Liquidity trap

["Barry Brooks" <barrybrooks@xxxxxxxxxxxxx>]

While reading Paul Krugman's "THINKING ABOUT THE LIQUIDITY TRAP,"
http://www.wws.princeton.edu/~pkrugman/trioshrt.html, I was surprised
that he concluded that fiscal stimulus would not work.

His reasoning was based on the assumption that "tax cuts will not
stimulate spending."  And, "the income generated by the purchases
will not lead to higher consumption, because it will be matched by the
present value of future tax liabilities."  This is the kind of reasoning that
leads to acceptance of the recent claims that tax cuts for the rich will
stimulate the economy.  Failure to distinguish between taxing the poor and
taxing the rich is hard to understand without suspecting that political
motives are behind it.

He considers debt and tax cuts, but he never considers tax increases
as basis for fiscal policy.  It's clear that the basic problem is that when the
investing class has more income than they can spend or invest the
extra money must be taxed or borrowed to maintain the previous level of
demand through government spending of transfer payments to the poor.  If
the surplus income of the investing class is not taxed or borrowed it will lead to
speculation and demand deficiency rather than that surplus income being
returned to a productive component of the economy.

The economy could run very well without debt if we simply taxed the money
we would have borrowed.

Barry