I Think Demand Drives Supply, Which Drives Job Creation

[MoValley John]

Unfortunately, the Wikipedia model doesn't account for elasticity of demand. If demand for a good or service is relatively inelastic, an increase in price will not result in a corresponding drop in demand. The demand curve for gasoline is relatively inelastic. Demand for steak, on the other hand is relatively elastic, as an increase in the price of steak will cause a larger corresponding drop in demand as people will start eating hamburger (or Ken-L-Ration).

You are right, but I'm trying to simplify this as to why the whole more money equals more demand is a fallacy.

[MoValley John]

One more thing, giving money to the poor can spark a weak economy. It cannot sustain an economy. There needs to be ROI, and if your ROI is eaten up by taxes, two choices are made, increase price or leave the market. If you increase price, all this "demand" created will evaporate into inflation.

[shocka khan]

It's the multiplier effect and its not ROI. The reason supply-side economic theories worked so well when Reagan was president and not-so-well under Bush was that the highest marginal tax rates under Carter were something on the order of 70 percent (which they had been since the 1940's) and around 50 percent under Bush. Another explanation for the Bush tax cuts not delivering the economic expansion that was promised is that the model has changed. Capital is more fluid and will flow to the point of highest returns, which is in third world countries.

So Bush's tax cuts produced a windfall for third-world countries and not so much for us.

Supply side economics works well as a theory when marginal tax rates are high and the tax cuts can stimulate an economy. The lower the marginal tax rates go, the less effective supply-side economics is.

Also note that increasing prices does not stimulate demand. Increasing prices actually shrinks demand, and the amount that it shrinks is based on the elasticity of demand for the good or service.

Lastly, transferring money to the poor is somewhat akin to the opposite of supply-side economics. I agree that paying poor people without attaching work and responsibility to the process doesn't work, pure socialism is not a workable economic system, you only need to look at Cuba and Venezuela to see that. Market disruptions can be caused when the government eliminates the profit motive. Cuba is currently leaching off of Venezuela primarily because they can buy a half million barrels of oil per year at the artificially low price of $5 per barrel. Venezuela is having shortages of consumer goods and oil output is dropping primarily due to the nationalization of parts of the economic sector. The government of Venezuela is rewarding its citizens for being idle and non-productive. The economy of Cuba would fold like a cheap chair if it hadn't been for the Russians (and now the Venezuelans) selling them oil at a significant discount.

[WuDrWu]

It's a big circle, too. When you create taxes for things, you take away money that could be spent in the market place. When you are taxing your people up to 45%, they don't have the ability to support your economy. It gets pretty complicated and at the end of the day you have to ask yourself "how many of our programs and entitlements and benefits are worth what the taxes do to our economy"

Then you have companies leaving the US altogether to get the better deals they get by existing in another country....similarly to how people will move out of New York or California to states that place less burden on them. Taking money from the rich and giving it to the poor may seem like a good idea until the rich decide to move away.

It's noble and good to care for people and attempt to make their lives easier and better, but I'm afraid we will become over extended as a country and marginalize our own economy. Our country needs to take care of its people to a certain extent, but it also needs to balance that with staying free and being competitive with the development of the rest of the world.

Well constructed, common sense and polite commentary such as this are not welcome on the political board, or anywhere in politics. Obviously you haven't been paying attention young man.

[shox1989]

It's the multiplier effect and its not ROI. The reason supply-side economic theories worked so well when Reagan was president and not-so-well under Bush was that the highest marginal tax rates under Carter were something on the order of 70 percent (which they had been since the 1940's) and around 50 percent under Bush. Another explanation for the Bush tax cuts not delivering the economic expansion that was promised is that the model has changed. Capital is more fluid and will flow to the point of highest returns, which is in third world countries.

So Bush's tax cuts produced a windfall for third-world countries and not so much for us.

Supply side economics works well as a theory when marginal tax rates are high and the tax cuts can stimulate an economy. The lower the marginal tax rates go, the less effective supply-side economics is......
.

Actually the top marginal tax rates were over 90% during the 40s and 50s. President Kennedy lowered them to 70%. It still amazes me that our economy was as strong as it was in the 1950s with marginal tax rates that high. It seems to me that there would be no incentive to make a lot of money since the government would literally take all of the additional money made.

[Play Angry]

The tax code back then allowed for more abuse of loopholes, usually through tax shelters, and virtually nobody ever paid effective rates over 60%.

Such a high top bracket sounds draconian but the effective rates from 1951-1963 weren't that much different than they were under Carter or where they're headed in the future.

What's sad is that those high rates back then were put in place to pay off World War II. The upcoming escalation in rates will be implemented to pay off decades of simple overindulgence.

One of them is easier to stomach than the other for those of us with three or four more decades of payroll deductions in our future.

[Aargh]

So far in this discussion, I've seen very little that would support the current tax strategy in Kansas, which appears to be that if employers have more disposable income, they will create jobs.

Jobs are directly related to the demand for the goods ands services produced by those jobs. Unless there is something driving the demand for goods and services, it seems unlikely that jobs would be created regardless of the amount of money available to employers to hire additional wage-earners.

