The Republicans Just won’t Trade in their Fairy TalesPosted: November 11, 2012
There’s a notable absence of economists on panels in the mainstream media that discuss the fiscal “ramp”. I’m refusing to call it a fiscal cliff because that’s a misnomer. I’m not sure why they won’t put research economists on these panels. Perhaps they think we’re not photogenic or–despite the fact that a lot of us teach–we can’t explain ourselves. There’s an extremely strong consensus in the economics community on the s0-called budget crisis. Dragging out mainstream economists like Paul Krugman and Joseph Stiglitz and labeling them lefties because of their political leanings is rather disingenuous. It stops them from getting on panels where they could actually explain to people what’s what.
The corporate press would rather haul out a few journalists with real background in the field. There’s a difference between asking a journalist, a lawyer, or some self-anointed policy expert a question on economic theory. First, asking an economist to answer a question as an economist means they’ll stick to the theory and the empirical findings. Second, you can actually pull in almost any economist either trained after about 1980 or who has kept up with the dynamic business cycle models, the empirical findings, and theories and you won’t get much disagreement. You wouldn’t know that if you listen to the press, which seems to be made up a few folks with MBAs who have very little understanding of theory, models, or findings.
Deficit hawks tend be either Wall Street types, lawyers, or partisan right wing politicians. The folks that are screaming worst about dropping the tax cuts for the uber rich tend to have the most to lose personally and the least to lose professionally. Study-after-study-after-study shows that tax cuts to the middle, working, and lower classes and to young people tend to create completely different circumstances than they do for older people and the rich. First, there’s more folks in the first group. Second, they tend to spend a lot more of their current income. Third, their savings and investment opportunities are limited, so the assets they use stay in the country. None of this applies to the uber rich who tend to create jobs and wealth overseas these days and work hard to avoid taxes anyway. We’d do well to just simply let go of the idea that increasing the tax rates on the rich will either lead to unemployment, won’t pay down the deficit, or will suppress growth. These are tales of sound and fury signifying nothing but personal greed.
It is true that we are not on a sustainable spending path. This is because of the direct actions of the Bush administration. They lowered tax rates. Ran two huge wars with no tax increases. They oversaw and created two recessions. They created an asset bubble and then popped it. Growth, employment, and the value of taxable assets all decreased because of their actions. We simply have to reverse their trajectory. We have to do some work on Medicare and we need to walk away from the decaying, rotting corpse of Zombie Economics. The Republicans still won’t let that rotting corpse go.
Krugman talks about some of this on his blog in a post called “Squirming Hawks”. Paul Krugman may be a liberal but he’s certainly not going to risk his reputation in the economics community to spout crackpot hypothesis. Look at what happened to Arthur Laffer whose basically been expunged from any serious text, publishing deal, or institution. When you push crackpot hypotheses that do not stand up to empirical testing and you do not give them up and move on, the community of those who base their research on the scientific method will write you off. Those that follow Hayek and Von Mises have been similarly written off. Their ideological hypotheses do not stand up to any empirical testing.
Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you’re in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.
So they’re left making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:
a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.
Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?
Meanwhile, the CRFB features on its home page an op-ed by Jim Jones declaring that
We are perilously close to trillion-dollar yearly interest payments, 7 percent yields on 10-year U.S. Treasury bonds, 10 percent home mortgage rates and 13 percent rates on car loans. For the good of the country, the parties must come together and not let this happen.
How does he know that we are “perilously close” to this outcome? Not from the markets; not from any kind of economic model. My guess is that Peggy Noonan told him.
Scaring people with large numbers that are not grounded to other large numbers is a mean and terrible thing to do. We have a huge tax base. We have more than enough ability to continue to borrow at low interest rates. We have the ability to print money. We have all kinds of options. We have a huge economy that is showing signs of coming out of a lot of trauma. We should get a double peace dividend shortly. These things point to a very good reason not to be crazy-go-nuts like the Europeans and fall on the austerity sword.
I think that Mark Thoma has some interesting things to add to this conversation. He asks rhetorically and then answers: Hasn’t Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason…
I guess Paul Krugman hasn’t heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it’s ticked at the CBO because “it assumes higher tax rates generate more money” when making budget projections. That’s right, despite all the evidence against the claim that tax cuts actually increased revenue — it’s a myth that won’t die because people who know better, or ought to, still promote it — we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.
And that’s not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
I’ll pass over the “record levels of unemployment’ claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word “levels” and ignoring population growth — and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most).
On the main claim about fiscal policy, there’s plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts — it’s amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.
Republicans just can’t help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn’t agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don’t want to hear (so they basically cover their ears and ignore them).
The Republicans aren’t the only ones doing this. I watch about 5 minutes of an Ali Velshi panel that really horrified me. No one there directly took on Stephen Moore of the WSJ on that same damn fairy tale about job creators and tax rates on the rich. Why doesn’t any one mention that his assertions have no basis in reality, theory, or empirical evidence and have been thoroughly trounced? Better yet, why is some one who spouts propaganda even on a news program that supposedly informs people about economics, finance, and policy? There was one truly knowledgeable person on the panel. The rest of them should have asked questions then listened to Mohamed A. El-Erian. Again, Stephen Moore should only be placed on panels where fairy tales are involved. His degrees in economics are obviously stale. Plus, he works with Laffer whose been laughed out of any organization that contains serious economists. He’s basically a tool of the plutocracy.
Sen. Patty Murray (D-Wash.) on Sunday said Democrats were prepared to allow the expiration of all George W. Bush-era tax rates if Republican lawmakers objected to raising taxes on the wealthiest.
“We can’t accept an unfair deal that piles on the middle class and tell them they have to support it. We have to make sure that the wealthiest Americans pay their fair share,” said Murray on ABC”s “This Week.”
Murray said one option would be to let the lower rates expire across-the-board and then return to the table next year with new talks on a tax-cut package.
“So if the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year. And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this,” said Murray.
The Washington senator is likely to become chairwoman of the Senate Budget Committee and previously served on the congressional “supercommitee,” which failed to finalize a deficit-reduction plan, which may trigger sequestration cuts in January 2013.
The evidence points to the recessionary impact of tax cuts on the middle class. There is nothing that shows allowing the Bush Tax cuts to expire will do the same. Republicans keep suppressing the evidence.
In particular, the CBO gave its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, the numbers show.
Just like the damn things did little good for the economy and most of us, letting them die would do little harm. I hope the Dems just hold to the facts and that the election has given them some resolve to do the people’s business.