Avoiding the simplistic, re: tax cuts and spending [View all]

[cthulu2016]

For all the Republican denial and scorn of Keynes you would never guess that he was the guy that settled the matter that tax cuts do stimulate the economy.

Unfortunately, ALL Republicans and a few Democrats have assumed differing politicized quasi-Keynesian views that distinguish tax cuts and spending increases categorically.

All Republicans think tax cuts are awesome and spending increases are bad. This is based on a weird fantasy that government is evil and thus cannot contribute to the economy in any productive way. Yet government infrastructure is clearly more economically productive that starting a dozen hedge funds. (Try opening your factory somewhere with no roads or running water.)

Some Democrats (and others on the left) take the view that tax cuts are simply not stimulative. Since we are the smart side, and that is flatly wrong, where does that come from?

Government spending is, on average, more stimulative dollar-for-dollar than tax cuts. Given the choice of adding $500 billion to the deficit by borrowing $500 billion to fix bridges or borrowing the same $500 billion to pay for tax cuts for the rich it is quite obvious that the bridge repairs will be more stimulative. That does not, however, mean that the tax cut for the rich is not stimulative. It is. It is merely among the least stimulative uses of $500 billion of borrowing, and thus a dumb idea.

The trap some of us on the left side of things have fallen into is that after decades of arguing that spending is superior stimulus and tax cuts are usually unwise, thatsome have gotten the impression that tax cuts are categorically unstimulative, as opposed to less-efficiently stimulative. Like saying bowling balls are heavier than billiard balls (good so far) thus billiard balls have no weight (incorrect).

Any reduction of the federal deficit in current economic conditions is contractionary. Any reduction. Even eliminating Medicare fraud is contractionary. It may be an excellent idea for other reasons but it is still contractionary, considered in isolation.

Right after Obama took office (or perhaps shortly before) a member of his team spoke some real economic truth about the stimulus. He said we should have a stimulus package. The TV interviewer said, "How do you plan to pay for it?"

He replied, "If you pay for it it isn't stimulus."

Correct. Stimulus doesn't increase the deficit as a byproduct. Increasing the deficit is very much the point. When private borrowing and consumer spending nose-dives (as it had) the the government is correct to borrow more (making up for reduced private demand for credit) and somehow get the money to consumers (making up for reduced consumer spending).

Tax cuts are not a very good efficient to accomplish that. Tax cuts are not optimal stimulus.

But if your only choice in 2009 was huge tax cuts or nothing the huge tax cuts would have been correct. Note the word "if." If that was the only choice then tax cuts would have been correct.

Tax cuts are almost never ideal policy but they are stimulative.

Now then... should the Bush tax cuts be extended? If they are all allowed to expire the US economy will shrink as a result. If they are allowed to expire only on income over $250K the US economy will still shrink as a result, but much less so.

That does not answer the question, of course. Say ending the Bush tax cuts on income over $250K generated $500 billion. (A round number for an explanation, not a real figure.)

If that $500 billion was then used to increase government spending by $500 billion over what it would be otherwise then the move would be net stimulative. If, however, the government took in an additional $500 billion and did not increase spending then it would be a blow to the economy.

There is no economic downside to the the deficit in the world of 2012-2013. None. In fact, the deficit is the only thing keeping our economy moving forward right now. Reducing the deficit would hurt working people today. It is not a desirable thing, for its own sake, no matter how it was accomplished.