the attempt to create an economy based on an endless series of financial bubbles.

We can not live on a fake economy based on exporting multilevel financial investments.

When we do actually produce wealth that we and the rest of the world can consume prosperity will return, until then, hand outs and tax cuts will amount to nothing substantial.


Mike Reardon

January 12, 2009 04:10 PM

A house has two values, one is the fact value its sold for and the other one adds in the interest that will be paid on the loan you have to repay. The houses face value and that full return value, determine what its value is to investors.

Over these last 8 years investors, hedge funds and banks have all done some magic things with that full return value. A refi that gave you and extra $15000 was not a problem.

All the creative finance that came into the markets as liquidly, came as much from borrowed money from China as that creative reinvestment behind this extra housings valuations full debt return.

Those full returns are becoming hollow with foreclosures and those returns of houses that are now underwater investment to owners. Any draw down in price now goes right against the full returns investor can realize, that is the double problem for highly leveraged investor going forward.

This is going to become a much slower banking system. Get ready for real four square banking going forward, where you must have capital saving for a deposit on any major purchase.

Listen to Mr. Mandel, and take the money and pay down your debt so you can have real disposable money from here on out.

And everyone stop trying to shrink anything that still has a face value. The real value on some of these businesses is the price of the scrap metal in the structures they own.

No one but Government is going to invest in holding up the markets, make the banks support and invest in the build outs behind that government investments. If housing stops building for a year and carmaker stop making cars, we will only get 21 million unemployed who can’t pay taxes. The only expansion this year will be from businesses taking market share from failing competitors.

John

January 12, 2009 04:47 PM

It's clearly a complicated issue but there's quite a lot of evidence that tax cuts don't produce as much bang for the buck as spending on infrastructure and suchlike. The other benefit of infrastructure spending is that you have something to show for it. The package needs to be a mix of items but supply siders are so totally discredited, perhaps that's why the author swears he isn't one, that's not quite how I remember it but we'll let that pass, so I'm inclined to go with people like Krugman on this. The current administration and it's supporters of whom Mandel has been one, has had such an incredibly awful record economically that they just don't have any cred any longer. Basically in Summers, Geithner and Romer we have to trust. I don't think Mandel has much to contribute to this.

Tod

January 12, 2009 05:53 PM

Here is a thought...

If My people, who are called by My name, humble themselves and pray and seek My face and turn from their wicked ways, then I will hear from heaven, will forgive their sin and will heal their land.

Recession Proof Business

jdflorida

January 12, 2009 06:44 PM

The fastest and most efficient way to stabilize the economy and ultimately return to growth is to lower COPORATE and PERSONAL income tax rates along with capital gains tax rates.

Corporations will see an improved risk reward ratio for new investment (read: jobs and profits) and individuals will be incentivized to work and have more disposable income to spend.

The Obama tax cuts are weighted to the least productive workers or assets in the economy. Fixing balance sheets will be aport of the solution in the long run but it wont be very effective in the short run.

There are trillions of dollars in money market accounts at the moment; an enormous explosion of assets. LOTS and LOTS of cash. More than EVER before. Those dollars will sit there until the risk reward of investment improves and that can be accomplished best and fastest by lowering marginal tax rates and lowering capital gains tax rates.

The Obama tax cut is flimsy . In many cases it will go to people not paying income taxes. Tax cut is alie in that case. It is truly welfare. I'm all for helping the least among us to sustain themselves. The fastest way to find them a job is to??? Re-read above !

joe_joe

January 12, 2009 07:43 PM

To anyone posting that Obama's tax cuts are actually welfare because they will go to people not paying income taxes, please cite your source (Rush doesn't count) because I am appalled at the notion...but am skeptical that it is true.

Jeremy Janson

January 12, 2009 07:55 PM

It should also be noted that the progressivization inherent in Obama's plan would cause economic harm that would make it much more difficult to get to where we should be going. Frankly, I'd rather do without and prevent the economy from becoming any more lopsided towards cash-flow then it already is.

mulp

January 12, 2009 09:03 PM

Tax cuts don't work to end recessions as we have seen from the failure of the Bush tax cuts to end the 2001 recession. In fact, the Bush tax cuts have only served to delay the recovery from the 2001 recession.

