Frank the Financially Savvy Atheist - The F.S.A.

First a intro econ course from a person who almost failed econ, me :). Aggregate Demand¹ is made up of four components: Consumer Spending, Investment from Businesses, Government Spending, and Net Exports. Tax cuts are designed to stimulate consumer spending. However, consumers are smart people (mostly) and if you tell them they are getting tax cuts, but they believe the cuts are going to be temporary then the effect on Aggregate Demand will be muted as most people will just save their money instead of spending it.

So in this extremely limited context, one can make the argument that Bush and the Republicans were "right" to effect the tax cuts and not only that, but they are "right" to constantly harp on the fact that they are trying to make the cuts permanent. They need to let people know to spend, rather than save so that the effect on consumer spending will be greater. Also, this is purely from a positive economics basis which doesn't begin to get into value judgements: are tax cuts only benefitting the rich? Is the American tax system fair? We're just not addressing that right now.

Now, tax cuts generally lead to deficits and deficits aren't all bad. Large, record breaking deficits however, need to be dealt with, otherwise they will be problematic. The analogy I like to use is that we hit a rough spot in 2001 and had to run up our credit cards, but now we need to do more than just pay the minimum payments.

The economy is much more complicated than what I've posted here, but that gives you an idea of how to look at it. Plus, it's better to be informed than the typical knee-jerk liberal Bush-bashing. Not that I don't enjoy the occasional knee-jerk reaction to Bush's remarkable stupidity, but I try.

This post was inspired by: A Democrat Tax Wall.

¹ A proxy for aggregate demand is GDP

Tags: personal finance tax cuts