Wednesday, July 31, 2013

Latest Grand Bargain is (mostly) a Grand Waste of Time

It's so frustrating to know how the economy works(MMT), and then watch a bunch of men who don't, try and improve the national economy. Here is a one line sentence explaining how to grow an economy.

People need to spend more money so that there will be the increased demand for new jobs and new business.

That's it.  But let's look at Obama's latest Grand Bargain proposal from a critical MMT perspective.  Obama's plan has 3 parts.

  1. Simplify the corporate tax code
  2. Try to coax companies to "repatriate" their foreign money holdings
  3. Use the tax increase to fund infrastructure jobs.

The firsObama_and_Mitch_McConnell[1]t plan is to simplify the corporate tax code in 2 steps.  First, it's going to eliminate several deductions and so-called "special interest" loop holes.  That will increase the amount of taxes the government collects.  The second step is to lower the tax rate to the point where the money gained by closing loopholes is roughly equivalent to what's lost by lowering the tax rate from 35% to 28%.  Overall this is "revenue" neutral.  Will this help the economy grow?  Hell no!  At best it might make the economy run more efficiently(always a good thing!), but it won't grow.   It won't grow because all they're doing is changing who pays what, and not the total amount taxed.  No growth.

The second part is to get companies with foreign money holdings to bring the money into the country.  Normally, there is, apparently, a tax on doing that.  Therefore, companies leave their earnings overseas.  This estimate says there are over a trillion dollars out there.  Obama's proposal is to try and get those companies to bring in the money by offering a one time, low tax, to do so.  From an MMT perspective this would be bad for the overall economy because it's taking money out of the economy.

The third and final part of the Obama plan is to start funding infrastructure and job training programs.  From an MMT perspective, increasing government spending will be good for the overall economy because it will increase demand for jobs and business.  Hooray!

The reason I call this plan a waste of time is because, the first part offsets itself and the good in the third part is offset by the harm of the second part.  Making these plans revenue neutral will never give the economy the boost it needs.  Infrastructure jobs that aren't offset with tax increases will.  Tax cuts that aren't offset by tax decreases will also do the trick.
If there is any redeeming part of the proposed 'grand bargain' is the possibility that money will be shifted from those who are letting it sit, to those who will spend it.  That's why I added the qualifier(mostly) into the title.  If that money is truly just sitting in a foreign bank, collecting low interest dust, then shifting the money to infrastructure and creating jobs for the unemployed will help some.  My guess is that only some of that money is "just sitting there", the rest is being reinvested into other enterprises and will only end up moving around who gets it.

The thing that Obama, along with the GOP that's already dismissed the whole thing, don't understand is that the government doesn't need that money to spend on infrastructure.  The government can't run out of money anymore than a stadium can run out of points on a scoreboard.  Therefore, we can grow this economy until unemployment is back to a non-embarrassing level.
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