2009-01-25 | Filed Under SteveG's Posts |
Follow this link to read Paul Krugman’s Thursday piece on what was wrong economically with President Obama’s inaugural address.
One thing I would like to see Obama do is to correct people like Rep. John Boehner who claim that giving tax cuts is the fastest way to stimulate the economy.
Boehner’s claim might have some credence during normal times. However one of the key insights of Keynesian economics is exactly why tax cuts fail to stimulate the economy in times of deep recession or depression.
For any rational individual actor who is afraid of job loss, the best thing to do with a tax refund or cut is to save as much of it as possible. This may put lots of money into banks, but the banks are not lending right now. Why would a bank lend money to a company that might fail when the banks are teetering on the brink themselves? Why would a company invest in more capacity when their sales are shrinking?
So a large part of any tax cut will sit on the sidelines waiting for things to get better.
The only major actor who can take a chance on investing money at this time is the U.S. Federal Government. When other investors see the government putting money into some industries, then they will feel safer in investing money there, too. This will unlock some of the money that is sitting in cash reserve accoounts waiting to be invested.
I have heard that there are trillions of dollars sitting in semi-liquid assets waiting for the economy to turn.
Follow this link to an article by Steven M. Teles that offers another explanation of what I am trying to say.