Camp Keynes and Camp Classical
Don Boudreaux
Today's New York Times has this op-ed by Len Burman. I sent the following letter in response:
To the Editor:
Len Burman argues that repealing the Bush tax cuts two years early, in 2009, will stave off recession ("Make the Tax Cuts Work," January 23). He reasons that "If people knew that their tax rates were going up next year, they'd work to make sure that more of their income is taxed at this year's lower rates." And investors would "cash out their capital gains now to avoid paying higher taxes later."
If Mr. Burman's economics are correct, his proposals are far too modest. Why not propose that Uncle Sam announce that in 2009 he will raise income-tax rates to 100 percent and confiscate all investment property? Think of the enormous outpouring of work that will result in 2008! And because looming confiscation in 2009 will cause the cashing out of ALL investments in 2008, the resulting economic stimulus would dwarf that which would follow from merely raising capital-gains taxes next year.
Sincerely,
Donald J. Boudreaux
One of the fundamental problems with Mr. Burman's argument is his inappropriate obsession with the short-run (namely, 2008). People might well work harder during 2008 if they expect higher rates of personal-income taxation in 2009. Mr. Burman clearly focuses on the additional spending that he supposes will emerge from this extra income earned in 2008. But if Milton Friedman's permanent-income hypothesis is correct, people are unlikely to spend much of this income today, knowing that their income-earning profiles haven't risen permanently (and, because of higher taxes starting in 2009, likely have fallen). (Of course, the promised higher capital-gains taxes in 2009 will do their part to discourage the productive investment of this income.)
It's not excessively over-simplified to divide pundits on this "stimulus" issue into two camps:.
Denizens of the first camp -- call it Camp Keynes -- believe that willingness of consumers to spend money lavishly is the chief fuel of economic progress. Even the prospect of lower after-tax returns to investments won't much discourage investors from running their factories and stores at a fast clip if consumers will spend, spend, spend.
Residents of second camp -- call in Camp Classical -- understand that taxes discourage investments, and that investing for the long-run is crucial for economic progress. These campers know that spending power is the reward, and not the fuel, of economic growth.
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Selected commments -
My wife and I fall into the top quintile for household income. So the "stimulus" consists - for us - of generating several thousand dollars of debt in our names, and having (mostly) other people spend it. No-one has to think too hard to see what the effect will be upon our perception of our permanent income, and consequently the effect upon our spending habits.
We live in New York City, and have a child on the way. A top-quintile income in NYC goes mainly on housing and associated taxes. So this is hardly a case of shaking dollars out from under the mattresses of the rich.
Posted by: pylorus | Jan 23, 2008 10:07:29 AM
I especially liked Burman's suggestion that focussing the stimulus on food stamps would generate the most bang for the buck. Yeah, why don't we just write a check for $5K to every person who qualifies for federal food assistance and see how that works. I don't mean to sound elitist, but I have a feeling that those people are less well equipped to make good financial decisions than your typical income earner who is actually in a tax bracket.
Posted by: Brad Hutchings | Jan 23, 2008 11:50:07 AM
It's funny how most people have become acutely concerned about recession because of the tanking stock market. That's a pretty visible indicator of future trouble. So a genius like Burman thinks that repealing the Bush "tax breaks" will help? A big part of those so-called tax breaks is their relatively low rate of double-taxation on capital gains and dividends. What does Burman or his ilk think will happen to the stock market (and investment in general) if the government were to announce an early end to that double taxation?
Posted by: M. Hodak | Jan 23, 2008 5:08:02 PM
I noticed the Burman article and wonder how he can write that kind of crap with a straight face. For whatever its worth I don't think it matters whether people spend the rebate check or not. My thinking goes like this: (1) I get an $800 check from the government. This is good because that is $800 I can spend intelligently instead of having the government "redistribute" it to more worthy projects. Right? (2) Oh wait. The government isn't going to stop redistributing. They're just going to continue to waste resources while running a bigger deficit and taxing me later (I can say "me" since I'm still in my twenties). Wonderful. I get the burden not just of the wasteful and corrupt redistribution, I get to pay interest on it to. Hooray!
And I think the happiest people on the planet right now have to be the politicians. A pending recession gives them a perfect excuse to "do something bipartisan" while still not dealing with the deficit ("we'd really like to cut spending this year, but with the economy as fragile as it is").
The WSJ had a pretty good piece today on how even Keynes wasn't a Keynesian. Maybe somebody can comment on whether that piece is accurate in its assertions about him?
Posted by: Nick | Jan 23, 2008 6:46:18 PM
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