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I just came back from grocery shopping -- no sign of deflation at my local market. In fact, I think food costs are going up. But, I definitely buy less because I fear that my income will not cover the costs, and if I and millions of others continue to buy less and cut back, we will get into a nasty deflationary cycle. That is why the Obama administration is trying to put money, lots of it, into action.
That is also why tax cuts for the rich do not make sense right now. The money needs to go directly into the pockets of the unemployed, consumers, and the poor -- so that it will get spent quickly and flow back into the markets to increase demand.
Republicans are arguing that small business owners will invest more if we give them tax cuts -- because then they will have more to invest.
Recently I spoke to a person with lots of experience in small business but who is not now in business. She is going to be receiving a pretty good sum of money soon. I suggested to her when she gets it, she could open her own business. Her reply, "Not in this economy."
So, tax cuts help in inflationary periods because they enable investors to put money into producing more goods and services. But, in times of deflation or feared deflation, and when the money supply stops flowing (as is now the case), the government has to invest. Nobody else will.
You can give as many tax rebates as you want during a deflation or when there is the fear of deflation. You can keep handing money directly to the banks and big business. There will be no improvement in the economy until you increase demand -- and demand will only go up when ordinary people feel secure about having a reliable job and a regular paycheck now and in the coming years.
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