Monday, February 16, 2009

How to treat a recession IV

We often hear claims for tax cuts by free market advocates in times of a recession. Generally, they are right: cutting taxes allows people to control a greater share of their resources, thus making production according to public demand, not government fiat more profitable and thereby increasing the likelihood of an economy that actually satisfies people's demands.

But there's a catch: cutting taxes only works if government spending is cut by the same amount or more at the same time. Otherwise, it'll be merely make-believe: while you may have some more dollars in your wallet, your government will already be engaged in deficit spending or monetary inflation to keep up with the cost of burdensome state programs.

The current recession seems to be a prime example of this schizophrenic mentality: in order to reach a "compromise", supposed free marketeers and those who put their trust in government agree to cut taxes, but increase spending ("stimulate the economy") at the same time. That's like eating your cake and having it, too. You can only spend money once: either for private sector needs and wants or for state purposes. If both compete for a finite amount of goods and services, prices will go up and your tax cuts will essentially vanish.

Not only is this a very dishonest method of trying to buy as many political sympathies as possible, but it's more of the same "let our grandchildren pay" mentality. At some point in time, debt incurred by a state will have to be paid back: either by taxing every bit of surplus wealth out of those who are still producing, a sure-fire way to economic collapse. Or by madly inflating the currency, another quick road to economic turmoil through hyperinflation. Or by pleading with creditors to forgive debts which they will only do for a good amount of political favors - which means that the bosses you can still vote on will be subject to the decisions of another layer of creditor functionaries - so you'll be even more screwed.

In conclusion, be careful whose tax cut plan you support. Paying less is only reasonable if less is being spent as well. Otherwise, nothing fundamental changes about the unsustainable attitude of spending until the cows come home.

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