I am using the logic of conservatives who argued that FDR's administration did not end the great depression, but only delayed the recovery back to 1929 unemployment levels. The Bush tax cuts have failed to restore unemployment back to the levels whe he took office, and failed to prevent the credit crisis.

And by "putting money in the pockets" of individuals we ended up with roads to nowhere because those with the money in their pockets didn't step up to repair or rebuild old failing bridges.

Its a good thing that Republicans know to call for earmarks, or else I-35 would be a road to nowhere. Thanks to earmarks and government that is the solution and no the problem Reagan and Bush sought to make government, a bridge replacement that was not shovel ready was replaced in 15 months from the failure of the I-35W bridge to it carrying traffic. And it was replaced under budget and ahead of schedule.

So, enough of saying that government can't replace failing infrastructure quickly, because it was done in the past year already.

David Kielek

January 12, 2009 10:52 PM

Wow reading some of these comments I can see how Americans got into this mess! The level of economic ignorance is appalling, although not surprising, with our government run school system. First of all, it is the CONGRESS, JOHN, NOT the PRESIDENT, who is responsible for the federal budget. Yes, the president has his share of the budget, which, in this day and age, probably amounts to quite a lot of money, say, $100 billion annually. However, in a 3+ trillion-dollar economy, that is a drop in the bucket. So when you say that "The current administration and it's supporters of whom Mandel has been one, has had such an incredibly awful record economically" you are basically ignoring the fact that the economy was going pretty strong until the DEMOCRATS retook control of Congress in late 2006. THATS WHEN oil prices started spiking, unemployment started rising, and consumer confidence started tanking. The republicans have their share of the blame as well, I don't blame it all on dems, but their socialistic mindset is death on business. And guess who we have just given the keys to the kingdom? The biggest socialists we could find! Thanks, Obama, but KEEP THE CHANGE!

ben

January 12, 2009 11:43 PM

b

Lord

January 13, 2009 12:13 AM

There are tax cuts and there are tax cuts. One that gives a set amount would be better than one that changes rates. It might be time for a negative income tax, though this would be better on a weekly or monthly basis rather than yearly basis. Particularly to the unemployed whether they qualify for benefits or not. Especially to those not working. That is where it would do most good besides government investment.

willywashere

January 13, 2009 01:35 AM

Rich, ha ha, the rich don't pay taxes as they are way smarter than we are and usually live on a very small salary, and don't realize any gains. We don't have a wealth tax so its just you and me to keep the fat cats, fat.. Just remember.. the new boss is the same as the old boss. If you think they aren't you're just fooling yourself. Hey, I wonder if there are anymore senate seats to sell?

Andrew

January 13, 2009 02:31 AM

If you really think about it, tax cuts are the last thing this country needs right now. Deficit spending simply makes government MORE expensive as it is. Most economists agree that we need to invest in our economy through either tax cuts or spending. But if tax cuts are less efficient than federal spending (as it has been shown) and if tax cuts only guarantee that a decrease in government revenue(which it does) will make any deficit spending even more expensive... why are we considering tax cuts again? Is it because people simply want more for what they are doing rather than using tax money to create more jobs? Is it personal greed?

Andy

January 13, 2009 02:42 AM

It should be noted that these are not tax cuts BY DEFINITION--they are tax CREDITS, or, money handouts to the lowest two income tax brackets.

Beyond my general disgust for this communist highway robbery (note the Robin Hood-esque redistribution of CASH from the rich to the poor), it's obvious that these money handouts are next to worthless. They will not fix America's credit problem. They will not create long-term jobs, will not fix the credit problem, and will not help solve any long term economic problems. Period. All we can expect from this is a short-lived spike in retail spending.

This would be a different story if we were discussing cutting capital gains taxes (which Obama is raising), or income tax rates (again, he's generally raising them or holding them steady) because those help fix the risk-reward ratio in favor of entrepreneurs, who, ps, help to create jobs when it's worth the risk.

This might even be a different story if we were discussing funding education or other useful services. Which reminds me that, yes, green power is a solid investment.

Chris Bennett

January 13, 2009 02:54 AM

You are exactly right, except for the fact that it is mathematically impossible for the US debt to increase significantly beyond where it is right now without precipitating a bond market collapse (the Federal Reserves attempts to intervene not withstanding), which will lead to very expensive borrowing for everyone including the United States government.

