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At least I admit it.

So I’ve heard people with a professed Keynesian bent argue that we should end the idea of “tax cuts for the rich.” Fine, I suppose. But I’ve even heard this uttered during recessions, including the time from 2007 right up through today. I am not making this up so far, am I? OK, isn’t a primary objective of Keynesian economics that we should conduct countercyclical economic policy to cool down expansions and get the wheels turning again during recessions? So, while Keynesians might prefer additional government borrowing and spending for a variety of reasons (go check the empirical literature on this question by the way, you’ll be fascinated), tax cuts would also serve as stimulus when times are bad and tax increases as ways to cool things down during boom times.

Given this general idea, how is it plausible that Keynesians argue against “Tax Cuts for the Rich?” I can’t see it. It is argued that we should instead direct tax cuts to the poor. I can see why of course – you can argue that they have a greater propensity to consume newly granted income than the rich. But on economic grounds that’s shaky to begin with – do rich people EAT their tax cuts? If they stick it in the bank, then instead of consumers spending it, it ends up being spent by folks in need of excess loanable funds … in other words it just ends up as I instead of C in the fancy macro equations.

So, while it might reasonably be argued that tax cuts nicely targeted at the poor would be better there is not really a leg to stand on to oppose tax cuts to anyone in times of recession. Or is the primary objective actually NOT to fight recessions, but rather to use recessions to enact policies you otherwise couldn’t get accomplished.

Two final points that I think I’ve made long ago here.

(1) The fact that I’ve never heard a Keynesian vociferously argue, or write a heated OpEd, arguing that “now the economy is ON FIRE!” And it’s high time we slashed the government budget deficit to cool things down a bit, tells me of course they we’re arguing from an identity, not a principled theory.

(2) People smarter than me have correctly pointed out that there is no such actual economic theory called “trickle down economics.” I’ve never seen it in any economics book that was used to teach me, nor did I even see the term “supply side economics” used. It’s a straw man term invoked politically, not by actual real, living, breathing economics people. Nonetheless, it is used as a term of ridicule even to this day. But suppose we accept the ridicule, and accept it proudly. Then what dear reader, exactly, is Keynesian economic stimulus? Give some tax cuts to people or have the government spend a lot of money and they spending will “trickle down” to everyone else. This is particularly the case of stimulus spending, when it is most certainly not targeted well at lower income people.

4 Responses to “The Keynesian Pretzel Factory”

  1. Doug M says:

    In the Keynesian theory, an change in income leads to a change in consumption which triggers a cycle of income and consumption driving one another until the two settle out at a new equilibrium.

    By this theory we should expect most of the cyclicallity of GDP, then to be primarily changes in C, even if it was a change in G or I that triggered the change in C. Does the data bear this out?
    No.
    While consumption is the largest share of GDP. Changes in consumption are smaller than changes in Investment.

    • Harry says:

      Doug, good point.

      My question is how the hell do they know what G and C are? Because these are the numbers reported to the statistics gatherers? This is a question from a person who spent more time than necessary exploring the data presented in Barron’s Market Laboratory, always a source to lead to a desired conclusion.

      The experts in the government plug in blunt data derived from reports that we send to them, we being the people who comply when, for consumption, report taxable sales transactions at retail. Others, working in the warehouse, report sales that left the warehouse and went to a customer, or went to a trailer parked a mile away, depending on business decisions about how to handle the transaction, subject to the accountants. Are you going to trust these numbers the same way as if Annie Oakley were to promise she would just shoot your cigar and not you?

  2. Harry says:

    Excellent, WC.

    Trickle Down is indeed a political term, used today to mischaracterize “supply side economics”. Indeed, as Wintercow knows, the idea that tax cuts per se are dogma for supply-siders is accepted widely, even though it misses the point. (When I refer to supply-siders, I mean largely the editors of the WSJ editorial page, notably Robert Bartley, Jude Wanniski, et al, and sympathetic op ed contributors.) The term “supply side” contrasts with “demand side”, which is what big government people who draw their authority from Keynes like to manipulate, as WC points out, in the direction of “stimulus”.

    For example, in early 1993, just after Clinton got elected, and a year after the recession had ended, there was Laura Tyson, head of the COE, talking stimulus, showing her Keynsean colors. Never mind what happened after that; they had to reiterate the principle that we will be doomed if the economists are not at the helm, in control of the buttons and levers that regulate aggregate demand. We have better equations and better data, and we know what we are doing, now that we have a 486 computer, and can manage trickle down better.

  3. Harry says:

    I should add that supply siders do not deny that stimulating aggregate demand does not have any effects, some of them beneficial. Nor would supply siders (good supply siders, who agree with me always) argue that aggregate supply can be managed by the experts, even if they may make some beneficial decisions. (I cannot think of any right now, but that is a possibility.) The point is to allow the free people to prosper, and where possible, to avoid breaking windows to employ more glaziers and stimulate demand from subsidized broken window owners. There are two sides to the stimulus coin.

    So the question is not whether you pledge allegiance to Keynes or Jude Wanniski, but what do you think about the ideas in this momentous controversy. It sure would be good if a cricket would speak up.

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