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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Saturday, September 27, 2008

The US Economy....

Consumer spending accounts for around 70% of GDP up from around 60% 20 years ago. I have stated in the past, that consumer spending needs to fall back to the 60% level. What that implies is not necessarily a bad thing. What consumers don't spend, they save. So, a change of 10% of GDP shifting from consumption to savings is around $1.3 trillion of additional savings and investment.

The problem is, as we are seeing in the current financial crisis, is that the risk that this change will come about very quickly instead of over time. We have to see about that.

But also, US tax policy HAS to change. Tax policy that gives more money to middle class consumers, unfortunately, typically goes into consumption and does not increase savings. Tax policy in the US is simply horrible. What sense does it make to, for example, create tax benefits of mortgage interest? What does this do? It encourages more debt. It increases the cost of housing since people do not mystically get the benefit but look at the after tax cost of buying a house. So, if there was no tax benefit for mortgage interest, then the price of housing would fall to a price so that the after tax cost is the same as if there was a tax benefit over time. So, therefore, its silly to have this tax policy for mortgage interest. Taxes change people's behavior and skew decision making.


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