The only solution is to let the bad debt default, let the bad banks fail, force the fraud out into the open and the games to stop, and then capitalize new federally chartered banks with fresh balance sheets to get things moving again.

All other plans are doomed to fail.

Wayne Vaughan

January 13, 2009 03:10 AM

I'm embarrassed by reading these comments. How can so many people have strong emotions about something they have such little knowledge about. It's like listening to a bunch of eight year olds argue about whether the Red Sox or Yankees are a better baseball team.

Mike Mandel

January 13, 2009 07:12 AM

Chris writes:

The only solution is to let the bad debt default, let the bad banks fail, force the fraud out into the open and the games to stop, and then capitalize new federally chartered banks with fresh balance sheets to get things moving again.

That would be one solution, but it's pretty drastic. It still requires the federal government to lay out a lot of money, and it would hurt all the people and mutual funds who have investments in mortgage-backed bonds and bank stocks.

richtfan

January 13, 2009 07:34 AM

so let me get this straight........when people save money instead of spending it, nothing good economically happens. What a moronic statement. When people save money, that's the same as investing it. The institution that is holding that money lends it to someone who needs it. That's the way banks make money. By lending money. the best way for us to get out of this is to have a tax holiday for at least 2 months for every single American taxpayer. No social security taxes, fica taxes of any other federal tax. That would put the money back into the hands of the American people. These stupid infrastructure jobs are a joke. Those jobs are temporary anyway. They're not long term opportunities. As soon as the road construction is over, the people will again be out of work and in the same boat as before. Give the people back their own money. NO tax increases of any kind on any group of americans. Tax increases always always always reduce revenue to the federal government. Tax cuts always always always increase revenue to the feds. It's in the history books. At least it's in the ones that weren't revised by liberal publishers.

JOhn Jones

January 13, 2009 08:05 AM

Personally I could care less about tax cutes, I need CASH like all the handouts they are giving out!

www.privacy-web.us.tc

Trey Waters

January 13, 2009 09:35 AM

WRT all of the people blaming China and companies (Wal-Mart) importing goods made in China for our economic troubles...the problem isn't with Wal-Mart - it's with US!

First, China has the capabilities to make products cheaper than we do here because of our decisions (mandated minimum working conditions, mandated minimum salaries, etc.) China does not have these restrictions, or their restrictions are lower.

Second, WE buy the China-made products BECAUSE they are cheaper, ignoring the more expensive US-made products, forcing US-based companies to move their manufacturing outside of the US to be able to compete with cost.

If everyone would be more diligent in making purchases of US-made products, the jobs would stay here. As long as people are only concerned with price and not origin, most products will continue to be produced in the most cost effective locations.

Before I get flamed on my comment above - I'm not making a judgment call on our imposed working conditions. I do realize that they improve the safety and living conditions of workers. I'm just pointing out fact in that these represent real costs to employers (companies).

Dood

January 13, 2009 11:17 AM

Long story short, Obama's not going to cut taxes at all because the government has already spent too much money on the bailouts. If they take another 300 billion dollar hit then that's another 300 billion plus interest to pay back to foreign lenders. Foreign borrowing is exactly what Obama should avoid because spending money we do not have is the crux of the problem in our hollowed-out economy. Get real people. This thing's gonna get a whole lot worse before anything gets better but that's what needs to happen. We should have bit the bullet and let the free market flush out the assets underwater, let the companies go bankrupt and stabilize interest and inflation rates instead of inflating the dollar to "infuse liquid capital". The steps already taken are only going to prolong and intensify the economic downfall of this country. Congratulations Ben Bernanke, you have almost single-handedly bullshitted your way into the worst economic situation the world has ever seen. Hooray for bureaucracy.

