Freedom Isn’t Free
Paul Krugman has a compelling post about the old canard that cutting taxes increases revenue. I’ve heard Giuliani spouting this line on the campaign trail, pandering to the Club for Growth crowd.
This seems to me to be a conservative fantasy, a cynical ploy to appeal to people who are so opposed to paying their taxes that they are willing to abandon the most basic logic. Surely we can all agree that if we cut taxes down to zero, then we will take in less revenue. Therefore, it must follow that there is a point beyond which cutting taxes cannot increase revenue.
I do understand the economics behind the principle. Cutting taxes leads to more disposable income for consumers, which leads to greater demand for goods and services, which leads to increased demand for labor, which leads to increased employment and wages, which creates more overall income to be taxed. However, in this age when outsourcing of labor is on the rise, and America is importing more goods than it is exporting, that chain seems to have a few weak links.
January 17th, 2008 at 12:53 am
The economic boom of the ’90s didn’t boost the economy, either. I hate to be an iconoclast, but my understanding was that the United States did very well for itself mostly because of the collapse of the Soviet Union as a major player in the global economy.
Tax cuts or tax increases have little to do with it.
Presidents have little to no control over the economy — that responsibility is left to the Fed and, to a lesser extent, Congress.
Ideology and economics shouldn’t be mixed, and Krugman is as guilty of that as anyone else. Well, maybe not as guilty of it as Bush, but most people.
http://awaitingtenure.wordpress.com
January 17th, 2008 at 9:45 pm
Benjamin (if I may), I warmly welcome people with viewpoints that differ from mine, because they encourage vigorous debate. In that sense, your comments are particularly welcome. In the spirit of that debate, I’d like to counter your assertions.
First of all, I don’t know where you get the idea that ideology and economics shouldn’t be mixed. Economics is far from an exact science, and any economist brings to the table a philosophy of economics that informs his or her practice. Did Keynes keep his ideology out of his economics? Did Milton Friedman? For that matter, what about FDR and Ronald Reagan?
Krugman is very up front about his ideology, but you should take note that he always backs up his opinions with valid economic theory and data in context. Compare this with the free market crowd who spout the mantra of lower taxes as though no further explanation is needed. You mentioned President Bush, but he’s actually one of the tamer examples.
There is a philosophy, almost a religion, among certain conservative circles that free markets will solve all of our problems. They believe that the income tax is bad because it interferes with the market. I believe in markets, but they often require regulation, and sometimes they are not the best answer at all.
I’ll grant you that presidents have less control over the economy than is often assumed, but “little to no control” is pushing it. Presidents can also influence members of Congress, and they appoint the members of the Fed, so let’s not count them out just yet. I disagree that tax cuts or increases have little to do with the economy.
Finally, I would be remiss if I didn’t point out that an economic boom, by definition, boosts the economy. Now, if you want to say that the boom didn’t last, I think that’s a case you can make. The Soviet Union may have been a factor, but the impact of the rise of the tech industry in the ’90’s is undeniable.
January 18th, 2008 at 10:08 pm
I appreciate a lively discussion, too. Handshake.
Point 1: Ideology and economics are always mixed. I’d partially concede this — they’re usually mixed.
I believe — there’s ideology again — that it isn’t impossible to avoid economic bias, given sufficient peer review and honest self-reflection. Ideology and economics have rarely worked well together. Evidence: Roosevelt’s cornerstone New Deal policies didn’t get the country back on its feet — the Second World War did, then the Cold War.
To my understanding, a president’s ideology informs his choice of economics advisers — FDR had advisers, Reagan had advisers, economists all — and that’s about as far as the president himself goes. Rather than find the most objectively valid economic theory — does it exist? — most politicians fall in with their party in lockstep.
Let’s look at the The New Deal and Reaganomics, too. The New Deal kept people distracted and working, but the economy didn’t pick up until the U.S. went into wartime production. You debunk Reaganomics by discrediting the free market crowd, so I’ll skip that one.
Point 2: Free markets aren’t the answer. Conceded.
I don’t read economic theory, and I don’t agree with completely free markets, either. That’s because I read history. I don’t want The Great Depression Part Deux, spurred by monopolies, insider trading and telecommunications. No bueno for anyone below the top 2 percent.
Point 3: What about the tech boom? Conceded, but my point stands.
My point is that Clinton — any president — couldn’t have produced the economic boom. To my knowledge, no fiscal or monetary policies under the power of the president have ever been realistically linked to a single president’s tax policies.
The tech boom had quite a lot to do with the massive growth and, historically speaking, the last big boom and bust was in the 1920s, if I remember correctly. If this is as common as they get, we’re not going to see something like that until the next big thing. For that matter, the housing bust is small potatoes compared to the Dot-Com Bubble and The Great Depression.
Anyway, if I understand it correctly, a free market does very well over time on the aggregate level. Not so well when you get down to the serf class.
Point 4: Little or no control is pushing it. I disagree on more than principle.
If economics is far from an exact science, also, then what’s to say that his tax raises or his breaks had any effect on the overall economy, positive or negative? If there were no positive effects, were there any negative effects? This isn’t just black and white. Consider the grey — there’s always the possibility that it had no measurable consequence.
What’s to say that any presidential action has an effect on the economy, liberal or conservative? Republican or Democrat? Appointing the Fed’s chairman isn’t going to be the crux of a candidate’s platform. Presidential appointments are far from an exact science, and presidential influence on members of Congress is one of the weaker, less balanced checks in our system of government.
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There are some of the most radical ideology-informed economic policies among candidates in the current election. President Bush is looking pretty tame, indeed.
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I’ve tried to sort out the discussion to make it a little easier to read. I’m tired enough that I expect a number of grammar and mechanics errors, so please continue to overlook them.
http://awaitingtenure.wordpress.com
January 20th, 2008 at 8:52 am
Well, it looks like we have some common ground after all.
You’ve conceded three of my points, so I’ll meet you half-way on the fourth. Federal fiscal policy can affect growth, but presidents cannot exercise direct control over the economy by either raising or lowering taxes.
My original point was that cutting taxes cannot be a reliable method for generating revenue, as many Republicans claim, and I think that’s consistent with this.