May 31, 2003

Fuzzy Math
So, here's a little economics lesson:
What happens when you take in less money while simultaneously spending more money? You go into debt. When the Federal Government runs a debt, they borrow money from the same place you and I do: banks and private citizens (remember those savings bonds you bought?). Except, when the government borrows money, they borrow it in the billions. So, what happens when billions of dollars suddenly disappear from the public space? There's less money that you can borrow for your car, or house, or whatever. And, when there's less of a commodity, the price of it increases. The price of money is interest. So, when the government runs a debt, interest rates go up, and everything else in the world gets more expensive. People have less money to buy things. The economy slumps. People lose their jobs. People, now hungry, proceed to knock other people in the head for money for food. Crime increases.

See how it's all interconnected?

Well, the President would have you believe that, by letting corporations and rich people have tax breaks (thereby shifting the burden of paying for things like blowing up Iraq to the middle and lower class), they'll have more money to spend. Corporations with more money will, presumably, hire more people. Rich people with more money will, presumably, buy things, increasing demand, inspiring business to make more things that rich people want, so they hire more people to help meet the demand.

But let's think about this for a minute: Corporations are required by law to maximize profit for their investors. By incentivizing companies to pay dividends, aren't you increasing the likelihood that these companies will simply turn their extra cash into profit, instead of investing in new employees? Moreover, what do rich people typically do with their money? They invest it in their personal fortunes, i.e. buy things that will make them more money like stocks, bonds, real estate, etc. After all, that's what distinguishes them from poor people. So, they, too, give more cash to corporations to give back to their investors, namely themselves. I suppose the rich go on vacation alot, so that helps tourism. But they don't really eat much more or wear more clothes than they were before. After all, food, clothing, and the like are miniscule expenses compared to the kind of money these folks get back in tax breaks. I also guess the rich by lots of property, possibly for investment, but largely for luxury purposes. My point is that the lion share of that money is never going to make it into the job creating sectors of the economy. It will just ping-pong back and forth between investors and investees, increasing in virtual value simply through the activity of the transaction and making the rich, richer.

So, will this tax cut help the economy? Unlikely. Will it hurt? Well, the federal deficits are already increasing. You do the math.

In the meantime, here's what Michael Kingsley has to say about this mess in Time magazine. Even taken at face value, this dog won't hunt.
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