Idea for a tax extension compromise

[angus]

The best compromise for the Bush tax cuts would be to extend the cuts for everyone making under $1,000,000 a year rather than $250,000 a year.  This would likely affect less than .05% of all taxpayers and would not harm the economy, as most people making this much money dont spend a high percentage of their income, unlike middle class taxpayers. 

Obama should throw cold water on any plan that extends all of the Bush tax cuts for any amount of time.  Its bad politics, bad economics, and bad for economic equality. 

I'm no fan of tax increases, but he campaigned on the 250K didn't he?  Our federal government budget deficit is around 90% of our aggregate GDP and this isn't sustainable.  He should make the case.  If you really want to grow the economy, cut the corporate rates but let ALL of the Bush taxes expire.  But Obama did promise 250, so that's the appropriate goal for his administration.

Also, the new congress should repeal or dramatically reduce the scope of the massive health care bill recently passed.

We should also consider means-testing for Social Security and dramatically raising the minimum age.

Most importantly, we need some austerity measures.  Time to cut some spending (some welfare programs and subsidized union activities, for example, as well as hiring freeze in the federal civilian workforce).  Unfortunately I don't think the new congress (no matter which party controls) will have the courage to do this.

[angus]

No, austerity = depression, angus.  The way out of a deflation/depression is massive government action.  It isn't hard to accept once you drop the false dichotomy between 'private' and 'public'.

okay, I'm not an ideologue, and don't automatically recoil at the idea.  I know that the Make Works programs of the 30s did decrease unemployment, and when everyone thought the depression was over they cut spending and it got worse.  So that's the model you look to, presumably, when you make such statements.  It's a valid one.

But we can also note that the ongoing model shows that countries with high deficit-to-GDP ratios have longer-term problems.  There's also the foreign-owned debt problem, and the fact that we no longer know how to make the goods here and we therefore have huge trade deficits with emerging markets.  It would be one thing if you could do it the way FDR and his cronies did.  Their spending ultimately went into the U.S. national product.  But if you earmark huge sums for science, agriculture, public infrastructure improvements, and the like nowadays, the money spent on the crane makes its way to Japan, and the money spent on the turbomolecular pump makes its way into Germany, and the money spent on consumables like gloves and hats and boots and pipettes and syringes makes its way into China.  Maybe that's okay.  I'm not sure.  But I do know that it's a different world order from the 1930s, so you can't hang all your hopes on that model and expect exactly the same outcome.  

[angus]

Money spent on fiscal stimulus should be strictly required to be made here in the USA.

Some inherent problems in that as well.  It may be that the specific gene sequencing device you need to buy is manufactured only in France.  Or that the lithium you need is mined only in China.  You can encourage US-made goods, and in the 1930s that would have been great, because there were many US made goods.  Back then, all you really needed to go outside the US for was tequila and silk.  And I don't mind a few dollars going to Jalisco and Oaxaca if it makes for a good party, or a few dollars going to China if it means the softest sheets and pajamas.  But I don't want boatloads of money going redistributed, by fiat, from the US taxpayer to the rest of the globe.  It's really a dilemma.  Let me buy anywhere and I'll buy from the cheapest supplier.  Let me only buy from US manufacturers and I'll limit myself to sub-standard equipment in certain cases, and not even be able to find it in other cases. 

[angus]

don't bring in fairness, because it's a joke that other countries don't heavily subsidize their own industries. The US has historically been more committed to free trade than anyone else, which our large trade deficit is a prominent exhibit thereof. We are entitled to a little favoritism when the case is fiscal stimulus.

Inside every moderate Democrat is a Republican struggling to break free.  

Okay, good points all.  I'll surrender specifically on the point of favoritism.  After all, if the stimulus is to bolster the US economy, you have to make some stipulations.

In the broader context, you have to address the huge federal government's budget relative to the aggregate economy.  Regardless of opebo's comment about private and public sectors being arbitrarily defined (assuming he's serious), it's a real concern.  So does the stimulus really help grow the economy, or does it simply delay the inevitable contraction which must necessarily follow the irrational exuberance of the preceding decade and a half?  If it is our time to recognize that we are no longer the biggest bully on the block, we can admit that gracefully and move on.  After all, China's stimulus was only a fraction of what we did, and theirs was more more targeted, and therefore more effective.

[angus]

Ah.  Yes, I guess if you look at the China stimulus relative to that country's GDP it was big.  I was thinking of the actual amount, in dollars, compared to the US stimulus.  Sure, relatively it was huge then.

Also, yes for the past two years we're going through a contraction, stimulus or no, and we are also delaying the natural contraction, or if you don't like the word "delay" since it implies a forestalling, then let's call it a lengthening of the contraction.  Either way, the magnitude of the contraction will be controlled by market forces, and the stimulus only slows it down, so instead of being out of it in five years, we take ten, or twenty, and in that way perhaps get used to the idea of ten percent unemployment.  Not sure that's an ideal situation.

[angus]

It is entirely within government power to control the level of unemployment,

...but not without affecting the inflation.  Increased employment means increased demand for goods and services, so that means firms experience a decrease in spare capacity and decrease in volume goods not sold.  Higher unemployment, on the other hand, means greater price competition.  Also because higher unemployment makes it harder for workers to bargain for higher wages, wage inflation will decrease during the period of rising unemployment. 

You can't tweak one variable on the economy and expect to keep all others constant.  I see you already recognize this anyway with your analysis, but that's another thing to consider.

All of this is a little off-topic, by the way.