Skip to comments.The New Flat Earth Society-Myths about deficits and economic growth.
Posted on 05/23/2003 5:13:32 AM PDT by SJacksonEdited on 04/22/2004 11:48:58 PM PDT by Jim Robinson. [history]
In a last-ditch attempt to stop broad-based tax cuts, Democrats dusted off their shopworn argument that budget deficits will drive up interest rates. They might have picked a better time to pipe up: If deficits send interest rates skyward as they claim, why is the 10-year Treasury note now trading near 3.5% -- a 45-year low?
(Excerpt) Read more at online.wsj.com ...
If Larry could only survive a confirmation hearing. Sigh. He'd make a great Fed Chief or Treasury Secretary.
Any connection with deficits is fuzzy at best.
This is simply untrue. When the government runs deficits, it has to compete with the private sector for capital. That can drive up interest rates in an environment where people are likely to substitute the purchase of government securities for corporate securities. In such an environment, corporations will be forced to increase the interest rates they offer on their securities in order to compete for capital with the government. We're not in such an environment right now, however, so the deficit should not present too bad a problem.
Deficits are also bad in the long run because they reduce the savings rate, but our deficit is likely to go away when the economy picks up again.
This is NOT the Laffer Curve. This is the Reagan Equation.
The Laffer Curve, as I understand it, suggest that there is a "perfect" point of tax rates/government revenue.
Too high a tax rate, and there is more evasion, slacking off, etc. and government revenue declines. Too low a tax rate, and the government basically leaves money on the table when it could be extracting more. Conservatives have never acknowledged the low tax half of the Laffer Curve.
Conservatives think that currently we are on the "right" side of the curve (high taxes which hurt incentives) and should move tax rates lower so that eventually the gov't has higher revenue.
The HIDDEN danger in the Laffer Curve that conservatives have never faced is that the underlying premise says that gov't revenues can be MAXIMIZED. Unbeknownst to them, they are actually advocating a LARGER government. And ironically enough, it has been conservatives who have bought into the conventional Laffer Curve argument for the past 20 years.
However, why should we even be looking for that magical point that gives the government the most revenue? Shouldnt we go even further in tax rate reduction, toward the other side of the Laffer Curve, and have lower rates AND reduce government revenue? That way we would have the best of both worlds: a low tax rate that encourages income, spending, saving, and all of the things that good earners/consumers/citizens should be doing, while also keeping money AWAY from an entity known to be grossly inefficient.
Break on through to the other side of the Curve, and see good things happen.
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