Well the reason why it could work is that in order to get even richer, the rich invest their money. This investment produces jobs and thus helps the employment rate. The return on the investment then makes rich people richer. But here's the thing, extending the tax cuts will not increase funds available for investment, it will just keep that amount the same. But with increasing savings rates across the board, there's actually a good amount of economic "slack" in the system, meaning that if the rich lose some of their money to the government it will not change significantly the amount they are investing.

Ultimately the problem is on the demand side but its not the unemployed causing this. The unemployed are disproportionately among the poor end of the population to begin with (college graduates still have an unemployment rate of 4-5% while high school dropouts have an unemployment rate of over 15%), and this part of the population doesn't contribute that much to demand to begin with.

The "problem" is that savings rate I talked about. People are now scared of going into debt and losing their job. This means even wealthier people with secure jobs are cutting back on their spending. In the short-term this is a bad thing as it depresses economic growth, lowers incentives for investment, and means there is less need for productivity to rise to meet demand (and if you don't have to increase productivity much you don't have to hire new workers).

In the long-run, a higher savings rate (5-10% vs. the negative savings rate right before the crisis) will have a number of beneficial effects. For one thing, it will provide local funds to buy treasury bonds, thus lessening the American government's dependence on foreign debt-holders. For another, it will mean people will have a greater safety net in times of recession and thus not need to rely on government funds as much. In addition, a higher savings rate will mean Americans buy fewer imports and thus help re-balance America's trade deficit without resorting to harmful tariffs or protectionism. Finally, a higher savings rate will provide more funds for start-up businesses both as people use their savings rather than loans and as more loanable funds banks can offer to people.

So what's happening in the US right now is an adjustment period towards a higher savings rate. The trend doesn't look to reverse itself anytime soon, which could eventually be a good thing, though the transition period sucks.

"The unemployed are disproportionately among the poor end of the population to begin with (college graduates still have an unemployment rate of 4-5% while high school dropouts have an unemployment rate of over 15%), and this part of the population doesn't contribute that much to demand to begin with."

I don't mean to sound dispassionate or cold, but with the exception of one case I'll give in a moment, I'm really not shedding many tears over 15%+ emplyoment for high school dropouts and below...

As shoddy as it may be sometimes we DO offer public education in this nation and you ARE, as a child, expected to pass and graduate and gain said education so you can become a functioning member of society (and hopefully much, much more.)

If you throw away your education...well, you've thrown away the chance to be prepared for a job and so if you lack qualifications for THAT reason I have little sympathy, there are enough people WITH qualifications that don't have jobs to deal with and help first, those aht hurt themselves by allowing themselves to stay uneducated don't deserve help, at least not before those who at least did gain an education are helped.

Notice I said "ALLOWING" themselves to stay uneducated. Here's my exception--if you lack an education because of forces you COULDN'T control, that you wanted to finish but were unable to because, say, you had to go work in the coal mines to support your family or became so extraordinarily ill that you couldn't even be homeschooled, at THAT point, then yes, you DO deserve some slack and leeway and assistance, it wasn't your fault that you didn't receive your education--you wanted to and tried to have one but forces outside your control didn't allow for it.

In THAT instance, yes, help them.
But if you don't have that HS diploma because you were a druggie and dropped out or never showed up to class or just didn't pay any attention and wasted your time talking about how gay that quadratic equation or that Shakespeare dude is...sorry, you've failed yourself, and there's no reason for me to lower myself to help you if YOU wouldn't even help yourself, or try to, when you had the chance. You ruined your life, you fix it.

(That's not to say a HS diploma's a great thing, though, we have a pretty poor education system in a lot of the nation...)

I agree with what Scourge said and just wanted to add one more thing.

In economics there is this theoretical taxation curve called the Laffer curve. Basically it says that increasing tax rates will increase tax revenue up to a certain point, at which increasing tax rates will decrease revenue because it discourages people from spending. We don't want to raise income tax to such a high rate that we are essentially punishing the rich for working. No, we want the rich to work so they employ other people and pay income tax, etc. No one can say exactly where that point is on the Laffer curve where increased taxes start having a negative effect, but I think thats what the tax cuts were going at

Some of what Scourge said is valid, however the problem is not (cannot be) "on the demand side". Demand is a consequence of production of goods is increased by savings, investments and underconsumption. The problem we have now is a consequence of the boom years; in turn the boom years were a consequence of overconsumption as encouraged by demand-side thinking.

