Friday, January 16, 2009

God Forbid we help households pay down their debt

Great unintentional blooper from Princeton's Uwe Reinhardt
Noneconomists may ask, of course, exactly how a $1 cut in taxes would translate itself into a $3 increase in G.D.P. at a time when traumatized households, whose wealth has been eroded, might use any new tax savings merely to pay down debt or rebuild their wealth through added savings, rather than spend it, and when businesses unable to sell their output even from existing capacity might hesitate to invest such tax savings in more capacity.

But never mind this fine point.
The point is obviously too fine for Uwe. The private sector's desire to increase net savings is a normal action following years of unsustainable net dissavings. Household debt ratios were at an all time high, and sooner or later they had to revert to mean -- no mystery here!

A tax cut would help households pay down their debt faster. Increasing the deficit to help households pay down their debt is non-inflationary, as savings do not contribute to inflation. They do not contribute to GNP either, but helping households save through lower taxes means they won't try to do it through lower spending and investing, which is exactly what's happening now.

And besides, if households save some, just give them more. It's not complicated

Instead, Reinhardt has some bizarro fantasy where state construction contractors being really really busy in 2010 and 2011 is going to help unemployed investment bankers and real estate agents in 2009. With households as indebted as before.

But never mind this fine point.


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