From: fcrary@ucsu.Colorado.EDU (Frank Crary)
Subject: Re: income vs. consumption (was Re: VOTE, BABY, VOTE!)
Organization: University of Colorado, Boulder
Distribution: usa
Date: Wed, 11 Nov 1992 00:52:46 GMT

In article <1992Nov10.181707.23485@cbfsb.cb.att.com> mbb@cbnewsb.cb.att.com (martin.brilliant) writes:
>> Perhaps you haven't been reading all the posts on this topic (and perhaps
>> you should, before you make remarks about misinformation.) ....

>I just read all the posts that mention consumption tax.

I'm sorry, I didn't intend that comment to apply to you.

>> ...    The proposal
>> posted was to tax all income which was not invested by the end of the
>> year. That sounds to me like the current income tax system with
>> all investments counting as deductions. Certainly there is room in
>> such a system for cost of living deductions.

>You want to modify the current system so as to make all savings
>deductible.

No, _I_ don't want any such thing. I'm not sure it is a good idea. It
is not, however, inherently regressive (as someone claimed.) I was
just pointing out that there was room in the system for deductions,
and these deductions would avoid a regressive tax.

>But - what is the purpose of all this complication?  Do you really
>believe that this economy is stagnating because people aren't saving
>enough?  Look at the stock market and the interest rates!  Interest
>rates are at a historic low, and price-earnings ratios are near a
>historic high.  Would that be true if entrepreneurs were scrambling
>for investment money?

Possibly: The Federal Reserve has a great deal of influence over
interest rates, and low rates have been a goal of theirs for about
a year and a half. It's quite possible that interest rates are 
artificially low and don't say much at all about the availability
of credit. Also, for several years now, banks have been very
carefull of _who_ they lend money to (ever since the S&L crisis.)
If interest rates are low, but very few people get their loans
approved, that would still translate into tight credit and
few investment dollars floating around. All things considered, 
I have no idea what connection exists between our economic
problems and savings/investment. I also don't think "expert"
economists have any idea either.

>If you encourage consumption, you put more money in at the retail
>level.  That encourages retailers to hire help and buy more from
>wholesalers.  The money flows up the chain, and the goods flow down,
>and workers get hired and paid and buy more.  If you encourage
>savings, the economy continues to wait for something to happen.

That presumes that low consumption is the problem. That _might_
be the problem, but it also might not. (Also, it isn't clear how 
you "encourage" consumption. Usually a "lack of confidince in the
economy" is given as a reason, and I don't see how this can be
altered by economic incentives.)

My personal opinion is that cause and effect (in terms of macro-
not micro- economics) is not well understood at all. Since the
side effects of a given economic policy aren't clear and
might be just as bad as the current problem (e.g. for all we
know, the supposed cure might be worse than the disease), I think
the government should avoid manipulating the economy. There is
no evidence it helps more than it hurts.

                                           Frank Crary
                                           CU Boulder

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