Myth: Tax cuts stimulate the economy; government spending does the opposite.

To comment on this video, go to: http://beingism.org/community/?q=node/13

In which a man with an exceptionally creepy mustache explains why both tax cuts and government spending may or may not stimulate the economy, depending on who the tax cuts go to and what the government spends money on.

Note: This video is part of a series which debunks myths pertinent to laissez-faire capitalism. Many points not addressed in this video can be found at the above link.

Myth: Tax cuts stimulate the economy; government spending does the opposite.

Overall, the evidence is not consistent with the belief that the level of taxes or government spending has a large effect on economic growth. There is no clear link between periods of low taxes and high growth. The strongest period of growth in U.S. history was the 1960s—when the top marginal rate was 70 percent or higher. More recently, economic growth in the 1990s was quite strong, despite the 1993 increase of the top marginal tax rate from 31 percent to 39.6 percent. In addition, after-tax income gains have been significantly larger among the top five percent of tax filers—the only group affected by the increase in marginal tax rates in the 1990s—than among the rest of the population. More detailed economic research also finds no evidence that countries with lower tax rates or higher levels of government spending experience stronger economic growth.[Source]

Neither government spending nor tax cuts necessarily stimulate the economy. Indeed, some kinds of government spending—such as that which essentially distributes money to powerful corporations—almost certainly will not help create an economic boost. This is the kind of spending that occurs when corporate power, acting through government, is inadequately checked. Any reasonable person would have a problem with this; it certainly qualifies as waste, and libertarians and progressives should be working together against it. However, there is plenty of evidence to suggest that government spending on other kinds of things (to name just a few examples, mass transit and freight rail, "smart" electrical grid transmission systems, and wind and solar power) can and does stimulate the economy:

Nobel laureate Joseph Stiglitz and now-CBO director Peter Orszag wrote in late 2001, Basic economic analysis indicates that increased government expenditures can indeed be stimulative, and, in fact, are often more effective as stimulus measures than tax cuts. Similarly, two senior Federal Reserve economists found in 2002 that increases in government spending tend to have a greater stimulative effect than tax cuts that have the same cost, because more of the increase in government spending will translate quickly into an increase in total spending in the economy, while a substantial part of a tax cut will generally be saved.[Source]

This only stands to reason. Individual spending on productive ends stimulates the economy, and there is nothing magical about the process of individual spending on productive ends that makes it fundamentally different from government spending on productive ends. Further, when it comes to whether tax cuts to the rich or to the poor are more likely to improve economic prospects in general, the answer is pretty obvious. If spending stimulates the economy and wealthy people are more likely to save and invest their money than poorer people, tax cuts to poorer people will clearly be of greater advantage to the economy than those to wealthier people.

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[ryansatori28]

Great video!! Makes a lot of sense, Progressives and Libertarians need to come to gether because 30 years of Regan politics has given us 13 trillion in debt!!

[Beingism]

@ryansatori28 Thank you. We agree—it's easy to forget our commonalities sometimes.

[Americaisgreat123]

No, because if the government for example followed the constitution to begin with, we would have never had a bank bailout or the corporatist "stimulus" bill because the constitution does not allow for the Congress to do those things. They are not listed in the short list of things they are allowed to do under Article 1, Section 8 of the Constitution.

Big businesses loves big government because then they can rent seek by using government to their advantage to stifle competition.

[christo930]

The US is in a recession because we put massive amounts of resources like equipment, capital and labor into building houses because the fed blew up a housing bubble. The housing sector and all the jobs it supports needs to shrink back down to free capital and labor to pursue other economic activity.

[FreeEcon]

True in one sense, but false in its implication. First off, when we had a 70% top tax bracket, that was after it was cut from 90% before. Second, Clinton reduced government spending, which is another key part. Often times, taxes are cut, but spending stays the same or even rises. That's the major problem. Sure, government could do something right with it, just as a broken clock is right twice a day. But it lacks the structure that would make it choose good policies and avoid bad ones

[guidedmarkets]

@l3GaliZEFREEdome38 "Whenever there are in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right." —Thomas Jefferson

[saagua1953]

Facts say exactly the opposite. From 1951 to 1963 the top tax rate in the US was 91% (on incomes over $400,000). The real inflation adjusted growth rate of the economy during those years was 3.34%. Shrub lowered the top tax rates drastically in 2001 and 2003. What was the real inflation adjusted growth rate of the US economy during those years: 1.60% or less than half the rate when top rates were very high.

[guidedmarkets]

@aaasssfffdddiii Right, but alas, this shall remain a point of disagreement between us.

[aaasssfffdddiii]

@guidedmarkets Ya, that is a point we can agree on. The reason I commented on this video was that it claimed that my opinion is nothing more than a myth. I simply pointed out that, in fact, there is alot of evidence that governemnt spending hurts the economy, while lower taxes help the economy.

[guidedmarkets]

@aaasssfffdddiii *shrug* Well, I wish I could say I agree, but I figure agreeing that there are things government should do and things it shouldn't is probably as close to an agreement as we're going to get to.

[aaasssfffdddiii]

@guidedmarkets I took your comment as meaning that you think all economists agree that the government should "boost" aggregate demand. If not, that is my bad. Yes, the government certainly has basic responsibilities. As for keynesianism, the data that shows excess government spending hurting an economy is a major blow. You should read Henry Hazlitt. He wrote a chapter by chapter critique of Keyne's book. It was devastating, yet academics and politicians continue to buy into keynesian myths.

[guidedmarkets]

@aaasssfffdddiii Keynesian economics (which, incidentally, is very far from discredited, and in fact there's been renewed interest in it during the last few years) doesn't have much to do with it. No economist is going to deny, for example, that building transportation systems (buses, roads) that allow people to get to work will have effects that stimulate the economy. Some might claim that this would be better done by the private sector, but this is immaterial to the point we're arguing.

[aaasssfffdddiii]

@guidedmarkets You are mischaracterizing my statement. You said that all economists believe spending can "stimulate" the economy. This suggests that you think all economists believe in keynesianism, which is not at all true. All economists do believe their should be a government, as do I, but many do not believe in stimulus spending. By the way, keynesianism is a widely discredited theory, both theoretically and empirically. I call it keynesian mythology, which is more accurate.