Stimulus will by definition raise taxes

2012, May 21, 08:17 pm

Taxing hot economies is just as important as stimulating cold economies.

What Everyone Says

Everyone has heard about the debate over stimulus, whether to increase government spending in hope of pulling us out of the recession or cut back spending to reduce deficit. Detractors say that recession is a regular part of the business cycle and that it is irresponsible for the government to spend money which it doesn't have. Supporters say that the stimulus will cause the economy to provide more tax revenue than spent stimulating it. The above is the half story repeatedly reiterated throughout the spheres of public opinion.

What No One Ever Told You

It is very important to raise taxes, cut spending, and run a huge surplus when the economy is doing well. An active fiscal policy involves two modes: expansionary fiscal policy, and restrictive fiscal policy. Expansionary fiscal policy is the government running a deficit in order to stimulate the economy in recessions. Restrictive fiscal policy is the government purposefully cooling off the economy and reducing inflation through raising taxes and reducing spending. Although restrictive fiscal policy is important for paying off dept left from expansionary policy, the main purpose of restrictive policy is to prevent inflation from causing a recession. What caused the last recession? Inflation in the housing market. If the economy gets too hot, prices for goods and labor rise which, if not controlled, can cause a recession.

Why Has Restrictive Fiscal Policy Remained an Open Secret?

I leave this an open question. A basic and fundamental idea in economics is completely absent from public discussion. You can't blame this on politicians. They follow the voters who do not like taxes. One cannot blame the media. How many reporters have taken economics? By the end of the day who is to blame is irrelevant. All that is important is how much you the reader will help the problem.

Some fun related links

Germany's view of stimulus
An interesting type of stimulus
Some problems with stimulus


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