by I am generally very very impressed by Paul Waldman at the Plum line blog (for one thing I admire the lack of Ego he demonstrates by writing for a blog subtitled “Greg Sargent’s take from a liberal perspective). Waldman is reliably brilliant (so is Sargent). Now finally I find something he wrote with which I disagree. In the generally excellent “President Trump Appoints Tax Fairy to Key Economic Post” Waldman wrote ” The point isn’t that tax increases help the economy and tax cuts hurt it, but rather that tweaking the tax code has very little effect at all. You might get a modest economic bump from tax cuts, but it won’t ever create enough growth to pay for them, as Republicans always insist their next tax cut will do. Democratic economists know this, which is why they don’t think changing the tax code — even in a progressive direction — is a particularly urgent priority. He is demonstrably wrong. I am a Democratic economist and I think that changing the tax code in a progressive direction is a particularly urgent priority. I think this is just a case of sloppy writing (yeah I know, look who’s typing). By “economists” Waldman means “economists thinking about GDP growth”. This is unfair to economists.
Topics:
Robert Waldmann considers the following as important: Taxes/regulation, US/Global Economics
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I am generally very very impressed by Paul Waldman at the Plum line blog (for one thing I admire the lack of Ego he demonstrates by writing for a blog subtitled “Greg Sargent’s take from a liberal perspective). Waldman is reliably brilliant (so is Sargent).
Now finally I find something he wrote with which I disagree. In the generally excellent “President Trump Appoints Tax Fairy to Key Economic Post” Waldman wrote
”
The point isn’t that tax increases help the economy and tax cuts hurt it, but rather that tweaking the tax code has very little effect at all. You might get a modest economic bump from tax cuts, but it won’t ever create enough growth to pay for them, as Republicans always insist their next tax cut will do. Democratic economists know this, which is why they don’t think changing the tax code — even in a progressive direction — is a particularly urgent priority.
He is demonstrably wrong. I am a Democratic economist and I think that changing the tax code in a progressive direction is a particularly urgent priority.
I think this is just a case of sloppy writing (yeah I know, look who’s typing). By “economists” Waldman means “economists thinking about GDP growth”. This is unfair to economists. Very few of us are obsessed with GDP and, I think, almost none of us are sincerely indifferent to the distrubution of national income (I am guessing that people who claim they are do so because they know their view that the rich should be richer is unpopular).
Many economists who work in public finance are obsessed with the income distribution and, obviously consider changing the tax code their life’s work. There are excellent reasons to suspect that a more progressive tax code would cause dramatically higher welfare.
I have another objection (after the jump)
Waldman also stipulates too much with his clause including “might”. The word is used for the sake of argument. But I think that even with the “might” and even stipulating not conceding the claim, Waldman comes too close to arguing that tax cuts cause higher growth, just not so much higher that deficits decrease.
This stipulation is not a reasonable basis for debate. If I believed that, I would support tax cuts. Deficits are not bad in themselves (we don’t directly suffer because of the national debt). They are bad if they are bad for the economy. I think the largest cost of the national debt is the distortion of consumption due to the illusion of wealth (Ricardian non equivalence). I believe that tax cuts can cause lower GDP growth. The data (weakly) suggest that reducing the US top marginal tax rate would cause lower growth
Here I think Waldman assumes that the US is in the liquidity trap. He doesn’t consider the risk that deficits crowd out private investment. This is reasonable if the Federal Funds rate is at the zero lower bound. It is not a reasonable now. The US is not in a liquidity trap — the Fed Open Market Committee (FOMC) is actively considering increasing the target Federal Funds rate. What should matter to fiscal policy makers is how the FOMC would respond (not how it should respond).
Currently in the USA tax cuts (and public spending increases) will cause higher short term safe nominal interest rates. The response of the monetary authority might cancel the short term effect of tax cuts on aggregate demand. Since they think unemployment is at the natural rate, they will attempt to do this. The remaining effect is reduced investment due to the higher interest rates. This could cause lower GDP growth.
The target federal funds rate is under 1% but it is high enough that we are back on the usual side of the looking glass in which saving (including public saving from reduced deficits) causes greater income in the future. Again I stress this is a statement about what the FOMC would do if taxes were cut. It is not a statement about optimal monetary policy or secular stagnation or any actively debated issue.