Louis' Ramblings

Economic Rant (Part 1)

Okay, I have been ranting at a bunch of of my friends lately about economics and tax policy lately, so I figured what the hell, time to subject anyone foolish enough to read my blog. In this post I am going to focus on why cutting Taxes in the context of the current economy does not help people.

DISCLAIMER: I am not an economist. I have never had any formal training in macro or micro economics. The only formal study I have ever had on the subject is some highly theoretical mathematics work on derivatives trading about 7 years ago.

First, lets discuss some basic principles. During the course of normal economic transactions wealth does not disappear. Ii is mostly zero sum transactions (I buy something from you, you give me some money, a bit is taken by the government, and I give you an item which I had a specific value for). The amount of wealth in existence has not changed. You and I may differ in what the intrinsic value of the purchased item is, but from either point of view the amount of money in existence is constant. The second fact worth mentioning is that in an economy whose currency is not directly backed by a fixed commodity printing more currency does not increase the amount of wealth in existence, though it does implicitly devalue the existing stock of currency, and therefore redistributes wealth from everyone to the printer (in my case the United States Government). Wealth is created in very specific ways, either invention of new ideas, the exploitation of natural resources, etc.

Now some history. A lot of things people say are pure conjecture. It is hard to experiment with economic policies. But we can examine what has happened in the past. Given the fact that wealth transactions or generally zero sum, and in the absence of wealth creation or inflation money can be used as a proxy for wealth, we can say that generally when there is a depression the amount of money (and by proxy wealth) does not drop (all you screaming about the stock market and unearned gains quiet down, I will deal with that in a future post). So what happens. In the great depression basically all the wealth stored in the market ended up gathered in a few people's hands. So there were a few very rich people, and the rest of the country suffered massively. Taxes were almost non-existent compared to today.

Now what can we draw from this. First, having the wealth of the nation being highly consolidated seems to be empirically bad. We can probably make the claim that the more times a piece of currency exchanges hands the better it is for the economy as a whole. We can also can also note that the worse economic drops in the history of the country have tended to happen during periods of low taxes. It also means that rich people are bad for the economy. The more money that they someone has the more consolidated they make the economy, and the more money that is not being actively used in standard economic transactions throughout the country. Likewise, people living month to month are great for the economy, since the money the get quickly goes through several economic transactions before getting either recycled into someone else's pay, or unfortunately consolidated into some large pool of wealth

Now, I am not arguing people should live month to month. It may be good for the economy, but it is bad for for personal security. The point is that there should be a happy medium. The other point to take home is that if any tax cuts really do have a relatively short term effect on the economy than it would be tax cuts on people who are immediately turning over the money, people living month to month. As the case is that means payroll taxes in the United States, which is how the majority of Americans pay most of their taxes, and is interestingly the sort of taxes that the current administration has been loathe to cut.