On what grounds will Keynesians reject Marco Rubio’s fiscal policy?

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.

Comments

Why not just reject Republican tax proposals because they're obsessed with marginal rates at the expense of every other consideration, because they're very uneven in their willingness to advocate cleansing the tax code of special favors for sectoral clientele, and because they seldom carry with them the assumption that tax collections are properly a function of expenditure plans? You can reject Democratic tax proposals on the grounds that anything they advocate is just the usual corruption.

because they’re obsessed with marginal rates at the expense of every other consideration, because they’re very uneven in their willingness to advocate cleansing the tax code of special favors for sectoral clientele, and because they seldom carry with them the assumption that tax collections are properly a function of expenditure plans?

I'm confused about interplay with the first two. Generally a strong (rhetorical and otherwise) emphasis on "cleansing the tax code of special favors" is strongly correlated with obsession about marginal rates. The vast majority of "other considerations" outweighing marginal rates tend to be "special favors for sectoral clientele" that simply have too high status, power, or influence to be called "special favors."

The second and the third objection, while quite true, tend to be anti-correlated. The Republican plans that do the best job of cleansing the tax code of special favors tend to be the ones that lower revenue so much to ensure that there are no losers, so that even the vast majority of those losing special favors get a net tax cut. (The particular type of VAT type plan, actually somewhat close to an X tax, featuring in the Paul and Cruz plans has a lot to argue for it, but would need to be tweaked to be reasonable without cuts that the American voter looks unlikely to accept.) There is the occasional plan that do have reasonable expenditure plans, but that requires cutting quite popular things and thus those sorts of plans tend to actually be quite unpopular.

Generally a strong (rhetorical and otherwise) emphasis on “cleansing the tax code of special favors” is strongly correlated with obsession about marginal rates

Not at all. The marginal rates are dependent variables if one cleanses the code of favors and insists on revenue neutrality.

... yes, and when you remove special exemptions, they "depend" downward, as these selfsame Republicans want :-P

What was the objection again?

The objection was his notion that if lower marginal rates were an implication of other objects, the author was therefore 'obsessed' with lower marginal rates. That does not follow (and was not what I was referring to originally). Ideally, Republicans would be concerned with removing the preferences in the tax code and composing spending plans in accordance with policy goals, and let the chips fall where they may on rates.

Vote Curmudgeon Party in 2016! Lets have a president that wants us all off his lawn.

here is some on this issue including a krugman quote

https://www.washingtonpost.com/blogs/plum-line/wp/2014/02/10/should-progressives-support-tax-cuts-as-economic-stimulus/

tax cuts for the rich seems like a very bad stimulus idea

tax cuts for the rich seems like a very bad stimulus idea

Really? I thought that Democrats all supported trickle-down economics, at least when dressed up with names like the Ex-Im Bank.

They also like trickle down when it's government stimulus spending on infrastructure. For some reason they don't have a conflict about giving away federal dollars to wealthy developers and government contractors.

At least when you do it that way some f**king bridges and airports get fixed.

Tyler answered his own question....the objection with Rubio's idea is that there's a much better and more just one. If you are hellbent on increasing the deficit to create more safe assets, do it by spending some money to fix up some things, not making rich people richer. Sure some rich contractors will get richer, but so will their employees, and then the multiplier comes into play.

At least when you do it that way some f**king bridges and airports get fixed.

State and local governments are quite capable of doing their own capital budgeting and facilities planning.

It's quite evident they are not.

It’s quite evident they are not.

Evident to whom?

Most people not fake-named 'Art Deco'

Ex-Im bank turns a profit for the Treasury.

Not accounting for any deadweight loss which has capital allocated by public agency rather than by banks who undertake trade finance.

To the extent that these campaign tax plans are real, I lament that they are lazy, and disrespect the voter. They are just less tax in the sense of vote buying, and not tied to any economic model (this is 2015, why isn't an economic model on-line and open source?).

They certainly don't do the hard work of restructuring spending for growth (fewer planes, more DARPA?).

But ultimately they are not real. They fail so immediately on the math that they cannot be serious.

They are hymns.

