The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Financing Stimulus

11/23/2016

With the stock market in record high territory, you can guess the most common question:  Is it time to sell?  No, the stock market is high, but it is not nose-bleed high.  While the charts for the Dow, S&P, and Russell are all similar, the chart for the Nasdaq is easier to see.  Take a look at it:

Chart of the Day

You can see it has fluctuated within a “channel” since the global financial crisis in 2009.  At almost 5,400 now, you can see that a run to 6,000 is still within the channel.
So, from a technical standpoint, the market is not too high.  In addition, there is plenty of cash on the sidelines that has missed this strong rally, which means that the cash for increased demand is readily available.  In recent history, however, the stock market seems to react, make that over-react, to macro or larger environment.
For the last six years, the nation has merely treaded water. as Congressional gridlock stymied everything.  This was unnecessary, unfortunate, and unpatriotic.  What is driving the market now is the belief that Congress will finally approve a real stimulus plan.  Fortunately, gridlock has now been broken.  The Fed has fought a lonely battle to save the economy with its only weapon – Monetary Policy.  Finally, Congress may actually help, instead of obstruct, and actually use Fiscal Policy, like a stimulus plan.  
The battle to watch is between Supply-side Republicans and Austrian Republicans, not Democrats or Republicans.  Supply-side Republicans believe tax-cuts,especially to the affluent, gives a caffeine injection to the economy.  It is explained by a diagram popularized by Arthur Laffer.  Take a look at it:
You can see along the bottom axis that income tax rates can rise from 0% to 100%.  At each point on the bottom axis, go up to the red bell-shaped curve and then move to the left to see the government revenue at each tax rate.  In an ideal world, the tax rate should be at the midpoint, where government revenue is maximized.  If you are on the right side of the midpoint, government revenue will actually increase if you decrease taxes, according to Supply-side Republicans.  
So, why were the Kennedy tax cut and the Reagan tax cut successful, while the Bush tax cut failed, causing deficits to soar?  Presidents Kennedy and Reagan correctly thought the economy was on the right side of the midpoint, while President Bush was wrong.  Supply-side Republicans seem to think we are always on the right side.
Austrian Republicans are old-fashioned Republicans who follow the Austrian school of economics.  To get a visual understanding of what Austrian Republicans see, go to:
www.usdebtclock.org 
Do you want to finance a stimulus plan with tax cuts or deficits?  Can we afford a mistake by assuming a tax cut will NOT increase deficits?  A failed Supply-side tax cut is nothing more than Keynesian economics!

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