Sheree

January 13, 2009 12:07 PM

I don't have debt. I didn't buy things or have children that I couldn't afford. The rest of the world has gone crazy, but things are stable in my little bubble.

kthxbai

Patrick

January 13, 2009 01:12 PM

I am still so freaking amazed at how we got into this mess with all this crappy investments. Banks lend out money to people with out any regard to being payed back or having any valid assets to do so. And where were all the Financial Wizards with the Doctorates, PHD's in finance, the government and Wall Street Watch Dogs with their million dollar computer systems when this was happening.? Were'nt they around in the late 80's when this same problem with the ARM's occurred??? I remember it well and I said to my boss the shit is going to hit the fan sooner or later with the ARM ( adjustable rate mortgages). Where were the bank reps and managers and CEO's. Right now States and city governments are in one big hole. They are going to raise taxes on properties that have lost value, increase transportation fares like in New York cut services. So now tell me who will pay for all this? I guess they are counting on those people who still have jobs. Just look at anyone of your utility bills. Taxes,surcharge on top of surcharge, use tax, 911 tax. You name it and there is a tax on it. Where does it all go. There are more taxes in this country than you can shake a stick at.
My thoughts on this are...stop sending work overseas, bring back manufacturing to this country. Put some of the money into the infastructure.. look at New Orleans...still in a hole. Bridges are in need repair, roads, railway and urban transportation. There is too much graft, double entries, pork and other garbage that is hurting this country. The middle class is still the only structure that keeps things going.

econguy

January 13, 2009 03:04 PM

This is where the so called "Irish miracle" needs to be invoked. The neo libs conveniently ignored the fact that it has the lowest corp tax rates in the developed world and instead touted its educational system. It's now time to take another look at that small country without the policy bias and with full information. The eastern Europeans did not need to go there to figure it out, they only needed to look up the rates and tax laws.

Somebody had better figure this out fast because we are headed for an unfunded liability cliff that implies much higher tax rates and lower growth. The old policy crutch of growing our way out of the policy mistakes and unfunded liabilities will not work. Ignore this issue and several generations will suffer.

Web Smith

January 13, 2009 10:48 PM

All of this information adds up to one thing. While we are concerned about being too dependent on foreign oil and foreign manufacturing, we have become totally dependent on banks and they now have a strangle hold on our economy. With predatory lending practices and loan shark level interest rates, they have stripped the population of its wealth. The economy is not based on the banks as they would have us believe and they need to be downsized to their proper role which is not to buy designer clothes or finance junkets in the Bahamas. The population needs cash, not more credit.

Obama's plan to borrow more money from the Fed for the government to spend will result in months of special interest induced wrangling as the Senate, Congress, and the President decide which pet projects should get the money. New agencies will be created and the cost to send out a trillion dollars to pet projects will cause a major portion of it to not hit the economy. The government will only grow and cost more. The government collects about $100 per month in personal income taxes. What is needed is a yearlong tax holiday and to forgive all tax debt. The impact of this will be immediate. This money will immediately start being spent on the things that we need as a society and all businesses will start feeling the immediate benefits.

http://ewebsmith.com/Finance/hiddendemon.html

FBEye

January 14, 2009 01:54 PM

Sheree, I'm just like you! I'm 48 years old, I've never had any children, I have no house payment, and I have no car payment!!! I do have LOTS of FUN!!!!! Happy New Year from the FBEye!

HornBird

January 14, 2009 02:30 PM

Measures which help the average citizen to consume goods and services produced is the right approach in solving this mess.

Joe the Programmer

January 14, 2009 03:18 PM

We need to *stop* illegal immigration, and we need to stop giving away services like free education, in-state college tuition, and health services to people who are not citizens of the United States. The majority of illegals are poor, unskilled workers who take from public coffers and don't re-contribute into them. What you end up with is the U.S. paying for the education and healthcare of all of North and South America. This drives our taxes up and our benefits down. Any 3rd-grader understands this logic. We need to stop this misguided sense of "owing" other countries favors they don't extend to us. DEPORT illegals, BAN illegals from our schools and hospitals, and start treating the United States as a country to take pride in, not some whore to be raped.

dw

January 14, 2009 03:27 PM

the real cause of our crises is the falling (or collapsing) of wages. which lead to that fact be papered over by easy credit in last few years. and now we can't support that as credit has dried up. and i don't get it as to how employees making less was sold to us as a good thing, but it was. and now the tipping point for the economy has been reached. and we are still convinced if employees wages (other than ours of course) were just lower it would all work out. unfortunately every one is that boat. and wages will continue to collapse until we have third world wages. at which point its any bodies guess whether there will be a global or a domestic economy any more

D-Rock

January 14, 2009 04:34 PM

I think a point that is missed by all but a few is that the "wealth" built up over the last several years was never real, as we are all painfully finding out now. It's merely an illusion that has now been unmasked for all to see. What kind of drugs were people on to believe that a 1200 square foot ranch in Compton, CA was worth a half a million bucks, when a decade earlier it was worth less than 100,000, and can I get some of those drugs? I sure could use them right about now. Was the problem that the chickens were counted before they were hatched? I think yes. Is there really a way to fix the mess created by this illusory wealth? I think no.

