Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves. Mark is right to make fun. What a ridiculous thing to believe. All the good economists know that it is spending increases that more than pay for themselves.
Funny beliefs
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Would be nice to know who Alex considers ‘good economists’. Maybe even with some links of where they express this view. Thx for a great blog.
Riiiight. Care to explain why you think so?
FYI,
Alex is making a joke, people.
“What a ridiculous thing to believe. All the good economists know that it is spending increases that more than pay for themselves.”
Really?
NYU econ prof David Backus to Gregory Mankiw: “Let us say that for every dollar of extra government spending, GDP goes up m dollars, where ‘m’ is the multiplier. Undergraduate textbooks, including your favorite, sometimes suggest m is large. The evidence is fuzzy, to be sure, but to me it suggests a multiplier around one, maybe smaller. Even stimulus cheerleader Paul Krugman only claims 1.1. If that’s the case, the impact of government spending (say 700b over two years) is barely enough to reverse the decline in GDP we expect to see over the next two quarters.”
(http://gregmankiw.blogspot.com/2008/12/backus-on-spending-stimulus.html)
“the results in Valerie Ramey’s research suggest a government spending multiplier of about 1.4. [...]
By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. [...]
Suppose, for example, that tax cuts are not lump-sum but instead take the form of cuts in payroll taxes (as suggested by Bils and Klenow). This tax cut would reduce the cost of labor and, if labor and capital are complements, increase the demand for capital goods. Thus, the tax cut stimulates demand not only by increasing disposable income and consumption spending (the textbook Keynesian channel) but also by incentivizing more investment spending. A similar result might obtain if the tax cut included, say, an investment tax credit.”
(Gregory Mankiw at http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html)
Let me offer my usual disclaimer when this topic comes up: I worked for Arthur Laffer and he would say that he never said tax cuts necessarily pay for themselves, but rather that the dynamic effects would make a tax rate cut lose less revenue than a static analysis would suggest.
I’ve seen a million of his old papers etc. and I never caught him “slipping.”
So it’s true that some Republican politicians and maybe pundits repeat this supply-side “wisdom,” but Laffer himself never said it was always true. (He might have said it would be true for the particular income tax rates prevailing when Reagan took over; I don’t know.)
Very Funny
But where is the source ?
Plz explain me what you wanna say to us…
Thoma also believes that there was fundamentally a housing bubble and is probably a Credit Snob. What a fool!
I liked it too. Too bad Alex was a cheerleader for putting these guys in power. Witty and sarcastic, but also way, way too late. Pretty much like Jon Stewart’s Bill Ayres jokes on November 5th.
I don’t get it. Obviously, tax cuts pay for themselves at some point. However, to say that tax cuts ALWAYS pay for themselves, implies government can keep cutting taxes, all the way down to 0% and government would still gain more money than if tax cuts were at, say, present levels.
Both You and Thoma are right. There is obviously an inflexion point, to the right of which you are correct, and the left of which Thoma is. This is not ideology, but common sense. The question is, have we reached that inflexion point or not.
Oh Zing! Laughing in my chair!
Some questions I’d like answered about the spending multiplier:
1. What is the multiplier when the U.S. borrows 8 billion dollars for high-speed rail, as it has done in this package, and most of the money goes towards buying equipment and engineering services from foreign companies like Siemens or Hitachi or Bombardier? Very few high speed rail suppliers exist in America. As a more general point, if I took a billion dollars of government money and gave it to China for some magic seeds, wouldn’t my multiplier be zero?
2. If we are in a ‘balance sheet’ recession, and therefore helicopter money won’t work because people will simply save it (as seems to have happened with Bush’s last stimulus), how is infrastructure spending any different? If you employ 3 million people, won’t they just save the excess money they just earned? And if THEY don’t, won’t your multiplier stop the minute they spend their money, and the recipients, who presumably were already employed and had enough money to get buy, save the excess?
3. Have any macroeconomists considered how the multiplier effect is changed when the spending is targeted in ways which may not be able to utilize resources that are currently idle? For example, in the early years, the 20 billion dollar health care IT expenditure will almost certainly have to go to people who are currently employed, since there is not a lot of unemployment among the kind of high-level IT professionals capable of starting up and managing a project of this size. The same can be said for many of the specific items in the stimulus bill. Long gone are the days when you can take an unemployed stock broker and give him a shovel and put him to work building a road.
This last point seems critical to me. The stimulus bill is very specific about what must be built, and much of it is technical. It seems to me that there will be much more ‘crowding out’ under this kind of central plan than there would have been if, say, the feds has simply apportioned a trillion dollars to the states and allowed them to spend it as they saw fit. Or even better, to leave the trillion dollars in the hands of the people.
Given all this, how can any economist make the claim that the multiplier is X, with any kind of reasonable confidence interval? Historical analysis of past spending seems to be iffy, since the explosion of global trade has changed the game dramatically in the last twenty years. And in any event, study of past spending doesn’t seem to support the large multipliers some economists are claiming.
Mark (not Thoma),
So, if it is “foolish” to believe that the runup in housing prices we saw
between 1998 and 2006 to levels of price-to-rent and price-to-income ratios
never before seen in US history were not “fundamentally a housing bubble,” then
can you explain what that episode was, whose collapse we are now suffering the
consequences of?
I’m glad Alex is posting more.
Just keep telling the former the latter. They should have no trouble believing it.
I got the sarcastic joke and I thought it was pretty funny. Those people that didn’t like it seem to be picking on minor details such as “Thoma refers to tax revenue and Alex to the multiplier being larger than 1.” I believe Alex makes a good point because what really matters is ‘public debt/GDP’ and, in this sense, those who advocate a multiplier > 1 DO state that fiscal stimulus in the form of spending pays for itself.
“I have never made the claim the government spending pays for itself, ”
Alex never said you did. He said good economists do. And noone here said you fell into that category. And, while we are at it, the Judd Gregg excerpt never says that all tax cuts pay for themselves.
***Warning***
The above comment is an example of snark and lack of deference that is not to be encouraged on respectable websites when respectable commentators make a rare appearance.
Adjoran people who say US Offense spending has been neglected at any time have no credibility.
Too bad Alex was a cheerleader for putting these guys in power. Witty and sarcastic, but also way, way too late. Pretty much like Jon Stewart’s Bill Ayres jokes on November 5th.
Would be nice to know who Alex considers ‘good economists’. Maybe even with some links of where they express this view. Thx for a great blog
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