A tax cut for the rich will stimulate more saving, because the rich save a helluva lot more than the poor (for obvious reasons) but it can only really work if there aren't inflationary policies with the money supply and spending is cut so that it isn't just a deficit build up. It seems unlikely that Bernanke and Obama will pursue such a route.

RE the Laffer curve, the point of highest revenue sits at tax rates of about 25-30%

...

Guys, I can follow the ups and downs of "Hamlet" or "Oedipus Rex" or Dante's "Inferno" pretty damn well, I can keep up with Twain or with Steinbeck or Hugo, or Plato or Locke or Nietzsche...

But I am TOTALLY lost on most of what you ahve all said about demand and tax curves and the rest...

My level of understanding this? I barely know what it means to put a 1 or a 0 in the tax form they give you when hired to determine how much is deducted for taxes from your pay...



All I read in those responses are words, words, words, full of sound and fury, and signifying nothing--at least so far as I can understand it. :)

@obi - i understand your thinking about children being responsible for making the best of their oppertunities and I would always encourgae them to make the best of the hand that they are dealt, but they have no influence on the hand that they are dealt. To take extreme examples one would expect a child in Finland to outperform a child in Somalia, not because the Finish child is inherantly brighter but because he/she has access to well funded education and is influenced by their society's norms. Even if they didn't like school and struggled in class they would still end up 'brighter' than the Somalian child who may become a child soldier at 12. In summary equality of oppertunity is 95% of the issue, making the most of those oppertunities makes up the other 5%. I think it is hard for you to therefore blame the receivers of education rather than the providers.

Wow obiwan. I'm kinda shocked that you would say "Notice I said "ALLOWING" themselves to stay uneducated. Here's my exception--if you lack an education because of forces you COULDN'T control" as though that's the exception to the rule.
The truth of the matter is the phenomenon of high school dropouts are not just lazy teens who can't be bothered to write an essay. The socioeconomic factors that influence that are so much more complicated. If the normal case was that high school dropouts were just lazy kids who didn't want to work, we'd find that they distribute normally through the population. Instead we do not. We find that disproportionately, drop outs are the children of very poor families, and often the children of dropouts themselves. Because in exceptionally poor families, working or making money as a teenager is, in the short term a much better use of time and resources than going to school.
I understand that you get literature and philosophy Obiwan, but perhaps it's time to branch out a little and become a better rounded person. I understand literature and philosophy just fine, and yet sociology and economics are not completely beyond my grasp either, and neither is actual hard science or mathematics. Just because you're good at one thing, doesn't mean you should limit all your reading to that thing.

@scourgeOfGod - you stated that people being afraid to take on debt is a bad thing (in the short term). I'm not sure if this is the case. If I earn $20,000.00 per year for 40 years, I have $800,000 to spend on goods and services. If I borrow money so that I have more money upfront I have less to spend on goods and services because some of my money now needs to service my debt (interest), therefore my demand for products and services drops over my earning cycle. My reduced demand means that people who would have been paid to make those good I now no longer need (and can afford) are no unemployed and I pay higher taxes to support them. You may get some short term relief by borrowing, but you end up wit each generation borrowing more and more and this is the economics of a ponzi scheme, you run out of people who can borrow more andmore and the bust when it happens is hugh. As a general rule debt is bad, bad, bad, we all need to learn to live within our means.

@ghost - do you have any evidence for your statement that 25-30% tax rates produce the most income? Whilst I understand the concept of the laffer curve, I'm in two minds about how this operates in real life. Take for example Ireland's corporation tax at 12.5% on traded income. Because this is a competitive rate it may be that the laffer curve stops being a curve and will spike downwards if the rate is increased because overseas companies based in Ireland could relocate elsewhere almost overnight.

"we all need to live within our means" - dunno maniac, if I henceforth I order 3 hookers every night and day and hire my own chef and put a shelby mustang on the credit card, then I will soon be broke, but, I will have had one hell of a great time! :^)

@obiwan
the reason is simple: rich tax cuts produce poor tax increase, and as the poor get poorer, they need to work more, so you have more jobs, :P

@fiedler - and you would have kept 3 hooker, 1 chef and some car workers employed and they in turn can then hire three hookers, 1 chef and more car workers. I'm a convert to the 'shag your way out of recession' theory. More bangs for our bucks.

