I’ve been reading “The Great Unraveling” by well-respected economist, Paul Krugman. It came out in 2003. In it, he details how President Bush and the Republican Party promised big tax cuts in the 2000 election campaign. These tax cuts were conceived at the height of the Tech Boom in late 1999. Bush and his party said it was time that people be given some of their own money back instead of the US government piling up ever larger surpluses, as it had been. Paying down the US government's ever-expanding US$8 Trillion debt and building up reserves to fund Social Security and Medicare for aging baby boomers wasn't something he was concerned about.
By the end of 2000, the tech boom had turned to bust and tax revenues were falling significantly. There were not going to be any more big surpluses but there need not be large deficits either. The economy was slowing and there was a serious risk of the US slipping into recession. Alan Greenspan, governor of the US Federal Reserve (central bank) began lowering interest rates.
With no surpluses to pillage, Bush and his party shifted gears and sought to justify the big tax cuts by saying they would give taxpayers more spending power and boost the economy and growth - um….next year. As Krugman points out in detail, these tax cuts were going to create a US$ 2.3 TRILLION deficit over 10 years. This was before 9/11 and the invasion of Iraq…which has resulted in that figure doubling to almost US$5 TRILLION.
Krugman says if you want to boost a slowing economy, it would be far better to lower interest rates and increase spending to help consumers now than to give them a tax cut in 6 months or next year or in two years. By then, the economy may be reviving and the cuts merely add fuel to the inflationary fire. You'd then have to raise interest rates and transfer those tax cuts from people with debt to a bank instead. They still end up without "their" money.
In 2001, after concern from the Democrats about the effect on the deficit, Bush went ahead and implemented those big tax cuts and the deficit duly exploded, leading Krugman to predict - rightly - that we would inevitably see higher interest rates, inflation and ultimately - stagflation. His tax cuts were to kick in a new level each two years, coinciding with the electoral cycle. He also scrapped the inheritance tax.* *
We’re almost there already in NZ, based on the consequences of what Bush did in the US 7 years ago, and now National wants to repeat the same errors with our own government finances. National is promising to implement tax cuts in a bust that were conceived in a boom, shifting rationales just as Bush did from giving people back their money to stimulating the economy.....next year....while it slows down right now.
Incredible.
Finance Minister, Micheal Cullen’s strategy appears to have been the correct one. He has said several times that there would be a downturn and it has now come to pass. I should say I have had the same expectation. Mine own view was driven by the parallels between the likely economic and fiscal consequences of Bush invading Iraq and the consequences on those same things of Vietnam war. In both cases, huge deficits lead to a fading US dollar, higher interest rates and inflation and ultimately to stagflation. I’ve been planning for it for 5 years myself. It was screamingly obvious to any student of history what the effect of Bush invading Iraq was going to be……for the whole world, not just the US.
We must also factor in the impact of climate change and peak oil, two things National is still in denial about.
Cullen appears to have seen the present downturn coming at some point and has been prudently planning for it. His actions and statements make that clear.
It’s equally clear that National hasn’t got a blind clue what is going on or why or they would never have promised big tax cuts to begin with.
Read Krugmans’s book. His concerns of 2000-2003 have turned into the reality of 2008. He called it 5 and more years ago…..bang on.
NZ risks repeating Bush's error of implementing tax cuts without regard for the state of the economy or future risks to tax revenues.
** Concern about affordability of Bush's tax cuts was sufficient that a provision was included in the law that will see it expire at midnight, December 31st, 2010. At that point, tax rates will return to the 2000 levels and the inheritance tax will resume. As Krugman blackly jokes, an American's wealthy granny will be worth a lot more dead on December 31st, 2010 than than she will be if she dies on January 1st, 2011.
Daily review 15/09/2025
4 hours ago
Hi Truth Seeker,
ReplyDeleteI too have read Paul Krugman's the Great Unraveling and his other book, a Return to Depression Economics.
What I dislike about him is his overriding faith in politicians and government bureaucrats to always act in the public good when theres a substantial body of evidence to prove that it is patently not the case.
Not to mention the fact that irregardless of whether Bush cut taxes, its arguable we'd be facing a global recession anyway.
In the early 1920s a Russian economist named Nikolai Kondratieff identified four phases of a capitalist business cycle Spring (Expansion or boom), Summer (Stagflation), Autumn (Growth Deflation), and Winter (Depression)
What it appears he didn't appear to identify was the cause.
That is the expectations of people to get a return on their investments for merely deferring consumption, which from what I have deduced has reprecussions throughout all four phases.
(Spring), is generally precipited by the need to recover from the preceding depression. Its characterised by substantial expansion of credit and monetary stimulation, investment in productive capacity and development of infrastructure, high employment, fast economic growth, and widespread prosperity and consequential eurphoric optimism.
(Winter) Labour upon seeing the revenues that are accruing to the capitalists begin to demand greater share of the product of their labours and are further emboldened by their increased employment rate reduces the "reserve army of labour" willing to compete for jobs, which as a component of other price pressures feeds into costs of products.
This period is also characterised by a battle between the different factors of production over the share of surplus wealth and as it was prior to the Great Depression, since the liberalisation reforms of the 1980s, its capital that inevitably wins, because of their greater wealth and influence, which results in excessive overproduction and underconsumption as the workers who make the products can't afford to purchase them. This is especially relevant now with unheard of increases in productivity due to the automation and Information Technology revolution and the outsourcing phenomon.
To further compound the problem much of the surplus value or profit
is invested in speculative enterprise as real estate and commodities in order to hedge against inflation, which further stimulates wage demands from labour and thus puts added pressure on prices.
In the 21st Century these external pressures disguise the "productivity" gains of automation and "outsourcing" as they show up in the final cost of the product.
What we should have seen is deflation.
I'm convinced that the powers that be in Washington, New York, London, and Frankfurt have decided that exploiting the FUD that surrounds "Peak Oil" as a means of preventing or at least postponing a deflationary economic collapse similar to the Great Depression, but I think that the financial mavericks overreached themselves and put the plan in jeopardy.
The liberalising of the capital markets due to the reforms in the 1980s resulted in finance becoming almost completely decoupled from the real economy, which only makes the matters worse.
After experiencing an economic crisis in Argentina during the late 19th Century, the businessman, Silvio Gesell, felt compelled to examine and attempt to deduce the cause of the boom/bust economic cycle. He concluded that the monetary system as it stood, encouraged the expansion of credit when interest rates were low and as the productive cycle advances capitalists profit share, is invested, or in his opinion hoarded, which he though (rightly) inhibits the flow and distribution dynamics of money.
http://www.highbeam.com/doc/1G1-53449308.html