I am myself of the belief that we are fairly close to full employment, with full employment likely on the way, and our growth problems stem from the supply-side, not from the demand-side in the Keynesian sense, at least not circa 2015. For those reasons, I am skeptical of any plan to cut taxes without offsetting spending cuts or some other kind of offsetting fiscal adjustment (how about selling off some federal land?).
But on what grounds should the prevailing Keynesian approach reject the fiscal policies of Marco Rubio? In the context of discussing Rubio, Paul Krugman writes:
So now we have candidates proposing “wildly unaffordable” tax cuts.
But what’s wrong with that? In most demand-side liquidity trap and secular stagnation models, there is a shortage of safe assets and that is a major problem which requires remedy. Rubio’s plan, as I understand it, would raise the budget deficit and by a lot because it is unlikely to prove self-financing in the Lafferian sense. By current Keynesian views, that should be a feature not a bug.
You might rather the deficit be increased by cutting taxes for the middle class, or by building productive infrastructure, but still the Rubio plan would be better than just sitting tight and doing nothing.
Furthermore the wealthy will take their new surplus of funds and invest most of it and maybe spend some of it too. That boosts aggregate demand, and…if you think the multiplier still is high…well, you can see where this is heading.
Are we all ready to turn “C + I + G” into a mere “C + G”? I hope not.
And while the Fed is legally constrained from buying corporate bonds and other non-zero-ROR assets, wealthy people most certainly are not, so they could spend their Rubio tax cuts on equity, venture capital, and the like. In essence we would be using wealthy people, and fiscal policy, to make asset swaps which the central bank cannot. So liquidity trap arguments should not make this tax cut impotent and arguably they should necessitate it all the more. You might even (heaven forbid) wish to target the tax cut toward the wealthy, if they are the most likely to take cash and buy relatively risky assets with it. Right?
So by the standards of the current New Old Keynesianism, what exactly is wrong with Marco Rubio’s fiscal plan? Except that some other plan might be better yet. Inquiring minds wish to know.