@maniac: LOL it's all about giving! :) but really people just need to change their attitudes, think of being poor as an adventure! or, my personal favorite idea is to use the 'recession' as the perfect excuse to embark on a life of crime. sexy sexy crime a la bonny an clyde, dillinger et al.

I just want to throw out there that income disparity is at its highest level in the US in over a century. The wealthiest 0.1% earned 6% of all income in the US in 2007; the wealthiest 10%, 49.7%. Why is this? Labor is devalued in relation to capital.

I just find it amusing that in the modern political spectrum in the United States, the last fiscally responsible President we had was Bill Clinton.

But cutting taxes while increasing spending is, to put it mildly, insane. Nothing wrong with cutting taxes, but you have to cut spending, and there are certain spending sacred cows that aren't going to get cut.

But yet the individuals on the Right that are driving the current tax policy are hell-bent on reducing tax revenue when we're already up shit creek. They talk about fiscal responsibility, and then pull this?

@Maniac:

I only blame the "receivers" of education when they cease to be receptive to education on their own accord; if you don't listen in school, never try, drop out, and then bemoan the fact that not many high school dropouts are employed...well, it was your choice and your fault that you became one--I have little sympathy, especially when there are MANY other cases that are FAR more worthy of aid, and one you mentioned, actually.

Children in Somalia who COULDN'T finish school because they were forced to fight?

Yes, I have sympathy for that, and would hope that they could receive aid.

Children in California who WOULDN'T finish high school because they decided it'd be more fun to get wasted24/7 while trashing their parents place and not looking into a future or ever taking an interest in anything until their parents kicked them out on their sorry asses and SUDDENLY they see the world is rather harsh to the uneducated and cry for the very aid, an education, they threw away?

Screw that kid--let that aid go to the Somolian.



@Mafialligator:

While I've yet to actually take a class I actually like the idea of sociology, and I can handle politcal science, writing, literature, philosophy, biology...

It's really just math and, by extension, math-heavy science like physics that throw me, for at least two reasons I can think of:

-I honestly can never keep track of all the different ways all those symbols and numbers interact from one type of math to another, one equation to the next...in language, an "a" may be pronounced several ways, depending on the word, but that word, once you learn it, may have different meanings, but its still that word, "freedom" is always "freedom," whatever that means--I don't have to worry about it meaning something else if it follows a comma rather than a space or a period, and in literature,, Hamlet's soliquoy may be translated into any language you like and may be interpreted many different ways...but it STILL is "to be or not to be, that is the question," and that will never change, no matter what the grammar is. For something so allegedly constant, mathematics seems to change up on me all the time...once I learn the rules for a set of signs in one scenario it changes totally with another.

-If I WANTED to, I KNOW I would make a great lawyer--you can decide for yourself if my argumetns are good or poor on thise site, but I just know in real life, in classes and in the work place and everything, I've always gotten that, "You should be a lawyer" or "You should be a writer." I obviously wish to be the latter, but my point is--both of those professions...really, if you can phrase something well enough, use the right words at the right time, you won't fail, people can disagree with you but can't say you're "wrong" unless you foul up badly enough to be contradictory, in which case, again, you haven;t phrased thigns well enough. There are MANY answers in literature and philosophy and, to an extent, in legality and psychology. In mathematics...one answer. I HATE THAT. It doesn't feel like I'm really learning anything, it just feels like I'm being trained like a robot, do x and then y and you MUST get z as a result or you're wrong, your function is incorrect. In the other fields I mentioned, when you think, you HAVE to be unique and different, to think for yourself and come up with new ideas; I might quote Nietzsche and Shakespeare a lot, but I only use their ideas, ultimately, as either a contrast/example of a point I am trying to make which is my own or a springboard or base off of which I hope to build future points. Not with math--the answer's the answer, and that's all. It bores me to tears...I HATE business, and I'm glad my marketing class is done, but I can even do THAT because at least there, while I totally disagree with their philosophy, I AT LEAST can think for myself and try and be innovative with my answers, and that's the point. I can do marketing, even if I hate it, because of that. I simply cannot remember all the various mechanized functions of mathematics...I just can't remember things when I am reduced to being nothing more than a robot spitting out the correct sequence, I just can't learn that way...can't retain it...