[pinstripers]

Business owners must have profits. If they do not, or if the profit becomes too small, they either close their business, move it to another location, or sell it to someone who will immediately be in the same position as the original owner.

[wu_shizzle]

Actually the top marginal tax rates were over 90% during the 40s and 50s. President Kennedy lowered them to 70%. It still amazes me that our economy was as strong as it was in the 1950s with marginal tax rates that high. It seems to me that there would be no incentive to make a lot of money since the government would literally take all of the additional money made.

Nobody really paid those rates. Between the small percentage of those who actually earned "income" at those rates and the loopholes available, those rates were fictional.

Nobody really spends $100 on aspirin either, but when it fits your political agenda, truth be damned.

[wu_shizzle]

So far in this discussion, I've seen very little that would support the current tax strategy in Kansas, which appears to be that if employers have more disposable income, they will create jobs.

Jobs are directly related to the demand for the goods ands services produced by those jobs. Unless there is something driving the demand for goods and services, it seems unlikely that jobs would be created regardless of the amount of money available to employers to hire additional wage-earners.

The Government can't "create" jobs but that doesn't usually stop Democrats or Republicans from claiming they can.

Democrats love to claim that every dollar of tax money they spend creates jobs and Republicans are usually too often eager to claim that every tax cut creates jobs as well.

You cut taxes because it spurs investment and forces restraint on the State.

I think Milton Friedman said it best:

"I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible because I believe the big problem is not taxes, the big problem is spending. I believe our government is too large and intrusive, that we do not get our money's worth for the roughly 40 percent of our income that is spent by government ... How can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes."

[Play Angry]

Honestly, from the standpoint of personal income taxes, I really don't know that there is a lot more the federal government can do to take it easier on the middle class. Most people in the U.S. overestimate the amount of taxes they actually pay to a laughable degree. A married couple making $100,000 with two kids taking the standard deduction has an effective rate of just 9.6% on federal income taxes. That is, frankly, nothing, but good luck convincing anyone in that situation that they aren't oppressively overtaxed and getting screwed on the regular under the current tax code. Note that they may pay far less if they itemize. When you factor in that the poor pay no federal income tax, you can guess who is carrying the lion's share by a wide margin.

Now, entitlements are a different story altogether. That same family pays $6,200 towards Social Security and $1,450 towards Medicare under FICA withholdings. Think about that. An average family pays almost the same amount towards underfunded (!) social security and Medicare programs as they do to the rest of the federal government combined. There's pretty much no doubt this amount will only escalate as the boomers retire in droves. Social security is such a mess it could have its own sub-forum on this board.

State and local income tax is another matter and of course varies on where you live. Folks in NYC pay city taxes of around 3% on top of state income taxes of 4 to 8.8%. Texas, Florida, Tennessee, New Hampshire, Alaska, etc. residents pay no state or local income taxes, but they zing you hard if you own property and through other avenues. The beat goes on- states get their money one way or another.

Corporate taxes are a different animal but there is an unsurprising irony to the current code- you have to be the biggest of corporations to be able to take advantage of the most generous loopholes. The lobbyists earn every cent the big dudes pay them. I don't think we'll ever see that change in our lifetimes, either.

[wu_shizzle]

[Aargh]

The Government can't "create" jobs ...

Governments can and do create jobs.

Since 1962, the Executive branch of the US government has had anywhere from 2,470,000 civilian employees (1964) to a high of 3,067,000 employees (1990). Military has employed 1,400,000 to 3,100,000, and legislative and judicial has had 30,000 - 60,000 emp0loyees. That's a lot of jobs.

Following the Great Depression, the WPA employed 3,000,000 unemployed workers. The total cost of the WPA was $13.4 billion in 1930's dollars. It took that and WWII to pull the American economy out of a disaster. Both were funded by the government spending more than they took in in taxes. Deficit spending raised the standard of living and put the economy on a fast track to prosperity - and an addiction was created.

In the years since the 2008 recession, the government has spent a lot of money to aid in the recovery of the economy. In the years from 2008 to 2012, non-military federal government employment has increased - from 2,756,000 employees to 2,761,000 employees. An increase of less than .2%. Government spending to recover from the 2008 recession has gone mainly to the private sector so the private sector can use the money to create jobs - unlike the New Deal, in which the government directly created jobs.

If you follow the money trail, most government spending goes to employees. Goods the government buys provide money to people who produce those goods. For example, for a $1 billion dollar aircraft, the only non-wage cost is the cost of the raw materials used to make the plane. Even those have a wage factor because someone mines the aluminum, refines the components for the composites, etc.

When you cut government spending, you create unemployment, which leads to less demand, which creates a multiplier effect on job loss. Government workers whose projects or departments have been cut or eliminated don't just magically become employees in the private sector.

[MoValley John]

There are many people that believe FDR's New Deal extended the Great Depression. I have seen graphs that show economic recovery beginning towards the end of the Hoover admin, that slowed during FDR. Anyway, here is just one essay on the matter.

http://www.fee.org/the_freeman/detail/great-myths-of-the-great-depression

[kcshocker11]

http://iws.collin.edu/kwilkison/Onli...onNewDeal.html