The BBC is using the typical pro-tax line and you seem to agree with it. You claim that having the tax cuts expire will help cut the deficit. I see it as a catalyst that destroys jobs and makes things worse as government becomes a bigger player and pushes out private deployment of funds.

You are also questioning the need to cut the deficits because you fear the very contraction that is actually necessary before a true recovery can take hold. You claim that Obama should not care about the excessive spending because that creates a problem for the economy going forward. I claim that there is too much malinvestment that has to be liquidated so using more borrowed funds in order to keep malinvestments from being liquidated is a not a good idea.

I see you trying to have it both ways. In some postings you make it clear that stimulus spending will lead to disaster because politicians will respond to political pressures and use the funds to prop up players that should be allowed to go under. But in other postings and interviews you claim that the Keynesians are right and that we need government spending to avoid a recession. You fail to point out what you seem to understand quite well in the other postings; that a recession is necessary to cleanse the system and allow a true recovery to take place.

Everything we learned in the 20th century is no longer valid in the 21st century.
I think it back to school for all the so called experts including there [golden rules]
The experts are dazed and no longer on the right path and or totally confused about what’s going on.
I think its the [final count down] for Capitalism on global scale as we know it …
God bless America [the last frontier]

When I read this, Vangel, three words spring to mind: pot, kettle, black.

As to the economics, the fact is if you reduce deficits, this reduces consumption by either increasing taxes or reducing spending. That makes a recession MORE likely. No one disputes this.

The question is WHETHER to avoid the recession or not. Where I once said yes because of the threat of a deflationary spiral. That threat is still very real – but it is now clear that more government spending has only been used to continue misallocated resources and consumption which will not bring down excess private sector indebtedness. So I DO NOT advocate trying to avoid the recession through ‘stimulus’ what ever that might mean.

But, let’s be clear, what the Obama Administration is doing has nothing to do with reducing deficits. It is political ploy that does nothing to address the real structural issues of military spending, healthcare and social security. If I were Obama, I would focus on those issues ONLY and forget about the others.

As I have written before, we already have a model of how to handle a sever economic contraction effectively. Harding inherited a situation that was worse than the one that Obama got stuck with. Instead of raising taxes and spending as you suggest, Harding cut both taxes and federal spending. He stood aside and let the market liquidate lousy investments that could not satisfy consumer demand economically. As a result, the US went through a deep contraction that saw unemployment rise and GDP fall. But once the crisis was over the lower tax rates attracted new investors looking for an opportunity to become richer. Employment picked up and the economy grew rapidly.

Instead of suggesting that Obama look to the Harding approach, you advocate the one taken by Hoover and FRD. They both advocated intervention that kept prices high and encouraged spending at all levels of government. They increased taxes and by doing so scared off potential investors who required some certainty in order to justify taking the risks. From what I see, Obama is also discouraging investment because he wants the productive class to pay its ‘fair share.’ This is in a country in which the total share of the income tax paid by the top 1% of income earners increased by around half, from 26% in 1886 to 37% in 2004. During the same period the bottom 50% of the population saw its burden fall from 6% to 3%.

Frankly, I don’t see how rhetoric about how the rich have received ‘unfair’ tax breaks and how they have to be made to pay more will attract more capital to the US. Why would anyone build a factory if the government threatens to tax away most of the profits when it is far easier to take steps to protect one’s capital until the next regime shows more respect for productive risk takers. And how exactly does one get more jobs creation when productive investment is discouraged?

The debate took place quite some time ago and the Keynesians lost their credibility because what they predicted was a miserable failure. I prefer to go with the approach that does make sense and clearly works. A review of the basics is probably in order.

http://www.youtube.com/watch?v=d0nERTFo-Sk