I can sympathize, but economic theory is not the same thing as math, and you don't always need to understand the math to understand the basic concepts of economics. Because the equations and calculations in economics represent money, or the behaviour of people, or something that exists in reality, (unlike in some branches of mathematics say). Therefore, behind every graph, and every curve, and every equation, is a concept which can be grasped intuitively. You just need someone who's understands it to explain it well.

Also back to the subject which is sort of at hand, I don't think there are very many high school drop outs who match the description you gave of "Children in California who WOULDN'T finish high school because they decided it'd be more fun to get wasted24/7 while trashing their parents place and not looking into a future or ever taking an interest in anything". Secondly, you're a philosophy student, aren't you? Surely you realize there are moral philosophies people can adhere to other than the ones espoused by the dominant corporate culture.

DEFINITELY I can attest to the fact that there are people who don't adhere to the ideals of the modern, corporate culture.

I am such a person myself. :)

However, by that same token, as much as I hate that culture, being a student of logic I also recognize that no job=no money=no money for paper and pens and Nietzsche books. ;)

You can hate the culture, and WRITE against it, the pen is mightier than the sword...

But that doesn't change the fact that said pen costs money, at least until the Vulcans land and the United Federation of Planets forms and you can become a philosopher and navigator onboard the NCC-1701 USS Enterprise under Captain James Tiberius Kirk (just don't wear a red shirt whist onboard!) ;)

And what does that have to do with a marginal tax rate of 39% versus 35% for income earned that exceeds $250,000. After all, the income UNDER $250,000 is taxed at the same rate as everyone else... I fail to see how your concepts regarding work and buying pens and paper equate to this, obiwanobiwan.

I just meant that we live in a world in which capitalism is the dominant rule and so, no matter how much I or anyone else might dislike the idea of excess and living purely to make money that is a frequent cause of capitalism (though not inherent within the system, I'm not attacking capitalism, merely its overuse) that doesn't change the fact that as much as I might dislike the rule I must work with it in order to live.

Would I like it if there were no money and we could all just sit around all day, discussing, or go out on adventures, and not worry about cash or jobs?

Maybe, I don't know.

But will that happen.

NO.

So you need a job, and for a job you NEED, unless you're a one-in-a-many-million case, a high school diploma...and so if you neglect your chance to learn and gain one and then come crying to me "I don't have a job and I'm hungry!" I'm not too inclined to be sympathetic, especially when there are many people around the world in third-world nations that would have been all too happy to go for that diploma you threw away...

@Maniac RE: "You stated that people being afraid to take on debt is a bad thing (in the short term). I'm not sure if this is the case."

I'd like to note I agree that a longer term view would say savings are superior. But that doesn't help the current unemployment rate. That being said, I'm inclined to allow a higher unemployment rate for a while in return for setting the economy on a more sound footing in the long term.

@ScourgeOfGod - and therein lies the problem, people think that the unemployment rate should be manipulated and that will help growth, but the reverse is true. Debt is a way of givig people the resources to meet their demands, so if a person demands a car but can't afford it he can go into debt. That's good for the car workers of today, but bad for them tomorrow because now the first guy starts paying off his debt and interest and has less to spend on other things he demands, unless he increaes his debt. This spiral of debt continues until people cn't pay off their debt and buy new cars so the car workers are laid off, they can't buy things and pay off their debts so the washing machine workwers are laid off etc, etc etc. The only way to readress the problem is to stop increasing the debt, let the unemployment rate, find it's level, and only ever borrow to invest (ie to make goods cheaper)

"@ghost - do you have any evidence for your statement that 25-30% tax rates produce the most income? Whilst I understand the concept of the laffer curve, I'm in two minds about how this operates in real life. Take for example Ireland's corporation tax at 12.5% on traded income. Because this is a competitive rate it may be that the laffer curve stops being a curve and will spike downwards if the rate is increased because overseas companies based in Ireland could relocate elsewhere almost overnight."

I was quoting the findings of some empirical studies. I haven't got the full bibliography to hand, unfortunately.