Need some economics explained - not a political thread

[Mully]

Hi,

Was reading something about the tax cuts due to come in April 1. Someone said that, because it was aimed at the "middle and upper classes", that it wouldn't help the country.

This, apparently, is because Middle and Upper Classes will either save, or pay down debt with the money, whereas "lower class" people will spend and stimulate the economy.

Now, from where I sit paying down debt reduces our dependancy on foreign funding, and Bollard has been nagging at us to save for years, rather than spend.

Has that logic gone out the window?? I can understand spending instead of saving to a certain extent, but surely paying down debt (especially credit card and personal loan debt) will be of benefit to the country (and the individuals if they happen to be made redundant).

Any ideas on what I'm missing?? Please only comment on the subject, this is not a thread for or against tax cuts (feel free to say whether you think they are a good idea or not, but only with a post, don't make it your entire post).

[Pascal]

Your reasoning seems sound to me, but I'm not an economist. What I would suggest is you look at the perspective of the person making the statement. Do they only look at the world from an ideological perspective, for example, and would always oppose a tax cut because their reasoning is governmental spending is non-inflationary?

That should at least help, I think. In any event, on tax cuts? This is still my favourite link on it.

[MisterD]

I did see some data on the "bang per buck" of various types of spending in terms of stimulus for the economy: tax cuts at different brackets, infrastructure, blah blah and tax cuts for the lower paid was "more effective" than higher paid types. However, that was based on US figures.

I can't see that it would be a bad thing for debt to be paid down given that most of it is borrowed from offshore - that would be good for the country's credit rating and make funds easier to get for productive investment.

[slofox]

I too have noticed the about face on spending/saving, Last week we were all bastards cause we didn't save. This week we are all bastards cause we don't spend...can't fuckin' win can we.....

[MisterD]

The visible hand is a good source for economics comment in bite-size pieces...better than Mr Hickey for my $$ FWIW.

[davereid]

You can't answer the question without involving politics, as economics is a political science, not a physical science.

That is to say, a Keynesian economist will never agree with a disciple of the Austrian school.

And there is always, with any economic decision the irrationality of human beings to consider.

Lets look at the current mess we are in.

Economists are running around blaming Government. Or Taxes. Or Banks. Or too much regulation. Or not enough regulation. Maybe the Capitalists did it.

More likely, we all did it.

Human greed, pride, and stupidity may be to blame.

Encouraged by the US treasury, in an effort to avoid a minor recession, Banks created a bit too much credit. We liked it, and signed up. We saw our neighbours had a nicer house, and as we had credit, we upgraded. Land prices went up, so we were richer. And could get more credit. So we bought a bigger house.

The cycle of boom and bust had arrived.

We knew we could borrow more. In fact we knew we had to, or the house we wanted would have gone up again.

But, of course eventually, as land is common it would start to head towards its real economic value - it only increased because of human emotion.

Its happened in the past, long before we had credit cards, commercial banks, and before the words capitalist or communist had been invented.

For example, my wife likes bulbs. Not the see-in-the-dark kind, but the kind that get planted in the garden and then die.

My wife is not the first to plant bulbs, they have been very popular in the past.

They arent worth very much, yet they demonstrated how human emotion and greed overcomes any rational calculation of outcomes from any given economic event.

In 1637, in Holland, a tulip grower introduced a new tulip bulb, the "Viceroy". It was very popular, and soon it had doubled in price. Soon it doubled again. Canny investors said "hey, I'll buy some, as they double in value overnight"

Eventually, someone paid 2500ƒ for a tulip bulb. This was a lot of money, in fact the buyer didn't have it, so he actually gave the vendor

Two lasts of wheat 448ƒ
Four lasts of rye 558ƒ
Four fat oxen 480ƒ
Eight fat swine 240ƒ
Twelve fat sheep 120ƒ
Two hogsheads of wine 70ƒ
Four tuns of beer 32ƒ
Two tons of butter 192ƒ
1,000 lb. of cheese 120ƒ
A complete bed 100ƒ
A suit of clothes 80ƒ
A silver drinking cup 60ƒ

Shortly after, someone realised that it was just a flower. And possibly keeping the 4 tuns of beer would be a better deal, and the bubble burst.

[ManDownUnder]

Economics is a soft "science" which I would view as financial philosophy personally. Which there are some relative absolutes in economics you'll find that two people can argue contrary positions on theoretic stuff and still both be right/wrong.

That said.

You're right. They're right.

You're right - for the reasons you state.

They're also right... and my argument (which will be crafted and much more skilfully presented by others I'm sure)...

Tax cuts to the lower Socio Economic groups gets spent faster, so goes into the local economy faster encouraging the "money go round", boosting tax take giving Govt the ability to address international debt.

I'm sure there's numerous other arguments around the place... but you get the idea. I recall a joke somewhere Statisticians being Math majors that failed the personality exam, and economists being able to devine what your phone number out to be if you gave them your date of birth.

[Mully]

You can't answer the question without involving politics, as economics is a political science, not a physical science

Good post, and especially this point.

What I was trying to avoid was:
"Yay, Key is a hero because he is giving us a tax cut"
"Boo, Key is irresponsible because he's proceeding with the tax cut"
and so on, and so forth, type political argument.

[MisterD]

I recall a joke somewhere Statisticians being Math majors that failed the personality exam, and economists being able to devine what your phone number out to be if you gave them your date of birth.

Is it also said that if you ask ten economists a question, you'll get eleven different answers?

[ManDownUnder]

Is it also said that if you ask ten economists a question, you'll get eleven different answers?

depending on the rate of taxation in place at the time... possibly more.

[pzkpfw]

I thought saving was good because it gives banks money to loan out - and that stimulates economic growth. (The drying up of credit is one of the causes of the current trouble).

As long as the "wealthy" don't hide their money in their mattresses, then, any money they leave in the country is good, isn't it?

[AllanB]

I don’t give shit ‘why’ I’ll get a tax cut – just bring the bloody thing on – all those years with Mr Cullen stuffing my money up his arse did at lot of good for NZ didn’t it (play the Tui theme song).

Get it and do what you want with it – you deserve it.

Spend some at you local motorcycle store – they deserve it.

[James Deuce]

It's such an insubstantial amount of money that I'm not going to notice. It isn't even a tank of gas a week for the bike.

I'll probably buy a coffee every day instead of Monday, Wednesday, and Thursday.

[HenryDorsetCase]

I don’t give shit ‘why’ I’ll get a tax cut – just bring the bloody thing on – all those years with Mr Cullen stuffing my money up his arse did at lot of good for NZ didn’t it (play the Tui theme song).

Get it and do what you want with it – you deserve it.

Spend some at you local motorcycle store – they deserve it.

abso frickin lutely!

[peasea]

I too have noticed the about face on spending/saving, Last week we were all bastards cause we didn't save. This week we are all bastards cause we don't spend...can't fuckin' win can we.....

You're not wrong. We don't save heaps coz we haven't got heaps to save but....having a few coins in the cookie jar does help sometimes. The tax cuts for us meant things like a lamb roast more often or an extra ride, which ultimately means we spend it. So, given the idea that spending will save the nation I'm off to fill up.