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You can blame Warren Mosler for the second round of the Bush tax cuts. He met with Bush WH Chief of Staff Andy Card in early 2003, as the economy was still performing poorly and Bush's relection chances were up in the air. He advocated MMT at the highest level of government and the Chief of Staff listened. While the Bush WH did not enact or advocate for Warren's desired payroll tax cuts, and kept with the supply side view, they continued to press for more Keynesian style stimulus to jump start aggregate demand.
Here's Warren's comments on the subject and more:
"First, I was instrumental with regard to the Bush tax cuts. I visited with Andrew Card in the West Wing in early 2003 and first discussed why the low interest rates hadn’t worked and were not likely to work (interest rate channels work against rate cuts adding to aggregate demand. See Bernanke, Sacks, Reinhardt 2004). We then discussed how much of a fiscal adjustment was needed to reverse the negative effects of the prior surplus years, which was about 200 billion per quarter. Card agreed, and a week later Bush made his then famous remark when asked about deficits- “
I don’t look at numbers on a piece of paper, I look at jobs!”
He then went on to not veto a single spending bill (the conservatives still haven’t forgiven him) and got in every possible tax cut he could, including retro cuts. The q3 deficit got to about $200 billion, the economy turned, and it didn’t cost him the election.
Second, federal taxes serve to regulate the economy (aggregate demand) and not to collect revenue per se. This should be obvious when you consider that if you pay your taxes(or buy tsy securities) with old $20 bills the give you a receipt, then throw the bills in a shredder.
(States, corps, and individuals wouldn’t do that, only the issuer of the currency for which something very different is going on.)
So for a given size govt, if taxes are way too low you get inflation from excess demand.
If taxes are way too high you get high unemployment and a massive output gap like we have to day.
So right now my first proposal is a full payroll tax (FICA) holiday for employees and employers.
Federal taxes are like a thermostat. And right now the economy is ice cold and needs a tax cut to warm it up.
Also, the fear of being the next Greece is causing us to become the next Japan. Greece and the other euro zone member nations have put themselves in a position much like the US states. California, Illinois, or CT can be the next Greece, but not European Central Bank, or the central govt. of the US, UK, or Japan."
High end tax cuts necessitate larger government deficits because of the wealthy's lower marginal propensity to spend and higher marginal propensity to save. The lower end Bush tax cuts, massive increases in government spending, and the massive expansion of the subprime leg of the housing bubble (including the massive expansion of Alt-A state income loans, aka liar's loans) were the only things that kept the economy afloat following the 2000 recession and the damage done by the Clinton surpluses.
After relection, the Bush WH let the deficit fall as the economy was expanding, consistent with the deficit dove view; and with massive current account deficits, the accelerating lack of $ assets in the domestic private sector (1.7% of GDP government deficit in 2007), as well as the FED decision to raise interest rates, effectively put an end to the ponzi-style credit expansion, with everything blowing up in our face, leading to the worst recession since the Great Depression.
Until the Deficit Owl-MMT view is accepted and understood, there's little that can be done to bring about consistent, stable economic growth.
99.9% of the economic textbooks are wrong. So it's going to be one long, hard road out of hell.
Government deficit=non government surplus.
IT'S AN ACCOUNT IDENTITY, STUPID!
Net-Sectoral Financial Balances (graph)