The Laffer Curve

In my last post I mentioned the underlying problem in the economy.  I feel like I should be clear on what I'm talking about here.  To start there is something called the Laffer Curve in economics.  This curve suggests an ideal rate of taxation by government and follows common economic laws for the business cycle.  It is shown below:
 

This curve shows the revenue for the government as it increases taxes.  The point of diminishing  returns to scale suggest incentives to work have decreased because taxes are so high.  Now, what does this have to do with the underlying economic problem?  Well, given the recent state of the economy one could suggest a shift in this curve.  I would certainly suggest that the optimal tax rate for maximum revenue would decrease in a recessing economy.  This notion however is countered by increased government spending during a recession through stimulus packages.  These stimulus packages are meant to keep spending at current levels by simply giving people and industries more money to sustain the "optimal" level of spending.  I put optimal in quotations because I don't feel there is an ideal universal level of spending for the private sector or public sector for that matter.  In order to maintain this level of spending that has generated economic growth in recent years stimulus packages are expected to trickle down and solve the economic crisis. 

We all live in this economy and have noticed very bleak improvements.  One of the reasons for some improvements is perhaps the system of government we have which separates state and federal responsibilities.  However, that is another blog post for another day.  The fact that the economy is in a state of decline is due to the idea that an increased amount of spending will always solve the problem.  It doesn't.  And simple economics shows us that there is a point of diminishing returns to all spending...as marginal cost increases it eventually hits a point where it increases exponentially and thus diminishing marginal returns come about.  These stimulus packages only allow to pay for the increasing marginal costs but do not increase marginal returns and in fact keep the economy in the area of diminishing marginal returns with no ability to correct and begin a new cycle.  

The attitude that spending will solve the problem can be traced back to the mortgage loans given to unqualified recipients.  It can also be seen in the increased government funding to education.  While education has not been the best in America, we have seen increased government spending with very little, if any, improvement.  And while state governments make cuts to education, that attitude shows it's ugly face again and demands MORE spending to fix the problem.