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Tax cuts and tanks require real money

Ronald Reagan's OMB director David Stockman has been getting some attention for this op-ed flaying conservatives for their fiscal fantasies. The argument isn't really new, but it's always worth laying out clearly.

The issue isn't that conservatives don't care about the deficit. We don't really know whether Republicans care about the deficit. They say they do, and they would certainly prefer to reduce the deficit than give people health-care coverage or keep states from firing 500,000 employees. The issue is that they care about tax cuts and defense spending more. If they weren't interested in cutting taxes or purchasing lots of tanks, their deficit record might be quite good. But as it is, every time they get power, they focus on tax cuts and defense spending, and because you can cut a lot more taxes and spend a lot more on defense if you don't have to pay for any of it, they add both of them to the deficit.

Now, when Democrats get into power and want to do things that aren't cutting taxes or invading other countries, Republicans tend to prefer reducing the deficit to doing whatever it is that Democrats want to do. So though Republicans often campaign based on their concern for deficits, the best way to ensure they remain concerned about deficits is to keep them from holding power.

By Ezra Klein  |  August 2, 2010; 5:25 PM ET
Categories:  Budget , Taxes  
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Comments

"The issue isn't that conservatives don't care about the deficit. We don't really know whether Republicans care about the deficit.... The issue is that they care about tax cuts and defense spending more."

This is too cute by half Ezra. Kevin Drum's take on this is much more direct, i.e., conservatives on the whole really don't care about the deficit. They care about tax cuts for the wealthy, defense spending, and cutting goods and services for the middle class and poor except insofar as those cuts directly affect people like them (e.g., the mortgage deduction, or if they're elderly Medicare). Considering that the top two things all conservatives love (tax cuts and defense spending) have actually exploded the deficit in the past decade, we can say with confidence that conservatives definitely do not care about the deficit. The end.

Posted by: steveandshelley | August 2, 2010 5:58 PM | Report abuse

The GOP takes its economics a la carte - any proposition that rationalizes tax cuts and spending cuts is true, whether it's Keynesian or anti-Keynesian, hawkish on deficits or profligate.

Posted by: jduptonma | August 2, 2010 6:13 PM | Report abuse

The government is spending too much money. It all has to be paid for with taxes, either now or we borrow and pay later. Ezra being willing to pay for spending with tax hikes, doesn't make him more virtuous in our eyes - we'd rather not spend the money in the first place.

Posted by: MrDo64 | August 2, 2010 6:17 PM | Report abuse

No one cares about the deficit. The Democrats were the same way; they complained about spending under Bush, but now the deficit has increased by an order of magnitude under Obama. If only there were some way to keep both parties out of power.

Posted by: tomtildrum | August 2, 2010 6:42 PM | Report abuse

h@MrDo: we'd rather not spend the money in the first place.

This is just false. Conservatives were happy to put a trillion (more like 3 trillion after all is said and done according to Stiglitz) on the national credit card for 2 totally mismanaged wars and a bunch of no-bid cost-plus contracts to the defense industry. If they weren't, how did the Bush budgets pass the "conservative" congress? Republicans were happy to put Medicare D on the national credit card to pander to seniors. Conservatives just can't abide spending on the poor, minorities, the disabled, public sector workers, and the unemployed. That is the point of Ezra's post.

Posted by: srw3 | August 2, 2010 7:21 PM | Report abuse

"The government is spending too much money. It all has to be paid for with taxes, either now or we borrow and pay later."

This is true of both tax cuts and deficit spending. It applies to anything that adds to the debt. This is true of stimulus spending or Bush era tax cuts. This is why in economics, you often hear the phrase, "there are no such things as tax cuts, only tax deferments."

There are two more nuanced observations one must take into account though. Things that induce more debt during "good times" are just plain dumb. That is when one should pay down old debt. Things that induce debt during "bad times" arguably have benefits if they can get us off a low growth path that ultimately is more detrimental to the economy than the increase in debt.

Both tax cuts (or tax rebates) and deficit spending are arguably good things during recessions because of this. The question becomes, "where do you get more bang for your buck?" as that will determine whether or not it is worth the increase to the national debt (ie "low bang for the buck" is not worth it, "high bang for the buck" is). The answer, empirically, is that its best that the extra money (either via spending, or via tax cuts) be put in the hands of the less well-off as they have a higher marginal propensity to consume (thus increasing the multiplier effect of the policy). If you're going to go into debt during the bad times to rescue the growth path, you might as well make it worthwhile. This is why something like extending the Bush tax cuts for the wealthy is seen as a waste of debt-increase while extending unemployment isn't. One has a much higher "bang for the buck" thus increasingly the likelihood that this debt-increasing plan is, in the end, a net boon for long-term economic growth in an attempt to close what we economists call the "GDP gap" (ie, the difference between actual and potential GDP).

Posted by: nylund | August 2, 2010 7:38 PM | Report abuse

To follow up on the above, the problem, in part, stems from the fact that although both sides succumb to some ideological preference, for the most part, one position has quite a bit of empirical data to support it, while the other is nearly entirely ideology. It seems to me that the latter group assumes that since their position is based nearly entirely on ideology, the former is as well.

