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Posted on 08/19/2003 9:52:27 AM PDT by Festa
If I am to believe the media, President George W. Bush’s policies have engineered a complete economic meltdown and put us in the worst fiscal condition since the great depression. When I hear this I typically ignore it. As an economics major, I know how to read through nonsense.
Recently, however, it has come to my attention that many economists themselves have entered into this silliness. Recently, the think tank EPI circled a petition opposing the Bush tax cut that was signed by over 500 economists, including several Nobel laureates. What struck me as odd was not that some of these economists opposed the tax cuts, but the reasons they offered. The petition argues against the tax cuts as follows, “Passing these tax cuts will worsen the long term budget outlook, adding to the nations national debt...To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to stimulate demand.” This statement, taken together, is highly misleading
In order to understand why, an overview of what the consensus view is among economists on what to do during a recession. Modern macroeconomics began during the Great Depression. At this time, politicians including Herbert Hoover believed the best response was to balance the nation’s books. The government cut spending, raised taxes, and trimmed the nation’s money supply. What followed was a national disaster. By 1932, one out of every four Americans was out of a job and another 25% were underemployed. Franklin Roosevelt repeated this mistake in 1935 to the same dismal result.
The economist John Maynard Keynes knew this was going to happen. According to his theories, the government needs to run a deficit during a recession. If the government trims spending, the recession becomes worse. Think about it this way: during a recession do you want the government to stop purchasing fighter jets and constructing roads or do these things actually stimulate private enterprise? Within a few years this became common consensus. The belief was so widespread that between 1953 and 2000 the federal government rarely had a balanced budget.
Furthermore, many economists found ways of making this recessionary policy automatic and set up the process precisely so that deficits arise. Because the government relies on income taxes for most of its revenue, when the economy is in trouble people pay less in income taxes because they are working less. This acts as an automatic tax cut. Likewise, government spending automatically increases because as people become unemployed they begin to receive more unemployment checks. These pundits have it exactly backwards; it is bad if the deficit shrank.
Now what I have outlined here is the standard Keynesian analysis of depressions. During a recession you want deficits to increase, you want tax cuts and you want government spending to increase. President Bush’s original tax cut was not simulative. Most of the cuts were not going to take effect until 2006, 2008, and 2010. Therefore if stimulus is to occur, they had to happen now, not later. That is why President Bush proposed to make his tax cuts take place immediately.
Many people question why President Bush phased in his tax cuts rather than just send another rebate check out. The economist Nicholas Souleses recently published a study that highlights the advantages of permanent rate cuts over temporary rebate checks. His analysis compares the rebate checks President Ford issued in 1975 with the Reagan tax cuts issued in 1981. The conclusion is unambiguous: rate cuts stimulate much more because they are permanent and reliable for the consumer. Most people when they get a one-time rebate check pay bills and do not spend it.
“But Festa, isn’t there a way to oppose to Bush Tax Cuts.” Surely, but contrary to the signers, the reason to oppose it is quite conservative. After Keynes laid out his theories, many economists wondered whether or not it was actually a good idea to run a deficit in the long term. After long research they concluded that in the long term deficits crowd out investment due to increases in the interest rate. This decreases potential GDP and has an adverse affect on the economy. Furthermore, monetary policy is neutral in that all it does in the long term is raise inflation. Yet the signers want stimulus and stimulus will increase the deficit, which they do not want to increase. The best stimulus available is immediate rate cuts and increases in government spending. Temporary rebates do not work and “temporary spending” has already been employed. But this increases the deficit. What do they want, stimulus or a balanced budget?
Most economists argue that in recessions modest deficits are ok. This is exactly what is happening. Right now the 455 billion dollar deficit is around 4% of GDP which is enough to cause a panic.
The real reason to criticize the Bush Administration is for the structural deficits that will plague the U.S. thanks to the increasing costs of Medicare and social security. If nothing changes these programs will account for the entire 44 trillion dollar debt the U.S. will accumulate over the next 75 years. Bush is not doing enough in these areas and is also letting wasteful spending get out of control, which only hurts investment. Yet the signers barely even touch on this. The Bush Tax cut will not destroy Medicare, social security, and the budget. On the contrary, the real worries are wasteful spending and the flawed structures of our two biggest government programs. The media pundits, politicians, and economists ignore this and give citizens nothing but partisan bashing and hot air.
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The jobs appear to be being created in India, in China, and so on... what of the American middle class?
Remember those 'scholars' who objected to the impeachment of the perjurer!
Sigh. When will so-called conservatives stop listening to this Fabian Socialist? Bush's economic advisor has even named his dog after this child rapist.
BTW, as one who is studying economics, I think you may find this analysis to be of interest.
P.S. Economist joke: Why has astrology been invented? So that economy could be an accurate science.
We should not, however, commit the fallacy that because Keynesianism is in general wrong (it is), there is nothing respectable that can be plucked from it. It is clear that during the short term lower taxes and moderate spending help the economy. What Keynes and his followers ignored was the medium to long run impact of such policies as I noted towards the end.
Yet such is the duplicity of the people who signed the petition. They want stimulus but ignore the best way to stimulate. In principle, they are not opposed to increasing the deficit, they just dont like the way the president is doing it. Well, what do you want?
Capital will always seek the best return. If you want money invested in this country we need to reduce burdensome business regulation and slash taxes. Otherwise folks with accounts in the Caymans will send their money to China or anywhere else it can get a better return. America gained economic preminence because of her freedoms (people from all over the world come here and make money, notice they come here because they can't make money at home without it being taken away), take those away and you've killed the golden goose.
There's one problem with your theory:
"In the 20 months since the last recession officially ended in November 2001, employment has fallen about 1 percent. This stands in stark contrast with past experience, where, at this point in an upturn, payrolls would be some 5 percent fatter." -- Dr. Irwin Kellner, CBS MarketWatch.comSo the lagging indicator is lagging a lot more than normal.
Government spending is 'stimulative' of government figures like GDP, but that doesn't necessarily mean an increase in wealth. Roads to nowhere and fighter jets we don't use don't help anyone, certainly not more than the things they would have bought instead if the money wasn't taken from them in taxes.
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