Permanent vs Temporary Tax Cuts

Permanent vs Temporary Tax Cuts
by Alex Merced

  Let's take a moment and put taxes into perspective, at the end of the day taxes are a price like any price and thus it should have similar effects on behavior like other prices do. A temporary tax cut is like a sale at your favorite store, to create temporary spur of demand to move stagnant inventory. Sales can be a very useful tool for liquidating inventory that otherwise was not selling at full price, although you generally don't put goods that turnover regularly on sale since there is no benefit to doing so. A permanent tax cut would be similar to when a good is reduced in cost to supply, so the savings then gets passed along to the end consumer which just reflects increased productivity in producing that good.

 One may say wouldn't a store have permanent price reductions if demand drops for a particular good, which is entirely possible but once the current inventory is liquidated it's suspect that they may replace the inventory.

 Returning to taxes, taxes are just the price one pays for government and similarly tax incentives can be used for governments to compete (especially between states). Although the effects of Temporary over Permanent is most important when it comes to special tax programs to incentivize purchases of goods. For example a tax credit for investment in capital equipment.

 A temporary credit would cause businesses to make future purchases of capital goods now instead of later, so at the end of the day your moving purchases that would of already occurred to an earlier date in time, which just results in a slump in that industry in the future from which those sales were taken.

A permanent tax credit would reduce the cost regularly scheduled capital expenditures freeing up resources for other expenses which can be used for more investment although since the credit is permanent there is no incentive to move future purchases to the present allowing purchases to remain more evenly distributed inter-temporally (over time).

So when discussing different types of tax incentives it's important to realize that whether it's permanent or temporary has an effect on human behavior and outcome of such policies.

Interest Rates and Risk

Interest Rates and Risk
by Alex Merced

In plenty of articles I've written or videos I've created I've discussed how interest raes can cause mal-investment and alter the structure of the economy. The increasing of the money supply and lower of interest rates as described by Mises, Hayek, and Rothbard although how money supply increases occur and how does the mal-investment manifest itself can be different from econom to economy. In this article I want to discuss how central banks control over he money supply and involvement in overnight lending transforms into mal-investment.

What is Mal-Investment?

A mal-investment occurs when actors in the economys behavior is altered by distortion of economic signals such as prices, interest rates, and the visible supply and demand of goods. These signals may be distorted by a variety of methods, sometimes by private actors through corruption or fraud although private actors are limited in resources so their is an actual abosolute limit to their fraud and corruption on top of legal ramifications if caught. More important these signals can be distorted by government regulations, laws, and taxes imposed by this institution which has potentiall limitless resources and little fear of legal ramifications which magnifies it's ability to distort economic signals beyond any private actors.

What is the Role of Risk?

If your familiar with my opinion of economics, you'll be aware of how big a role I think risk plays in a sound economy being one of he most important if not most important signals an economy produces. People always complain of corporate and individual greed which is really just a function of an economic actors perceived risk of entering cerain actions. Government more than an other actor distorts the risk signal through guaranteed loans, insurance schemes like FDIC and Unemployent, and tax and monetary subsidies which distort risk signals which magnify what many may perceive as greed.

So what about interest rates?

Interest rates which are often seen as the cost of capital, or the cost to have someone defer consumption so you can consume now can also be seen as the cost of taking financial risk. For example, if you labor for a wage and take risk with those wages and those wages are losts you may have to borrow money with interest in order to buy food or make rent. This same phenomenon occurs with banks in which rates such as the discount rate and fed funds represent the cost of making riskier investments, so if these rates are low then the banks will be willing to make risker loans as the cost to borrow capital if the risks don't pay off is low. Does this mean inerest rates should always be high so economic actors don't take excessive risks? Not at all.

Taking risks can be very rewarding, although having some cushion to limit the effects of a risk taking is also important which is an importat function of savings. Savings serves as a safe landing pad for individuals and for the financial system as a hole so they can take larger risks to grow the economy, so when the savings landing pad is plentiful the economy and banks are signaled to take larger risks via lower interest rates. When the individuals havn't saved for a rainy day, the economy signals for less risk taking via higher rates.

Central Banks via open market operations will purchase government securities (treasury bonds) and increase the money supply. This increase in the supply which enter via bank reserves appears like savings, although individuals don't truly have rainy day fund but the banks are flush with cash which distorts interest rates and the risk signal it gives out. On top of it, if the central bank can keep rates such as the fed funds rate and the discount rate low, banks will feel the risks of taking risk with these artificial reserves to be low yet the economy hasn't ceated the savings landing pad for such risk taking which ends in the boom and bust cycle.

This one way the austrian business cycle can manifest itself, money supply can increase in particular industry via government guarantees for loans for a particular industry increasing money readil lendable to tha industry creating price bubbles. Local towns may grant tax subsidies for people film a movie in their town creating an influx of cash to temporarily enter the town having a similar effect of the local economy. Although at the end of the day this whole process is a function of Interest Rates and Risk.

Economic Equality versus Economic Liberty

Economic Equality versus Economic Liberty by Alex Merced

One of the fundamental divides among activist economics is what is the goal when thinking of policy and the economy. Progressives focus on Economic Equality and how policy can manipulate the economy to distribute resources in a more "equitable" or "fair" way as measured through income statistics. While Libertarians and Conservatives are more concerned with Economic Liberty allowing capital to flow freely increasing the odds of that capital to flow into the hands of those with the greatest entrepeneurial ability who can put that capital to use developing the division of labor, structure or production, and into innovations that create more accessibility to scarce goods for all.

It's hard to measure the effects of Economic Liberty via statistics because it's about the quality of products and services improving and their costs dropping. For example, the Iphone may not be a cheap gadget, but because of it there are many other purchases I can bypass such as buying watches, gaming consoles, calculators,  and many other things people would spend a lot of their wages on is now in one device for much less than all of those individual goods put together. So while looking at income statistics may show "real wages" havn't grown in decades but quality of life sure has increased since less wages are needed to have access to a variety of benefits since you need fewer devices to do more tasks. This is the result on entrepeneurship and innovation which can be magnified by free flow of capital and information which those who support economic liberty focus on.

 Although, those who support Economic Equality measure their policies via aggregate macroeconomic income statistics. Just because numbers such as "real wages" grow or "the income distribution" narrows doesn't mean that an increase in the quality of life has occured because quality of life is not tied to how much you make, but what you can buy with it (oh yeah... and if it makes you happy, which is not measurable) which is constantly being imporved by productivity gains and innovation from entrepeneurs. So instead of the hyper focus on labor wages, they'd be better of focusing on fostering entrepeneurship in individuals like the Economic Libertarians.