Puffer Fish wrote:That's assuming government does actually cut its budget.
In reality that very often does not happen.
The talk is all about cutting taxes, but no one wants to talk about cutting the budget, or reducing the budget deficit.
. . . .
To answer your objection, yes, if that were the case, then my whole argument in this discussion would not apply.
I apologise, my opening post was not the best worded. It was assuming we were talking about tax cuts paid for by budget deficits (adding to the national debt).
Puffer Fish, I'm not singling you out, but the conversation you are having simply stimulated this thinking.
I keep telling you, that I'm not an expert, but I'm all you have here for an MMTer.
The MMT based analysis of what happens when the US cuts taxes and also cuts the exact amount of spending is ---
. . . I'll assume that the cuts are mostly for the top 20% of earners.
So what happens?
1] The people whose income is directly related to the spending cuts is reduced. For example, workers in a plant making jet fighters will be laid off if the Gov. stops buying the jets. [In normal times they go on unemployment which is a state program , but they get somewhat less on unemployment and so they often spend less.] People who were getting money to buy food with Food Stamps (now with a debit card) will spend less on food or some other thing.
2] This reduction in spending will show up as a drop in GDP. It will also show up as a drop in sales and profits of small businesses where they live.
3] Some of the people who get the tax cuts will spend it all, but others will save some of it. Economic history tells us that about 20% of it will be saved.
4] MMTers have proved that saving is a dead end for the money, until the saver wants to spend it. Saving does nothing to stimulate the US economy in any way. This is also true of dollars spent (by the importer) to buy stuff from overseas.
. . . Banks don't need more deposits to make more loans.*
5] So, 100% of the spending cuts reduce the GDP dollar for dollar.
6] So, only 80% of the money left in the hands of the people gets spent to 'increase' the GDP.
7] Therefore, cutting taxes and cutting an equal amount of spending will always reduce the GDP. It, also, reduces the sales and profits of small businesses.
Now, those who want tax cuts will argue that the savings does do some good in the economy. They will assert this 'til their dying day. Do they have any evidence? I would like to see it. I will reject all simple assertions of it though.
. * . The Fed. has been giving money to banks with QE and other programs for many years now (since 2008). The amount has been several trillions, has trillions more been loaned into the economy? Maybe, but it has been used to buy corp. stock and real estate. This does not stimulate the economy.