Re: Deficit - so what?

[larson@xxxxxx]

Quoting William F Hummel <wfhummel@xxxxxxxxxxxx>:
> The only cash handout proposed by Congress is the Republican plan
> to refund several years worth of taxes to large corporations.
> That would please wealthy shareholders, but do little for the
> economy.  The fact is there is no shortage of funds for available
> for investment.  There is plenty of cash sloshing around in
> mutual funds, pension funds, hedge funds, money market funds,
> insurance companies, investment banks, etc.  The current problem
> is on the demand side, not the supply side, as is almost always
> the case.  With the manufacturing sector now faced with the
> largest over-capacity since 1983, most producers have no
> incentive to invest further.  Rather they are cutting employment
> because of the lack of sales, thereby further reducing demand --
> a classic case of positive feedback.

This is a good point. Modern financial investment institutions have shortened
the horizon of return much like our patience has been shortened by the web
click. Instant response or don't bother. However, a recession might give a
healthy cold shower to the wealthier part of those with cash "sloshing" around.
The unacceptable drawback is, of course, that recessions always hit those with
small or no assets hardest, and without a firm fiscal policy to back them up
the long-term perspective turns really bad. Productive investments become less
attractive when prospective consumer spending falls, and the only way out of
this is designated deficit spending. Your suggestion of quick-to-see tax cuts
for wage earners seems reasonable, but it will have to be backed by an anvil
reliable promise that it won't be revoked a year hence, or else the confidence
effect is lost.

/srl


--
Sven R Larson
PhD; Assistant professor of economics
Department of Social Sciences, Bldg. 22.2
Roskilde University
Pb 260
DK-4000 Roskilde
Telephone: (+45) 4674 2910