Wednesday, September 14, 2011

Again, not quite Matt

Another head-scratcher from Matt Yglesias. Obama did a really dumb thing recently, and Matt didn't seem to notice.

Yglesias writes: "CBO Chief Doug Elmendorf testified today before the Supercommittee and said, sensibly, that “[t]he combination of fiscal policies that would be most effective would be policies that cut taxes or increase spending in the near-term, but over the medium and longer-term move in the opposite direction.” In other words, the sort of thing that President Obama proposed in his jobs bill. Higher deficits in the short term when interest rates are low and the output gap is large, followed by lower deficits down the road when (hopefully) the situation will be different."

Except not. Obama is proposing covering that bill with a tax increase on the wealthy. It's as if he's saying "What's that? There's very little crowding out right now? Don't worry! I'll just crowd it out for you!". The reason for reintroducing the tax increase on the wealthy is obvious: it polls well. This turns what could have been a nudge of stimulus into primarily a redistribution scheme. Don't get me wrong - there are worse redistribution schemes out there than this one. But it's still not what we need.


  1. As a libertarian (I've gotten over my ideological distaste for Keynesianism and I'm trying to understand it better), it's always fun to see liberals try to combine their two favorite Duplo blocks - tax hikes for the rich and Keynesian stimulus proposals - when they don't necessarily go together. I actually pointed out this to a liberal commenter on Reason recently: the point of deficit spending is that it's financed by deficits.

    His response (paraphrased): is it crowding out though, if the businesses and the rich people from whom the money is taken aren't investing anyway? Yes, it's a redistribution scheme, but isn't it justified if it corrects the animal spirits and "gets the dough flowing"?

    Where's the problem with this line of thinking? It's a persuasive argument (use money that nobody's using instead of money you don't have), but I'm not an economist so I can't pinpoint why it's wrong, or even if it is.

  2. I think I've mentioned something like that before, but it's pretty weak fare. Yes, presumably you are moving spending from someone with non-zero liquidity preference (the rich) to someone with zero liquidity preference (the government). So it might not be perfectly crowding out. But redistribution is still going to be distortionary for one thing (this is NOT to say that we wouldn't want to accept some distortion in trade for some equity), and there is simply no reason to tax the rich.

    If he thinks taxing a non-zero liquidity preference rich person is at least somewhat stimulative by virtue of the fact that the liquidity preference is non-zero then by the exact same logic he should like not taxing the rich and running deficits even more.

    If we're going to identify a problem with the Bush tax cuts it's that maybe they aren't as progressive as we might like or maybe they're not good for the long-run fiscal position. Both of these seem like legitimate arguments to me. Neither of those arguments requires that we need to remedy it right now.

  3. Obama could be bold and say, "Hey, let's dump the entire tax code and go to a consumption tax. At some point in the year you count up how much you earned vs. how much you saved, and you tax the former. No deductions. No taxes owed for those who earn less than X, a slew of tax brackets (twenty?) after that." I would bet that would change the entire dynamic regarding his political fortunes.

  4. @ Dan. If the spending was going to be totally paid for, then taxes will have to go up or spending will have to go down. Both are contractionary as you know, so the question is by how much and in what time frame, right?

  5. Anonymous: Revenues can go up without taxes going up.


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