To Stimulate the Economy

"It ain't so much the things we don't know that gets us into trouble. It's the things we know for sure that just ain't so." This quote is often attributed to Mark Twain (although there is some doubt about that). In any event, it is true.

This is a good part of what is wrong with the economy right now. That is, the current administration has gone through the litany of truisms, none of which are, in fact, true. The primary goal is to stimulate the economy.

When I was young the common saying was that war stimulates the economy. My daughter even tells me that she was taught this in school. Yet, as a student during the Viet Nam era, I was told, "we [the United States] will always need to have a war to stimulate the economy." Since I was taking an economy class at the time, I repeated this question to the professor. His response to me, personally, was, "War destroys a lot more than it builds up." Therefore, he reasoned, war will not stimulate the economy.

Still, this truism was taught to people in school, to the point were, when Bush first took office he pushed for a war to stimulate the economy, and got it. (For this discussion, the reason for the war is irrelevant.) I have seen polls within the last year or so which indicates that people are starting to see the foolishness of this truism, at last. That is, not that people are polled, "Do you believe war stimulates the economy?" but rather people are polled, "Do you think the war in Iraq is destroying the economy?" The latter is agreed to by the majority of people.

It might be worthwhile to see where this truism came from, and it is easy to see. Macro Economics is a relatively new field - I believe it dates to about a century ago, so almost all the observations are from this period. The big economic event of this era is the Great Depression, from about 1929 to about 1939. What is observed is easy - the economy collapsed (sound familiar) in 1929, the most visible aspect was the Stock Market crash. It continued despite much government spending that was supposed to end it until about 1939.

Another big event on the World stage was World War II, which started in 1938, although the United States did not become involved until December, 1941, and ended in 1945.

Therefore, people see the end of the Depression as being the Second World War, and the assumption is made that there is a connection. And there is, but not the connection that gets credit for it. That is, the truism, "War stimulate the economy." was born, but it wasn't the war.

I have already made reference to the fact that the war started, for most of the world, in 1938, when the United States was in the Depression. The economy was stimulated as a result of the Second World War because Europe, and Hitler in particular, conveniently destroyed the European industrial infrastructure. Therefore, the Europeans had to come to the United States to buy big ticket items, for example planes, and wheat. Many wealthy Europeans traveled to the United States to live. The result is that there was an influx of cash, and this influx of cash, and wealth, ended the Great Depression; it stimulated the economy.

Now let's look at another truism, "Tax cuts stimulate the economy." This truism was first made popular by Ronald Reagan. Therefore, Bush, true to this truism, cut taxes immediately after taking office. I was alive during the "high tax years" of Bill Clinton, when he stood up to the Republican Congress and vetoed the budget rather than allow them to institute massive tax cuts for the wealthy. This was the good times. Unemployment was down, people were doing quite well.

Then, Bush pushed through the tax cuts to stimulate the economy. It amazed me he would think about stimulating the economy, because things were going so well. Suddenly, the economy started to go downhill. Then, the 9/11 incident happened, and Bush suddenly became like a God, he had his war to stimulate the economy. And any economic problems could be blamed on 9/11.

I remember reading a news article in early 2002, which graphed the leading economic indicators (several, as I recall) for 2001. What is showed was ignored by everyone, as far as I know. It showed that the economic affects of 9/11 were completely absorbed by the economy by the end of December, 2001. That is, it showed, not the the indicators had gone back to it's pre-9/11 values, but rather that they had been dropping going into 9/11, and that they had returned to the projection of their values given the previous decline.

Like the "War stimulates the economy," the "Tax cuts stimulate the economy," has a history. In the 1950's the taxes on income was outrageous. This predates me, but from what I've seen, people assumed an Income Tax rate as high as 90? or higher for some people. At this time, Europe was starting to rebuild their infrastructure, and business in the United States was starting to feel the pinch, as Europeans could now get things locally. Therefore, a stimulus was pushed for. Kennedy pushed through a tax cut (I understand) which appeared to stimulate the economy. Yet, I would not be surprised to find the real effect had been to welcome back those people who had fled the United States due to the high taxes, therefore increasing the wealth in the United States, therefore stimulating the economy.

As I said, Reagan popularized this truism. That is, he said he would cut taxes, and the economy would be stimulated so much that revenues would increase. Therefore, he could also increase spending. He did, and the economy went south. That is, the unemployment rate hit record highs, the Stock Market crashed. I remember many big chain stores that closed their doors at this time, although the wealthy got to have more European vacations, so they thought things were going great.

It became so obvious the papa Bush pushed through a huge tax increase. This, coincidentally, corresponded with the beginning of the longest period of economic expansion in United States history. Then can the kiddie Bush, as I have said.

Therefore, I will ask the question, "Do tax cuts stimulate the economy?" Given the facts I've presented, I doubt it. Therefore, the fact that McCain is calling for more tax cuts to stimulate the economy sounds really stupid. One wonders when the economic collapse will progress to the point where people will realize that this "fact" is, in fact, not true. Fiscal responsibility will stimulate the economy. That is, balance the budget, any way you can, whether through spending cuts, or tax increases, or whatever.

For me, I'm voting for Obama on the hope that the net effect of his tax policy will be enough of a tax increase to stimulate the economy. I don't know that it will be.