TJP
THE JETHRO PROJECT
O R G A N I Z I N G F O R E F F I C I E N T O U T P U T
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Obama’s new Republican-like position on taxes appears to have created an irreparable damage between him and progressive Democrats.
The Republican, and now Obama’s, rational for keeping the Bush era taxes for the wealthy is that the Bush tax creates jobs.
The Bush era taxes were passed in a rare Memorial Day session in 2001, when the Senate passed a $1.3 trillion dollars tax cut.
However, after nine years it is clear that the Bush tax cut did not create jobs. If it did we would not be in dire economic conditions.
Thus, the argument that tax cuts create jobs is false. Nonetheless, in spite of Mr. Obama’s campaign rhetoric that we should not be executing the same failed policies and expecting different results, he has acted Bush-like since elected as President of the United States.
Therefore, for many, Obama is a continuation of the Bush era presidency. As a result, he appears to be a one-term president.
Mr. Obama appears not be aware that the multiplier for an increase in government spending has a greater effect on the economy than the multiplier associated with a tax cut.
The multiplier for an increase in government spending is 1/1-c(1-t). If the marginal propensity to consume out of income, c, is 0.80 and the tax rate is 0.20, the government spending multiplier is $2.78. Assuming that the banking system is providing credit, an increase in a $1 of government spending raises output by $2.78.
The multiplier for a tax change is {-(1/1-c(1-t’)}cY0∆t. If income is $1, and marginal propensity to consume out of income, c, is 0.80 and the tax rate is cut from 0.20 to 0.10 percent. Then, for a dollar income, there is an increase in output of $0.28.
Clearly, increases in government spending have a greater effect on output than reducing taxes.
So, why do Republicans continue to win the argument? Progressive Democrats believe that it is the timidity of Democrats allows Republican to impose their vision on the American political landscape.
The argument about what fiscal policy, taxes or spending, is more effective is superfluous. Since, neither can significant reduce unemployment.
The argument ought to be about creating real jobs. And, job creation is about increasing disposable income.
Increased disposable income causes aggregate demand to increase, and hence output and employment.
The mechanism for increasing output is the banking system. However, banks have been unwilling to provide credit to middle America.
Thus, Obama has to innovate, think outside the box. Thus, his administration has to bypass the banking system and become the lender of last resort.
It is only through credit that the money supply expands. And, if the money supply does not expand, disposable income, effective demand and employment will remain stagnant.
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