Take 2

We got to watch the first hour of the second debate, although we were watching on BBC World, which went down every minute or so and prevented us from actually hearing some of the comments. We believe that Georgie did much better this time than the time before. He just has a way of connecting with the people that John Kerry doesn’t have. That being said, we both think that Kerry did do better than we expected. We liked his taking the offensive on issues.

One thing that I would like to clear up (this is tp talking now). When we talk about tax cuts as a demand stimulus, it’s important to think about how we make these tax cuts work. I take the principle of decreasing marginal utility of money as a given: rich people value a dollar far less than poor people because a dollar makes more of a difference for a poor person. It follows that poor people will change spending patterns more readily, and drastically, when given money than will wealthy people. The probability of tax break money being actually spent is higher for them. Increase consumption means increased demand, which leads to higher production, which strengthens the economy, which is the goal of the tax breaks. The increase in money in the economy does lead to inflation, but in aggregate, real earnings still increase for those people. Tax breaks for wealthy people are more difficult to understand. Increasing the supply of money for rich people may lead to increased investments in productive capacity, but it is less likely to do so because it has less influence on their spending patterns, and does nothing for the ability of regular folks to consume the things produced. If anything, it reduces the real value of their wages, since the supply of money in the economy is greater. This is, yes, stagflation. If Bush is committed to jumpstarting the economy through tax breaks, he should be directing them towards the people who are more likely to consume. Oh yeah, and he shouldn’t increase non-defense discretionary spending.

You will notice that nothing that I said here is “democratic” or “republican.” That is all.

(JM) Whew, I’ll say. Don’t worry if you didn’t understand parts (or all) of that. I get running commentary and have a personal tutor and I still get confused sometimes! That being said, this stuff really is interesting if you take a moment to try and work it out. More on our real life adventures tomorrow….

Comments 2

  1. Steve Shewfelt October 11, 2004

    Nice photos, Tom and Julie. It looks like you two are having a great time, with the exception of the occasional Suharto’s revenge.
    I’m inspired to write by the political debate (no surprise there). The key question, it seems to me, is whether or not the tax breaks truly benefit a significant number of people whose wealth is wrapped up in small businesses. If so, then the argument about the marginal utility of the extra money in people’s pockets loses some of its bite. Wealthy people, per se, may not be very likely to invest in increasing productive capacity, but small business owners probably are. I’m inclined to think that this tax break doesn’t very effectively target small business owners. It seems to be more of an attempt to give money back to all the rich folk and hope that some of them will reinvest.
    On a related note, it is kind of funny that W is willing to put all sorts of faith in long causal chain arguments about social behavior (e.g. the tax breaks and the domino theory argument about all the dictatorships in the Middle East transforming themselves when they see the miracle of democracy in Iraq), but he just doesn’t think there is quite enough real science to believe that we’re destroying our environment. Maybe he knows something about polisci that we don’t.

  2. Tom October 12, 2004

    Hey Shewfie– Interesting thoughts. I’m still not sure that the tax breaks can have much of an effect on aggregate demand if the goal is to target production rather than consumption. Someone has to put money in the consumers’ pockets in order to consume. Investment in small businesses, like W’s wood company, cannot itself be sufficient to stimulate demand.
    The long causal chain point seems unfortunately all-too-true. Too bad that people don’t change their minds when you point out their logical inconsistencies to them.

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