On Extending the Bush Tax Cuts

All good points, but I must say I think Russ is the only one to get to the kernel of the question. We’re not in the price theory world: we’re in disequilibrium, so what we need are policies that get us into market clearing (particularly, the labor one). His conclusions are similar to yours, but his rationale is more applicable to the case at hand. His cancer analogy is great btw.

In our current economic and legislative environment

A) Productive people have sensed that they will be increasingly painted as the villains of our society unless they eagerly surrender an ever increasing share of their labor with others. And they know that willing or not, an ever larger proportion of their efforts will be confiscated to serve others through inefficient government spending. Therefore, at the margin, these most productive of people, are working a little less hard these days.

Meanwhile

B) a sizable portion of the less productive believe that “hope and change” will deliver some results, (even if through inherently inefficient government management) and thus they too are working a little less hard these days.

Perhaps macroeconomists can play a few more tricks shifting money from one pocket to the other and temporarily fool some of these people into not lowering their productivity. But as they say “you can fool most people some of the time…”. Eventually the inescapable reality that a nation’s economic prosperity equals the total amount of goods and services it produces, will override any smoke and mirrors macroeconomic manipulation.
Incentives to produce are being lowered for both competent and less competent. Therefore the new base trendline of American economics will be slower growth. Slower growth in a world that grows at 4% means that Americans, in relative terms, revert downward to the worldwide economic average within a couple of generations. The vicious cycle whereby voters typically respond to economic distress with calls for more central planning and more redistribution, will probably accelerate the process.