Tax Cuts to Boost Consumer Spending? Wrong, Wrong, Wrong

Bloomberg News reports this morning that Obama may ask Congress for “middle-class tax cuts” to boost consumer spending. It reminds me of Mortimer Duke in Trading Places, shouting, “Turn those machines back on!” That is dead wrong. When consumers spent more and saved less during the past fifteen years, the incremental demand sucked in more imports. Between 1998 and 2007 the U.S. ran a cumulative current-account deficit of $6 trillion. Households saved nothing, as the housing bubble boosted their balance sheets. Now that $6 trillion of home equity has vanished, households need to save more, especially in face of the biggest retirement wave in American history.


What America lacks is employment. During the past 40 years, 70% of all new jobs created in economic recoveries came from start-ups. That is not small business so much as small businesses that turned into big businesses. What is remarkable about the present situation is that large companies (the S&P 500) increased their employment by 10% during the 12 months through June 2011. These large companies only account for about 18 million jobs, so the net effect has been small. Entrepreneurs meanwhile are dead in the water.

Obama has imposed a higher threshold on business start-ups than any president in history, through Obamacare, an enormous disincentive to expanding employment (penalties kick in at 55 employees). That’s what is killing the economy. Big companies with existing health care plans and floors full of specialists at dealing with red tape have flourished in the present tough economic environment. Start-ups, by contrast, face the steepest cost incline at the outset. It’s like building an airport with runways that tilt upward at 60 degrees. No-one can get off the ground.

Throwing money at middle-class consumers is misguided. The problem with the middle class is that unemployment by the broadest measure  stands at over 22%, which explains why 18% of every dollar of personal income comes from government transfer payments.


Unemployment is high because private nonresidential fixed investment remains 10% below the 2008 peak (in nominal dollars — after inflation the dip is considerably worse).  What we need is

1) Regulatory rollback, especially Obamacare

2) Elimination of the capital gains tax

3) A cut in corporate tax rates across the board

Graph of Private Nonresidential Fixed Investment

The stupidity of demand-driven Keynesian doctrine is a perpetual source of wonder.


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