They are signals to primary voters that the candidate is against high taxes.

I think the Senators and others have to do these more so than governors because they do not have a tax record to use as the signal.

So a governor could issue a more sensible tax program, because his credentials are "proven" by his record.

A Senator can't really do that as well. Carson or Trump can't do it at all.

The more radical plans seem to be an issue of one-upmanship as well.

This happens to both parties. Remember, Obama's dreamed up his healthcare plan merely in order to have something to show at a conference where Hillary would be...its not as scientific and wonkish as people would prefer.

Agreed, and if as has been mentioned, "college for all" becomes a Dem position that will be silly as well.

Absent specifics, it's pretty easy to project one's fears or one's hopes onto a budget plan of any political stripe.

I imagine most economists that don't like Republicans would reject Rubio's plan based on his professed priorities rather than the macroeconomic implications. "It's better than nothing" isn't the same as "I support it."

Given that the 'macroeconomic implications' are small tweaks in the amplitude of economic contraction and expansion, I cannot imagine they're all that invested in any given policy mix from that standpoint.

We aren't absent specifics: Rubio's tax plan (not "budget") is here: https://marcorubio.com/issues-2/rubio-tax-plan/

With some skimming, it seems he wants to do away with taxes on dividends, interest income (but also this is no longer deductible for businesses), capital gains and estates and tax both corporations and non-corporate businesses at 25%. With the individual rate at 35%, I'm not even sure how this makes sense: everyone who earns in the high six figures will try to start calling themselves a sole proprietorship instead of an employee.

In any case, major changes to the tax code can affect policy for decades so this isn't a macroeconomic measure so much as a major restructuring of the tax code for the foreseeable future. There are enough details for informed people to read through and decide whether it is consistent with their own policy preferences or not.

While I like removing the individual burden for capital gains, dividend, and interest, I don't see how you do that while cutting the corporate rate. I would think corporate rate would need to rise to make it all revenue neutral.

Throw in a fantasy growth model and some dynamic scoring?

If you also added in a territorial tax scheme where we try to stop being one of the only countries to tax overseas profits (that have already been taxed locally) you would see a flood of capital heading back to the United States and many of our multinational corporations would stop fleeing to Ireland, the UK, Canada, etc.

Possibly, but that could be a separate experiment.

First, overseas profits are not taxed twice: American corporations can claim a credit for any taxes paid overseas. Second, according to the IFM, 7 other OECD countries tax worldwide corporate income including Chile, Korea, and Ireland. Finally, territorial taxation, all else equal, provides an incentive for capital to leave the United States, not the other way around. Why locate production in high-wage, high-tax America when you can shift it to a low-wage, low-tax country and maybe negotiate with the government for additional tax incentives and breaks?

When you talk of multinationals "fleeing" to other countries, what you mean is that they pay some lawyer a few thousand dollars to file incorporation paperwork there and then convert their U.S. offices and operations to a "branch office" of what is now a non-U.S. corporation. This is indeed a perverse side-effect of worldwide taxation but it is not clear it happens as often as some people seem to think and it has very little if anything to do with the level of investment in the United States. Shifting your country of corporation does not mean you have to shift your headquarters, your physical capital or any employees there.

"everyone who earns in the high six figures will try to start calling themselves a sole proprietorship instead of an employee.

This already happens. Its called a pass through.

You want it because otherwise you have to pay corporate taxes and personal taxes.

If you want to from a company, pay 25% taxes, and then pay 35% again on your salary...doesn't sound very smart.

Oh, and California will charge you $850 for your LLC and then you can pay more as your income goes up, unless you switch to an S corp. Enjoy!

Meanwhile, if you want to earn 6 figures without any personal risk, you just take a state of California job instead.

Yes, I know what a pass through is and have no objection to the concept in principle but, as I read Rubio's plan, he wants to tax individuals earning more than $150,000 at 35% while business income from proprietorships, partnerships, S Corps, etc. would be passed through to individuals and taxed at only 25%. Currently, pass through income is taxed at the same marginal rate that applies to non-exempt income from any other source (except long-term capital gains).

