Fighting Recession with Tax Cuts is Smartest Solution

Astoundingly, I heard the head of the Alberta Labour Congress, Gil McGowan, on CBC radio recently arguing that tax cuts would be a bad thing in the federal budget.

Wait a second. A guy who says he represents ordinary working class Canadians is arguing AGAINST putting more money in the pockets of his members?

These people go on strike to fight for pennies an hour in wage increases. What is the possible logic behind opposing efforts to let them keep more of that money for themselves?

Hard to say. But otherwise intelligent people seem to think that putting money into the economy through tax cuts is ineffective. Direct government spending is a quicker and better way of moving money into the economy, according to these folks.

The great big bogeyman is that people with a few extra bucks in their pocket might use it to pay down debt or save.

Again, stop and think. The tax cuts announced in the budget are going to amount to about $10 bucks off a paycheque every two weeks. Such a small amount is more likely to be absorbed into routine spending because it isn’t enough to make a significant debt payment or savings deposit. If folks have an extra tenner in their pockets every second week, they are far more likely to use it to buy things – a few extra groceries, a video rental, a beer after work one night.

But even so, opponents of tax cuts argue that not everyone will spend that ten bucks. So instead of spending it, the person makes a slightly larger monthly payment of $20 against debt, or puts $20 more into savings. The tax cut, according to proponents of direct government spending, has been wasted.

Balderdash.

Maxime Bernier MP, for all his other problems in politics, is an accomplished economist. He makes the point that the economy is quite fluid and contained. Compare it to a swimming pool. You can’t take a bucket of water from the deep end, and go down and pour it into the shallow end, and expect the shallow end to get deeper. The economy is like that. Add or remove money from one place and it moves around.

In other words, if I put $20 into my savings account, my bank now has $20 more to lend to someone else to buy something or invest. And when credit is at such a premium, it’s a good thing if banks lend money, right?

Or say I use the $20 to pay off one of my creditors. Well, now my creditor has $20 more that he can loan to somebody else (there’s that credit thing again).

To lean on Maxime’s metaphor, the money continues to float around in the system. It has moved from government into the mainstream economy. And that’s where we want it.  Right Gil?

Advertisements

1 Comment

  1. C.D. Howe Institute also says tax cuts are the least efficient way to stimulate the economy. I am biased becasue I am a member of the C.D. Howe.

    Welcome to the blogosphere Susan. You will add a great deal to the conversations.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: