One of the goals of our blog is to provide pertinent information to investors and to provide transparency on the MCS investment process.  MCS has received several questions regarding Wednesday’s blog, specifically on reducing taxes and increasing spending which must seem counterintuitive.

Speaking about taxes, spending and politics combined remind me of the brilliant book and movie by Frank Baum, The Wizard of Oz, especially the line “Lions and Tigers and Bears-Oh My.”  Since our office is physically located close to Washington DC, we know talking about politics is a sure way to get people fired up, scared and sometimes even angry; and politics can make people focus on the “OH My”, instead of a solution to the problem.

MCS speaks from a Capitalist bent.  Republicans want taxes cut -Democrats want spending increased so the blog should have appealed to both sides but that was not our goal.  For clarity, that blog had no political bent and was strictly from a economics and financial standpoint.  When an economy is in trouble and not functioning efficiently and effectively, the two primary factors that could dramatically alter that direction are massive tax cuts and huge spending programs.

Forget about the Deficit and what the mainstream media touts for just a minute.  An efficient government will always run at a deficit between 1-3% of GDP.  US GDP is projected this year at $17T and the projected deficit is $600B-$700B, thus the US deficit would be between 3.5-4%.

If both programs, tax cuts and infrastructure spending, are implemented simultaneously what would happen during the course of the year is that the deficit would increase more rapidly, initially.  The cut tax impact is immediate and the purchase of goods and services would not kick in until mid-year or after.  For 6-12 months the deficit would increase until the actual spending could ramp up; it takes time.

The second year is when the benefits would be significantly noticed.  At that point, the country would be entering full employment due to hiring millions of people to support the infrastructure spending.  Full employment pushes wages up and increases prices. (Just think of the increases to companies like Home Depot and Lowes alone!)  Thus there is a lag time initially until the taxes from the newly hired workers flow into the government coffers.

Once maximum employment is reached, the government should begin to reduce or eliminate the tax cut. From that point forward they would be taxing everyone at the old rate, money is flowing in and the deficit plunges into an acceptable range of between 1-3%.  Once the infrastructure projects begin to wind down after many years, additional funds can then be directed back to other agencies of the US, the military, homeland security and the CIA just to mention a few.  This is not a new concept and should sound familiar.  It is in essence what happened over the past 100 years and is part of the economic cycle.

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