Mike Mandel

January 14, 2009 07:36 PM

To D-Rock: The wealth was not real, but the debt is. So fixing it has two parts. First, we help recapitalize both the banks and the consumers. And second, we invest in innovation to help dig our way out.

Paul

January 14, 2009 07:36 PM

Can't you people add? You can't have the government bailing out the commercial sector to the tune of $Trillions AND a month later ask for a tax cut, it's simple 1st grade math. The government debt has to be paid back - with interest - and the money to pay for that comes from taxes.
The kind of attitude that would even consider a tax cut viable is the same attitude that built the buy-now-pay-for-it-after-I-die deck of cards empire that caused this busted bubble in the first place. The only growth market now is more efficient use of capital and resources. The reckless days of the baby boomers lumping future generations with unimaginable levels of debt to service long after they've all kicked the bucket has come to a crashing end! You'll all have to live in the REAL world where you EARN a living (instead of become millionaires just because you bought a home at the bottom of the market) and pay taxes to clear the debt you’ve lived off for years.

Bill

January 14, 2009 08:27 PM

Anyone reading this column would benefit from reading blogs and materials from academic macro economists who uniformly favor increased government spending, so long as it is fast. The tax cuts have a lesser multiplier effect, and much of tax rebates to consumers goes to purchase foreign goods or into savings, if it doesn't go to spending. If you are seriously interested in this subject, both this column author and the audience should do some serious research.

Akbar

January 14, 2009 11:23 PM

Welcome to Dubai. 0% Income 0% Corporate Tax. There are no taxes in the UAE.

Dave

January 15, 2009 12:06 AM

as much as multiplier effects are great, not all government spending is good for the situation here. Credit moves the economy. Failing banks starting increasing the unemployment that spiraled to what it is now; rather directly or indirectly. Smart banks are ditching the laws that made this happen and are reverting to provide responsible home loans and help only small businesses when rules can be bent. as much as people work for large corporations like in the auto industry, small business run the economy in the US and they have been screwed for over 20 years now. Helping them and the consumer will eventually fix the problem. Big government spending will mask it, causing us to keep spending to keep up with the failing small businesses. Even in the bailout, small businesses were screwed, and smaller banks were denied tarp money but larger ones received it, and used it to buy out the smaller failing banks like in the case of the PNC-National City buy. the US population bought National city for PNC. PNC took the tarp money and spent a sizable part of it on the purchase of a smaller failing bank. What BS?!?!?! I consider small businesses as companies under 5000 employees, and in that case i believe a lot of Americans are employed by small business and they should make sure policymakers make sure not to leave them out so our jobs are not the next ones cut. then we will have to complain about how terrible the unemployment system is.

judy

January 15, 2009 08:01 AM

Mark is so right about infrasturcture = foreign labor and foreign material. This is an idea of great recession. We are in a different age now.

Matt

January 15, 2009 08:59 AM

These bailouts are dubious; so much for survival of the fittest and capitalism.

One of the issues, for years, has been overspending and market manipulation by the government such as regulating banks in such a manner as to require them to push what they know to be extremely risky loan instruments in the name of providing a standalone house to every American (even those without external income).

There should be a fourth element whatever the government does with regards to this problem: cut government and cut taxes. Put balance back into a budget and force accountability on Congress and the Executive in the same manner in which they require it from business leaders. Have Congress try on a pair of SOX. Let's have some fiscal transparency in the federal budget.

The ever expansive reach of government into all facets of the country have caused and accelerated the deficits. The government has, by all accounts, eviscerated the concept of limited government. This eventuality was foreseen by the founders. We should keep that in mind when we see that politicians who were one of the root causes of the current problem are now declaring they have the solution.

