A Brief Lesson in Real Economics

[zoey]

i dunno man. i didn't trust either Dubya or Gore, but i had more faith in gore. Doesn't matter now, i suppose.

[Mr. Snrub]

Oh look - something i actually know something about.

Tax cuts do indeed foster economic growth. But GW is using the most stupid way of doing it. tax cuts to the rich are inherently damaging to economic wellbeing: wealthy people have a lower marginal propensity to consume (mpc), meaning that of the money they earn they spend proportionally less on goods and services than poorer people. The money they don't spend is "saved", i.e. it is unused (it is removed from the economic flow, and therefore the size of the economy is reduced) or becomes capital for investment. However, investment of this nature is usually purely speculative.
The problem with this is that increasing the amount of liquid capital in the economy, and therefore the level of investment, acts to increase aggregate supply in the economy without a commensurate increase in aggregate demand (although there will, of course, be some). This does of course create economic growth, because it is unstable growth - once the inflow of capital is gone, the excess supply will become unsustainable and the businessses providing this excess supple will become insolvent and collapse. The current problems with the NASDAQ and related companies are a good example of this.
However, when you decrease taxation on the poorer elements of society with a progressive tax system, who, as previously stated, have a higher marginal propensity to consume, you act to increase the level of aggregate demand in the economy, as these people will spend their increased money on goods and services.
The other proven methods that can be used by governments for stimulating economic growth are of course budgetary deficits and loose monetary policy (i.e. low interest rates). Both of these are effective in that they increase the level of demand, and do not create instead an artificial supply "bubble". It can of course be argued that budget deficits create an artificial demand bubble, but that's besides the point.
Monetary policy works because all it is doing is improve access to capital, without encouraging speculation. As the money is loaned with interest, people will only spend it in areas where they have a definite need or where a return on their investment is very probable. Therefore, the level of demand in the economy is increased, but in areas where it is sustainable. This is why the use of monetary policy has taken over from the use of fiscal policy (as keynes advocates) by governments who wish to control the level of economic activity in their countries.
Monetary policy is why people like Alan Greenspan have been so successful in promoting economic growth. Monetary policy is why Australia has seen economic growth averaging 4% over the last 10 years without inflation increasing over 2%. This is why Alan Greenspan was so critical of Bush's plan in the runup to the election. It is well known that politicians cannot be trusted in running the economy, as their outlook extends only to the election. That is why the controllers of federal reserves must be independent. God help us if this ever changes.
Bush't tax plan is stupid, irrational, and deeply political. It is done in the interest of a few rich individuals and not society as a whole.


There were a few holes in the explaning, and being economics it was very vague, but i haven't studied it in over a year so be nice.