Don't be confused by Keynesian stimulus
Heh, it's funny that this economics professor says what I've been saying here the last few days. Maybe it's just confirmation bias on my part, but I swear that I thought that the idea of the interplay between interest rates, business lending, and tax rates was my own from reading the news. Lo and behold I'm not the only person for whom these things are blindingly obvious.
If you've read the news recently, you may have come across the following three items: reports that big companies are borrowing large amounts of money cheaply but aren't hiring new workers; reports that banks are able to get money cheaply from the Federal Reserve but aren't lending it to small businesses; and arguments that a failure to extend the Bush-era tax cuts for the highest income brackets would be a disaster for the economy.
Because so few people are buying, big businesses see little reason to increase their work forces to produce more goods. They're borrowing money not to expand but just to lower the interest payments on their existing debt, much as a homeowner might choose to refinance when mortgage rates are low.
[...]The supply argument goes something like this: Wealthy people invest a lot. These investments provide money for businesses to expand, which in turn provides jobs. So increasing taxes on the wealthy will cost the economy jobs.
The problem with this argument is revealed by our first two items. Businesses are already borrowing large amounts of money, but they aren't expanding -- and they won't until demand increases again. So even if allowing the tax cuts to expire were to decrease investment by the wealthy, it's unlikely this would lead to further job losses.
Money collected as taxes does not simply disappear; it's spent on something. Whether a tax increase on the wealthy will lead to an increase or a decrease in total demand depends on how that money is used. If, for example, the money is used to supplement the incomes of the unemployed or the working poor, overall spending would almost certainly increase. Why? People who are living on the edge will spend almost all of that money, while people whose immediate needs are already met would save a significant part of it.
Okay, so that's like, half the article I guess, but it really is the most important main ideas. (Hopefully not too much.) And they should be so damned obvious to anyone who has any knowledge whatsoever about macroeconomics.
Contrary to some people here, I believe that supply-side economics does work. When they're called for. Which is why they were so effective in the 1980s. In fact, it's ironic how people tend to ignore Reagan's tax increases while touting his tax cuts. Of course the irony of the fact that eliminating deductions and loopholes is a "tax increase" shouldn't be lost on anyone.
We need to return to the Clinton-era tax brackets and simplify the tax code by reducing or eliminating incentives and deductions, etc.