The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

World Economy at One Minute to Midnight

Over the last week, portents of doom have enveloped the Parallax Brief. Increasingly, a Great Depression of the Twenty Tens looks to be the fate of the world. Lest we forget, the economic turmoil between 1914 and 1945 led to political upheaval almost unimaginable now, and unleashed the horrors of total war on the developed world.

Why do I feel so pessimistic?

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Limbaugh, Heffer Epitomize Right’s Ignorance, Lies on Tax Cuts

My usually rewarding scan of the Wall Street Journal was today polluted by the presence of Rush Limbaugh. Quite what the Journal is doing paying this pigheaded shock jock is quite beyond me. The Journal’s main rival from across the pond, the Financial Times, also employs the occasional celebrity columnist, but they’re always in the mold of George Soros or Zbigniew Brzezinski – voices that add value. What on earth could an ape like Limbaugh add to my understanding of economics, finance and business?

Of course, the op-ed was dripping the kind of arrogance, weasel words and outright lies favoured by Limbaugh and others of his extremist ilk; however, its main focus – a recantation of the extreme right’s mantra that any economic stimulus should be in tax cuts – provides an opportunity to expose the egregiousness of the Right’s argument on this matter.

Simon Heffer, the Daily Telegraph’s very own porcine extremist (pictured below), puts the Right’s argument most succinctly, I think:

“Only one thing will give us an economic revival. It is… the transfer of money from the client state to the productive and private sector of the economy. This means spending cuts and tax cuts. Everything else is simply propaganda.”

What the Right is attempting here, as Paul Krugman has pointed out, is an old bait and switch trick.

It is true that a private person is more likely to allocate capital effectively than a government doing it for him – that’s why private businesses are more efficient than state enterprises. Therefore, all things being equal, if people have more money, they will spend more, and do so more effectively than the government. So instead of spending the money through the government, the argument goes, why not give it to businesses and people through tax cuts, and have them spend it for you, more effectively?

Sounds logical, but that is not the matter at hand, and never was. This argument is the equivalent of answering a different question to the one asked. Krugman explains:

“We’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. Things like roads, communication networks, sewage systems, and so on.”

By doing this, the government can directly stimulate private activity by creating jobs and boosting demand for raw materials, services, and manafacured goods.

Tax cuts cannot stimulate spending in the same way, because in this deflationary environment there are huge economic incentives for private individuals and businesses not to spend money. The idea is to inject the money into the real economy in order to stimulate calamatously declining demand, not remove it by cutting taxes so it can be stuck it in the proverbial sock under the floorboards.

Even worse, the Right wants most of the cuts to go to the higher earners, the group least likely to spend the money.

Of course, the extreme Right, as I have argued before, is an absolutist group that will countenance no departure from their scripture – even when departure is the right thing to do. In this situation, economic theory (and common sense) clearly demonstrates that tax cuts will prove less effective than government spending in stimulating demand, but the right, as represented by the likes of Limbaugh and Heffer, is still screaming for tax cuts.

We must conclude that the Right is either ignorant, or is being wantonly intellectually disingenuous.

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