Quote:
Originally Posted by Vulcan
From what I understand, he's following the lessons learned from FDR in combating the Great Depression. Speaking of FDR.
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The irony is that the depression was followed by the largest governmental monetary stimulus ever in the form of a world war.
The situation the US faced going into 2008 offered a problem for the conventional economic levers that are pushed and pulled. Interest rates to borrow were already low, and could not be meaningfully lowered any more. In that respect, the fed had maximized that specific incentive for businesses to borrow.
If businesses are not borrowing cash at historically low interest rates, that means they're reluctant to invest because they see a poor demand environment. Giving the businesses a marginal tax cut won't do anything different as they're not inclined to invest the money (read: meet expected increase in demand by hiring people).
As for the population, the tax cuts only help the employed and don't do anything to combat the number of unemployed. In an environment where businesses are not expanding, those with jobs are going to take their tax cut and save it* (which is what happened with the stimulus checks (income tax rebates) that Bush mailed out in 2008). When the employed save their money (the exact opposite of what is needed in the current climate), they reduce demand. Without demand, the businesses won't borrow and will look to increase productivity (layoffs / longer hours per employee).
The whole paradox of thrift deal, wrapped up in zero interest rate policy, means that the demand (read: business revenue) has to come from somewhere. If the population is not going to do it, then the government has to do it temporarily to smooth out the cycle for businesses.
* This is exactly what happened with the income tax rebates George W. Bush mailed out in 2008. By and large people kept the money instead of producing demand by spending it, which was the opposite of what was required/intended. This was similar to the outcome following the first one he did in 2003 wherein ~2/3 had spent a portion of the money 1 year after receiving it. This is why the attempt now is to maintain/produce demand (and garner a multiple on that spending) by funding infrastructure projects to attempt to dampen the large increase in unemployment.