Cutting, and ultimately eliminating taxes, is dear to the
Libertarian’s heart. After all, since
taxes are expropriated under the threat of violence, they are in essence State
sanctioned theft. Unfortunately, unless
tax cuts are accompanied by a concurrent cut in government spending, the tax
break is simply accounting magic. In a
fiat currency system, if taxes are cut but spending isn’t, the government
covers the revenue gap by printing money, shifting the burden from direct tax
collection in the present to indirect future collection in the form of
inflation. (Borrowing the money is no better as it forces future taxpayers to pay not only the principle on the initial program but also interest on the bond.)
While Obama’s plan does offer some beneficial and much needed
tax cuts to businesses, his plan also targets low- and middle-class income
earners, even those who do not pay income tax, in the form of payroll tax
credits. While this sounds compassionate,
from a Keynesian economics perspective there is another motivation at
work—these folks are more likely to spend this money than save it.
Keynesians believe that economic growth is achieved through
consumer spending. In reality, consumer
spending is actually a by-product of economic growth. Real economic growth is created by
delaying consumer spending, in other words, by saving and investing.
The Keynesian solution to climb out of a recession is to stimulate consumer spending by increasing available money and credit. Of course, the Keynesian prescription runs
counter to the Austrian economics philosophy which is to let the mal-investments liquidate,
thereby allowing the economy to return to sound footing with a more efficient
allocation of resources.
Obama’s plan follows the Keynesian prescription to a
tee. It also reinforces my contention
that the real danger that Americans face is not deflation but hyperinflation.
The credit contract that has resulted from the bursting of
the debt bubble has resulted in a deflationary environment. Forced liquidation has caused many
institutions to sell whatever assets they could in order to shore up their
balance sheets, resulting in a stronger dollar and a drop in the price of
assets of all classes.
In order to combat the deflation caused by the credit
contraction, the Federal Reserve has massively expanded the monetary base
. The problem thus far has been in getting the
money into circulation. Despite efforts
to get banks lending again, the velocity of money (along with the money supply,
the other factor that leads to price inflation) has remained low as individuals
and institutions hold onto their dollars.
The American Recovery and Reinvestment Plan is just what
Dr. Keynes ordered. By cutting taxes for those more likely to spend than save,
Obama hopes to stimulate consumer spending.
By expanding government programs and “investing” in infrastructure,
alternative energy, education, and healthcare, more government dollars will be
showered on the economy.
In addition, Obama’s inauguration may cause a sea change in
the American psychology. FDR once said
that the only thing we had to fear was fear itself. In reality, the thing we had to fear was FDR’s
socialist policies. But Obama will say
similar things. People are scared and are doing exactly what they should in this situation--saving their money. Obama, however, will tell everyone that everything is okay and they should get back to the business of being consumers. While folks may scoff at
George W. Bush encouraging them to spend, spend, spend, they may react differently when the Messiah
Currently, the low velocity of money is the cork in the
inflationary dam. Knock out that cork
and the dam bursts, unleashing a massive wave of price inflation.