Tax Cuts Don’t Cut It or Cure It!

The economics blogosphere is pretty lit up with discussion about Krugman’s latest Op Ed piece  questioning the motives of Republicans over the Obama Stimulus Package.  Believe me it was a joy to read Krugman call down John Boehner for spouting ‘dishonest flak’.  I also enjoyed reading Brad Delong  dispatch Ben Stein (a real economics midget) and John Cochrane (one of the supposed gods of finance) with such ease.  As I have often said here and they argue effectively in the links, there’s a big difference between using tax cuts and government spending for stimulus.  These discussions have pretty much been based on theory we teach first year econ students which makes Delong’s send off of THE John Cochrane even funnier.  Tax cuts just are not an effective way to get an economy off of a downward economic spiral caused by decreases in investment and household activity.  PERIOD.

But rather than rehash my previous pieces here or paraphrase Delong and Krugman, let me take a different track.  No theory this time for me.  I’m going to share with you a nice piece of empirical work by Larry Mishel that proves the point just as effectively.  Hello, Congressman Boehner!  We TRIED tax cuts to stimulate the economy just a few years ago in 2003.  Remember those?  And guess what?  THEY DIDN’T WORK!!!!!    Larry Mishel demonstrates quite effectively that the 2003 tax cuts for “Jobs and Growth” neither created jobs OR growth.

Tax cut approach has already been tried and failed as stimulus:…[The administration claimed t]he Bush tax cuts of 2003 … would generate 1.4 million jobs on top of the 4.1 million jobs that were expected to be generated over the eighteen months following June 2003. See [here]…

EPI tracked the initiative’s effectiveness through a website, www.jobwatch.org, and found that it fell far short of its goals. Not only did the promised 1.4 million additional jobs not appear, but the 4.1 million jobs expected with no action also failed to materialize. In all, only 2.4 million jobs were created—1.7 million short of the administration’s projection without their new policy. Thus, by the Bush administration’s own metrics the tax cut program fell short by a total of 3.1 million jobs (149,000 pr month). For an analysis of how the Bush 2003 tax plan (The “Jobs and Growth” plan) fell short of its job claims see [here]…

On what basis can the conservatives who embraced those failed initiatives now claim that tax cuts are the best policy?

You can go read more of Mishel or take a glance at the  astute analysis from Economist’s View .  This is the blog of University of Oregon Economist Mark Thomas.  You” ll get more of what we’ve all been saying for some time about Voodoo Economics.  Skip the damn tax cuts!  They don’t work! From Dr. Thomas:

So the tax cut policy isn’t really about stabilization policy. There could be jobs that are created from tax cuts, even in the short-run, but in its heart of hearts the tax cut policy is about cutting revenues at every opportunity in an attempt to reduce the size of government. If you doubt this, ask yourself what the right will argue when the economy starts to improve.

The last time I talked about the Republican cure-all for anything–tax cuts–Steven Mather who contributes to my blog likened it to the Republican version of apple cider vinegar.  Republicans argue that it’s good for whatever ails you.   I’m glad, however, that many academic economists are finally crawling down from their ivory towers to outwardly name this obfuscation for what it is: potential poison to all things done by the government.  

As Krugman says, Republicans hate the New Deal and really don’t want this stimulus package to work.  They want this even at the cost of dragging this downturn on for some period of time. Limbaugh has even said as much too.  This is because if a large government purchase led stimulus works a second time, it will more than clearly dispatch the continual politically motivated drivel Republicans spout about the New Deal.  They can no longer point to only World War 2 as the savior of the American Economy in the 1940s when things were clearly on the mend in the 1930s.

If a second New Deal works, and clearly economists from all sides (yes, even Martin Feldstein) believe that government spending in this case can do it, Republican radicals can no longer try to dismantle the successes of the New Deal–especially Social Security–under the guise of anything other than tearing the fabric of the safety nets away from millions of Americans.  I hope, as economists, we continue this public discussion.  I, for one, will not shut up about it.

 As I continue to watch my privately managed Optional Retirement Plan be flushed down the drain of Wall Street greed, I’m more and more thankful for the existance of Social Security every day.  It is, the very important third leg of the retirement stool.  It has frequently been the last leg standing for many people–including my father the retired ford dealer and ww2 medal laden veteran.

This does not mean that we should not be on the watch for pork in the Obama stimulus, indeed, if Senator John McCain or other folks concerned with the content of the package think there’s abuse, by all means point it out and deal with it. Just stop pushing the meme that tax cuts will deliver us from all evil.  It simply isn’t the case.  It’s dishonest.  Republicans want to kill all remnants of the New Deal and continue to strangle government.  So, in a similar vein, President Obama and the Obama administration need to quit pandering to these folks in the name of bipartisanship when it clearly isn’t the intent of the Republicans to behave in a rational manner.  Let them work out the details of the TARP with Pelosi.  Put down the tax cuts and send in the solutions offered up by the professionals, not other politicians.  President Obama, stop hiding behind the safe mantle of bipartisanship and just use your damn bully pulpit!  You promised real change, get on with it!

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14 Comments on “Tax Cuts Don’t Cut It or Cure It!”

  1. Why would Mishel’s study be relevant? It’s farkin obvious that the figures used to promote any government program, whether they are revenue figures, expected cost, or anything else, are always bullshit of the sort that would make Kruschev think of chandeliers.

    And we’ve been over this – perhaps Republicans want to strangle government in La-la Land, or Bizarro world. However, in the USA at the beginning of the 21st century, they just tend to prefer a more military, corporatist brand of socialism. Tsk-tsk.

