Does Cutting Taxes Stimulate an Economy?

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Economic theory is interesting. There never has been "scientific" proof documenting how any theory performs against the wide range of economic dynamics because there is no experimental control sample for comparison. Like most of us, I have opinions (based on theory) but I do not confuse opinions with data or facts.

This past week, everyone's "love him or hate him" economist  Paul Krugman opined:

Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Sam Brownback, the governor, proposed the legislation — in percentage terms, the largest tax cut in one year any state has ever enacted — in close consultation with the economist Arthur Laffer. And Mr. Brownback predicted that the cuts would jump-start an economic boom — “Look out, Texas,” he proclaimed.

But Kansas isn’t booming — in fact, its economy is lagging both neighboring states and America as a whole. Meanwhile, the state’s budget has plunged deep into deficit, provoking a Moody’s downgrade of its debt.

Yah, Kansas is not booming but consider the following and let's see where these items might take us:

  • the debt in Kansas is not much worse  than any other state;
  • last time I looked, more than two states bordered Kansas;
  • how fast does any economic theory work? Should it be judged in the short, medium or long term?
  • raising income taxes removes money from consumers.

There is no question that based on employment, Kansas is doing worse than its neighbors (about the same as Missouri) and the average for Kansas and all its neighbors looks to be slightly below the national average. Remember that employment is a lagging indicator of economic growth.

GDP  growth  for Kansas appears also be very near the national average - but GDP growth is less than 3 of its 4 neighbors.

If raising taxes were an answer - the USA economy should be flying. And what aboutIllinois? My point? You cannot condemn a single element of an economy without examining all elements. I am not for or against raising taxes per se on a state level. My opinion would be conditional when judged against all the other economic  dynamics.

Consider also that the Federal Government has different monetary dynamics than the states (being a sovereign monetary issuer) - and the examples given in Professor Krugman's oped were based on Federal Government experience.

The individual states in America are economic laboratories. States should be encouraged to leave the trodden trail and experiment. Most experiments end in failure, but without failures - our understanding of economic dynamics is not enriched. Professor Krugman is the mouthpiece for liberal partisan politics, and partisan politics have no place in "factual" economic discussions.

Other Economic News this Week:

The Econintersect Economic Index for July 2014 is showing continued growth acceleration. Outside of our economic forecast - we are worried about the consumers' ability to expand consumption because the ratio between income and expenditures continues near all time highs. The GDP contraction for 1Q2014 is a paper contraction as GDP is determined by playing games with accounts. For 2Q2014 GDP, the trade balance will be a serious headwind.

The ECRI WLI growth index value has been weakly in positive territory for many months - but now in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

/images/z weekly_indexes.PNG

The market was expecting the weekly intial unemployment  claims at 307,000 to 325,000 (consensus 314,000) vs the 315,000  reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from  314,250 (reported last week as 314,250) to 315,000 .

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

/images/z unemployment.PNG

Bankruptcies this Week: Buccaneer Energy Limited, Privately-held MIG (aka Metromedia International Group)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy

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