This doesn't seem to change no matter how many times people post clear charts and graphs of the data. When that happens, the one group just sticks their fingers in their ears and screams, "laffer curve! Trickle down economics! blah blah blah" Well, thats not quite true. The latter group does have a bunch of think tanks that shows, IN THEORY, if you make a number of unrealistic assumptions unsupported by the data, that X SHOULD happen, even though it never has (and never will), leading to a "my chart says the opposite of your chart" battle even though one is based on what has actually happened in the past and the other on what may happen, given a bunch of unrealistic assumptions.

Posted by: nylund | August 2, 2010 7:47 PM | Report abuse

republicans will run in 2010,
on 'voo-doo' economics, as explained here:
http://www.youtube.com/watch?v=NkJkJRZdY80

Posted by: huj534op | August 2, 2010 8:08 PM | Report abuse

Now that was a funny.

Posted by: leoklein | August 2, 2010 10:01 PM | Report abuse

hahaha POT hahaha KETTLE hahaha BLACK

The track record when Democrats are in power?

$1.4 trillion deficit in 2009.

$1.5 trillion deficit projected for 2010.


Posted by: bgmma50 | August 3, 2010 12:39 AM | Report abuse

@ tomtildrum:

That's not true. Almost the entirety of the deficit comes from:

a) lost revenue due to the recession
b) the Bush tax cuts

Posted by: jldarden | August 3, 2010 8:38 AM | Report abuse

I was wondering what "conservatives" might post in response to Mr. Stockman's article. I see that they harp on the amount of the deficit. But, as Ezra has said, it matters what the deficit is spent on.

Posted by: gratis11 | August 3, 2010 9:13 AM | Report abuse

The last Democratic President balanced the books starting with a budget passed in 1993 by one vote that Republicans swore up and down would destroy the economy.

Years later, they're now trying to take credit for the decade of prosperity they did everything in their power to prevent.

Once they took power in the 2000s, they absolutely killed employment, busted the budget and then drove the economy into a ditch. Jimmy Carter had a better record than these clowns and that's saying something.

Why does anyone care what the Republican party has to say about anything again?

Posted by: lol-lol | August 3, 2010 9:48 AM | Report abuse

"So though Republicans often campaign based on their concern for deficits, the best way to ensure they remain concerned about deficits is to keep them from holding power."

No, the best way to keep them concerned about the deficits is to have divided government, similar to 1994 - 2000. Then neither party can do anything and you can reduce the deficit by funding the government by continuing resolutions.

Posted by: jnc4p | August 3, 2010 10:25 AM | Report abuse

First of all, Congress initiates spending. The 110th and 111th Congress have initiated the trillions of dollars spent since Jan 2007. Both Congresses were controlled by the Democrats and Bush did sign off on some of the spending while he was still in office, but the majority of the spending has been approved by Obama. Bush did sign TARP, but that money was actually paid back, although liberals seem to forget that fact. They also seem to forget entitlements require real money. More real money than the country will have available for many years, maybe decades. Tax hikes are coming and they will effect everyone (yes everyone) and in more ways than you can imagine.

Posted by: bajaMN | August 3, 2010 12:31 PM | Report abuse

Nylund,

I appreciate your effort to bring some objectivity and empiricism to the comments. I just think you are wrong. At best, the jury is out as to whether tax cuts or fiscal stimulus have the higher multiplier. Greg Mankiw's National Affairs paper (recently linked to by Ezra) says:

"The Romers' conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 — in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama's advisors assumed it was during their policy simulations.

Of course, it could be that all multipliers are larger than previously assumed. Perhaps fiscal policy has such a great influence over our economy that, if the tax multiplier is 3, the government-spending multiplier is 4 or 5. We don't know from the Romers' study; they did not analyze government-spending multipliers, only tax multipliers. But several studies on government-spending multipliers have been conducted using techniques similar to those used by the Romers. And none has found government-spending multipliers to be so large as to justify assumptions about the inherent superiority of government spending over tax cuts." (Google Mankiw Crisis Economics)

Steve

Posted by: FatTriplet3 | August 3, 2010 4:10 PM | Report abuse

Nylund,

The following paragraphs in the Mankiw paper are too good not to challenge your assertion about the state of the evidence:

"Some excellent work on this topic has come from Valerie Ramey of the University of California, San Diego. Ramey finds a government-spending multiplier of about 1.4 — a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (of the University of London) and Harald Uhlig (of the University of Chicago) have used sophisticated statistical techniques that try to capture the complicated relationships among economic variables over time; they conclude that a "deficit-financed tax cut is the best fiscal policy to stimulate the economy." In particular, they report that tax cuts are about four times as potent as increases in government spending.

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments.

The data in the Alesina-Ardagna study are mostly European; only a small portion comes from the United States. But the evidence leads to conclusions that are very similar to those from Mountford and Uhlig's work using American data. These conclusions are also consistent with the work of Ramey and the Romers, which looked at the historical record to identify multipliers. There appears to be a growing body of evidence, then, suggesting that taxes may be a better tool for fiscal stimulus than conventional models have indicated."

Steve

Posted by: FatTriplet3 | August 3, 2010 4:15 PM | Report abuse

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