Friday, December 10, 2010

It's All About Demand

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Albeit in a sidelong way, this blast of the blindingly obvious from Matt Yglesias tells us everything we need to know about the merits of the proposed tax cuts:
If everyone in Yuma, Arizona is unemployed then even a very competent proprietor of a dry cleaning establishment is going to have a hard time expanding his business. He won’t take out a loan to expand, he won’t get an equity investment to expand, and he won’t invest his own money in an expansion. You can give the guy all the money you want, and he won’t invest in expanding his business. That’s because unemployed people don’t need much dry cleaning and also don’t have much money to spend on dry cleaning. A guy with $0 and a good idea and a lot of potential customers will find a way to start his business. A guy with $1 billion and a good idea and no potential customers is just a guy sitting on a huge stockpile of cash. Things like the availability of credit matter, but credit is currently available. What’s not available is customers with money and an inclination to spend it. More government spending and more money-creation will lead to more purchases, more customers, more business expansion, and more hiring. Then people with good ideas will make a lot of money and complain about their high taxes.

While allowing taxes to increase on January 1st would be detrimental, the US economy doesn't need tax reductions. It needs employed people who have enough money to purchase goods and services. The excessive millions of unemployed and underemployed are already paying little in taxes because income and payroll taxes are not levied on earnings that don't exist. If these millions of people had more money and some prospect of continuing to earn it, they would be able and willing to buy things, and if there were more people with more money to buy more goods and services, businesses of all kinds could expand. Taxes have little to do with any of this.

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American businesses can't exist, let alone thrive or expand, without customers. Customers can't exist without income. Jobs are needed far more than tax cuts.

2 comments:

Eli said...

Holy hell - that last graph is terrifying.

Dale said...

Sigh. Terrifying is right.