Matt

January 15, 2009 09:39 AM

I think, based on Richard Starr's comment, that we need to change the term "Credit Card" to "LUI" (legal usury instrument)

312Capri

January 15, 2009 10:19 AM

The feds need to eliminate the taxes on 2009 IRA MRD distributions. We Senior Citizens are in a world of hurt with our IRA account losses. Since Bush signed the executive order December 23, 2008 I stopped my 2009 MRD. If it were not taxed I would take it and spend the money to help maintain my current status while stimulating the nations economy!

sam

January 15, 2009 04:22 PM

The author may not be a hard-core supply-sider, but he has possibly bought into the idea that taxes take money out of the economy. Simply not true. They don't burn the money, they spend it. A lot of people who complain about government spending get part of their paycheck from that spending. In the past few decades a lot of money has been distributed upward to people who didn't need to spend it. A lot of cold cash is in cold storage. Taxing the rich more would free up that cash and put it to work increasing consumption.

John

January 15, 2009 08:21 PM

As a construction estimator, my firm will expect revenue growth for the next year if the infrastructure projects that the state DOT's outlined to the Federal Government get approved.

After the fuel spike, lack of state funding for such projects, combined with the economic downturn causing a slowing of jobs in the private sector, our firm is hurting bad.

$70+ billion worth of federal funding for roads, bridges, and infrastructure investments will put a lot of our workers to work for a long time. When we have highways to build, we have money.

Additionally, most of the materials I bid on are supplied domestically. Furthermore, almost all our equipment is produced domestically. The jobs I bid on are often long-term, heavy highway jobs (2+ years).

Micah

January 15, 2009 11:53 PM

Hilarious article! Obama has it right, huh? He sure didn't think so when Bush was wanting more tax cuts and pushed for the economic stimulus! Now, Obama puts together the biggest stimulus our country ever has seen, and he's lauded as a great leader!?! How long are our memories?

The more we try to band-aid limbs of the economy that are decrepit and degenerate, the harder will be the pain when the entire body falls apart. The failures of businesses to compete is all part of weeding out the economy so that the best firms survive. Allow the markets to fail and clean the slate. Otherwise, we're limping along forever.

Idrid Cold

January 16, 2009 08:15 AM

The major problem the US faces is the overwhelming preponderance of undereducated workers in this country. No amount of tax cutting can change the fact that the world is outgrowing its need for manual labor. Automation will eliminate most of these jobs within the next 10 to 20 years. Those that remain will never again be a gateway to the middle class.

Dert

January 16, 2009 08:40 AM

Additionally, most of the materials I bid on are supplied domestically. Furthermore, almost all our equipment is produced domestically. The jobs I bid on are often long-term, heavy highway jobs (2+ years).

qkslvrwolf

January 16, 2009 12:29 PM

"not a dogmatic supply sider" my ass.

When, pray tell, are you recommending we raise the rates back up after your tax cuts so we can pay for shit again, or were you just planning on continuing to cut taxes on large businesses until they don't pay them anymore?

If you look at a conservative's version of a laffer curve, the peak of government income is directly above the zero tax rate.

Idiots.

Mike Mandel

January 16, 2009 03:49 PM

Qkslvrwolf writes: "'not a dogmatic supply sider'" my ass."

Sure I'm not, if you've read my writings. True, I'm not terribly worried about government budget deficits, but that's because the rhetoric of 'deficit-cutting' is usually used to attack essential government spending. I want to see government investment in R&D, in infrastructure, in state and local spending, in education.

James Raider

January 18, 2009 04:05 AM

Sure, reduce taxes, add 3 trillion to the debt, increase the deficit accordingly, and .... hmmm, where is the common sense?

The Pacific Gate Post

name

January 22, 2009 03:45 AM

Question: "How are we doing to pay for this?"

Answer: "ROI"

What's worth more to you, an economy in rapid deflationary spiral or one at max employment (even if the demand is "artificial")?

Sam

April 10, 2009 02:10 PM

how about cutting taxes? many of of my friends at www.affluence.org who normally spend their time making new businesses (ie competition, innovation, value, JOBS) are now going to sit on gold and not do a thing... is it really a good idea to tax businesses so much that it isn't worth creating one?

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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