Wednesday, September 08, 2010

Tax cut for the multimillionaire will be a stimulus to China

Even Peter Orszag is advocating extending Bush tax cuts for two years:

The reason is that the economy needs stimulus, and only the tax cut extention will receive bi-partisan support.

The economy is producing only 93.5% of its capacity according to WSJ. But 20% of the tax cuts go to people making more than a million - about 300,000 individuals. They are unlikely to consume more. And with idle capacity abundant they aren't likely to invest in the U.S. , either. I think they are most likely to invest their tax savings in China, where labor is cheap and capital return is more certain.

So in a globalized world a U.S. tax cuts will stimulate Chinese economy.

Tuesday, September 07, 2010

A stagnate future for the US economy

This is the source of Japanese style stagnation. US Economic growth is likely to remain low perhaps less than 2% a year over a decade. Unemployment will stay high for the forseeable future. People will gradually adjust to the new reality.

If housing price can not adjust downward, the only way to full employment is to raise the price of other goods and service - inflation. Holding down the mortgage rate alone will take a very long time to clear the market.

This is a political struggle between homeowners and bond holders.