President-Elect Obama announced yesterday, January 5th, 2009 that his administration was going to be offering $300 billion dollars in tax cuts. This is great news for the consumer right? I mean, who doesn’t feel that the government already taxes us too much as it is. There is a problem though.

During a recession or depression, tax revenues that are collected by the government go way down simply because people are losing their jobs or getting wage cuts that result in their paying less tax. Businesses are also shrinking or going out of business which further reduces government revenue. Cutting taxes therefore seems like a good idea but in a severe downturn like we are in right now, cutting taxes only makes the problem worse. Further, in a bad economy where consumer confidence is at an all time low, people will take the extra money they are getting from the tax cuts and simply save it. They won’t spend it yet that is why the government is offering tax cuts. Further, as Mish points out, these tax cuts will work at to about $19 / week for the average American. Clearly not something that will have a huge impact on the average household. It look to be something more for political purposes than real relief.

Obama is trying to pull out all the stops to get the economy going again. I give him full marks for at least doing something for the average Joe on the street. The previous administration was only concerned it seemed with the super rich. The problem comes from the fact that this will lead to further U.S. debt and will do little to nothing to stimulate the economy.

Paul Krugman argues, I think rightly, that public investment will give more bang for the U.S. buck than tax cuts. He makes the point that public stimulus will leave something behind when it is done whereas tax cuts will not.

Others argue that it doesn’t matter what the government will do at this point, the economy will continue to tank for the next few years. Some, like Robert McHugh, and Mish, predict using Elliot Wave theory that we are still staring at a grand super cycle correction some time in the next 1-6 months that will make the just finished crash look AND the great depression of the 1930’s look like child’s play. Time will tell I guess.