    It’s interesting how orthodox economists seem to have gotten beaten just as badly by the collapse. Perhaps it’s the predictive power of all those stat models being applied to the future? 😉 / :-p

  2. Jmac says:

    I’m totally confused on the tax cuts. Today the Financial Times writes, “At the risk of alienating the liberal wing of the Democratic party, Mr. Obama conceded $275bn in tax cuts even before he was sworn in.”

    Then I listened to Krugman on a panel with Sam Donaldson and he clearly was against the tax cuts (which are Obama’s plan) and yet some of the liberal blogs are saying thank goodness Krugman was on the panel to support Obama. ????

  3. dakinikat says:

    Jmac: you got me, it’s still the koolaid talking

  4. Steven Mather says:

    BK,

    Using the poison pill of “any figures that are used to promote any government program…are always bullshit..” , eliminates the need for discussion because all data falls to the axe of such dismissiveness, even the data that would prove the claim asserted by your axiom.

    To claim that Republicans would want to strangle some forms of government enterprise is entirely consistent with their wanting to champion other forms, such as those involved with the military industrial complex that you mention. Accordingly, it would be proper for you to stand in front of the mirror and give yourself the “tsk-tsk” admonition. ;*

    Which characteristics categorize economists as orthodox, from your perspective?

    SM

  5. Jmac says:

    Dak – you said this morning on RD’s blog, “we’ve got Dems in power now.”

    In my county, we have the Democratic Party of —- County AND the Obama Party of —– County. Obama is funding these separate groups to push his agenda through. It’s a huge tug of war in our county because the Dem party is worried about down-ticket dems, the O party is just worried about pushing Obama’s agenda. (and I, think, getting him reelected).

    I can’t imagine that Clinton could have gotten away with this.

  6. dakinikat says:

    Jmac: can’t argue with that

  7. SM,
    I’m not dismissing the possibility of accurate figures – what I am dismissing is the possibility of those figures being provided by people with a partisan interest in a given program being enacted.
    There’s not a single thing in government that they’ve really tried to do away with, and they certainly haven’t even thought about touching the things that the nonsensical stereotypes about them might indicate would be their first priorities. Yes, military spending is way up. But nothing else is actually way down. It’s all up as well, though to varying degrees.
    Thirdly, perhaps a better term might be “positivist.” Positivism got the coup de grace 20 years ago in philosophy, but bad ideas die hard, and one of those is that meaningful conclusions can be drawn by aggregating and observing empirical data in a nearly-infinitely complex system.

  8. Jmac says:

    I finally get the tax cuts – Republicans want even more and Obama has refused.

  9. Jmac says:

    I’m as dense as Kristen.

  10. dakinikat says:

    Jmac: I doubt it! When you cut taxes it decreases revenues, creates a deficit and it adds to the debt. The Government pays interest on the debt which adds more spending to the budget and increases the deficit which increases the debt in return and has more interest to be paid. In other words, if you cut taxes one year, it impacts more than one year and carries forward as well as ‘compounds’ or multiplies. So, the original bush tax cuts had limited effects for the first two years, the WSJ article outlines the small amounts which are smaller than the proposed Bush tax cuts. however, by the time they last as long, they’ll also build into the trillions, like the Bush tax cuts have too … that make any sense?

  11. Jmac says:

    Yes, thanks, I clearly understand that part. But I now understand why the liberal blogs thought Krugman was on Obama’s side on the tax cuts – because the Republicans wanted even more tax cuts and Obama refused, which Krugman thought was a good thing.

    I’m like Myiq – the whole thing gives me a headache.

  12. dakinikat says:

    Jmac: yeah, it gives me the ol’ blurry brain too sometimes … i just sorta havta swim thru it some times

  13. murphy says:

    hi dakinikat,

    I dont have your email, so I’m busting in here to reply to your comment over at the confluence.

    YES i sure DID read that NYTimes article. In fact I wrote a long piece about it on Sunday and it inspired a pretty excellent comment thread.

    Here’s the link if you’re interested.
    http://pumapac.org/2009/01/25/rewriting-the-textbooks/

    and p.s. I love everything you write and read it religiously. thank you for the extremely educational and thought-provoking economics and life lessons.

    women economists are #1!

  14. Steven Mather says:

    BK,

    Given that some government programs, such as omsbudsman’s offices, are designed to oversee other programs, your claim of partisan interest seems wrong, unless you are merely stating a truism, which relates to people necessarily holding biases within their frames. I am neither cynical nor naive enough to believe that things are black or white with respect to people behaving selflessly or wholly self-interestedly.
    Frankly, were the latter true, cooperation would not be possible.

    I accept that existence is inertia in the case of government programs. I appreciate your point about existential biases, but it does not seem to carry much mass in the example cited by dakinikat because, if it did, someone would also have been producing data trumpeting the success of the tax cut program.

    Comte had good aims, as did the positivists associated with the Wiener Kreis, which appear to be the ones to which you object. Certainly, their program of describing Archimedean data points collapsed upon itself. This said, and given the Quine-Duhem thesis and the underdeterminations of theory by data and logic, it is important to recognize the limitations of logical limitations in real world practise. That it is theoretically the case that an infinite number of theories could contain the same data points does not mean that such alternate theories are equally efficacious. In practise, they do not tend to manifest themselves and practise is the realm where meaning is made. If the theory works, how can it be said to lack meaningfulness, even if it is recognizably rough hewn and clumbsy? Furthermore, how are we to get anything done if we can’t start until we hold the truth?

    Cheers.

    SM