I might be reading that wrong but that is what I get from reading his website and it amounts to a huge tax cut to the well-off who can somehow configure their affairs in such a way that the money they earn from their livelihood is considered business income instead of wage income. And it is a truly massive tax cut for hedge fund and private equity managers who would pay no taxes at all on the 20% upside they take from investors (since it is a capital gains distribution under the carried interest loophole) and only 25% on their management fees. Some Republican candidates have mentioned wanting to do away with the carried interest loophole but I don't see any mention of the issue in Rubio's plan.

It's about 200 words long. Of course we're absent specifics. The littany of exceptions, caveats, etc. that eventually come about when it comes time to legislating are what matter. These are campaign documents, and when economists of any stripe evaluate them, they'll evaluate them by, as I said before, projecting their hopes and/or fears onto them to fill in all the gaps.

Aside from the fact that you are off by about 500 words, this makes little sense. Rubio says in plain English he wants to reduce the estate tax to 0%. Your position seems to be that since there are not thousands of words accompanying that proposal that it is too early for anyone to have an opinion on whether it is a good idea. I disagree. Some issues are very complex but others such as the estate tax, capital gains tax, territorial versus worldwide corporate taxation have been debated extensively and it is not necessary to have pages and pages of detail in order to have a reasonably well-grounded opinion on whether what Rubio says about these issues is in line with one's own views on the subject or not.

Of course they are campaign documents and while Rubio probably won't get everything on this wishlist if he is elected President, he is announcing pretty clearly what he will push for (or what he wants donors and voters to think he will push for) if he is elected. I think there is enough substance in Rubio's plan to make a preliminary judgment about what sort of politician he is and what he would spend his energy pushing if elected.

or the higher five figures. Every dollar I don't pay in taxes ends up being invested in my company. Call it no doc financing.

Sounds like a dog of a plan. Another reason for me to vote against him.

You seem like a Santorum voter.

Paul Krugman doesn't understand the faith based economic policy,

Cut taxes, and the Growth Fairy will appear from nowhere, just as it did for Bush in 2001, where the tax cuts would pay for themselves.

This is from a recent book by the Staff Director of the non-partisan Joint Committee on Taxation:

"To summarize, if the federal government had collected its historic average of 18.3 percent during the 2008-2012 recessionary period, and switched to the higher levels contemplated by the 2012 CBO baseline (i.e., the expiration in particular in the 2001-2003 tax cuts in their entirety ) for 2013-2023 period would have been on the order of $7 trillion lower (taking into account debt service savings). That $7 trillion in lower deficits represents a 35 percent reduction in projected levels of Treasury debt outstanding a decade from now."

From: Edward H. Kleinbard, "We Are Better Than This: How Government Should Spend Our Mone (Oxford University Press 2015) at p.179

Fun fact: "non-partisan" does not mean "non-political" or "non-ideologically driven."

True, which makes any 20 year out prediction of GDP and tax impact pretty suspect. I mean, the macro is probably not that good, and then add a finger on the scale.

It would be much better to make small incremental changes, and measure impact on the shorter term. If you cut tax, expect increased revenues, but get a shortfall, you would reverse. If you were honest.

You would not be left with structural deficit because old stimulus didn't work.

mike and Gochujang,

He used CBO data, and if you look back as to what transpired since the Bush tax cuts the projections matched reality.

What you are really saying is that you dont like the evidence and the conclusion, and have nothing to rebut it.

Are we talking projections or retrospectives? I took your quote as a retrospective look, using historic tax rates to quantity a shortfall.

In contrast, every President, Congressman, Budget Office has paired a projection with an, in retrospect, optimistic growth rate. You know, back when each tax or spending plan was proposed.

I believe the way it works now is that authors simply get to assert forward growth rates, and that Budget Offices must accept them for modeling.

Gochujuang,

We are talking BOTH retrospective and prospective. The prospective was based on Bush prospective projections, the retrospective was based on CBO look back.

I think maybe I was on the opposite side of this than you thought. It was indeed the gap between projected and actual growth that created the shortfall.

Maybe we should stop pretending we know future, especially far future GDP, and treat changes more as experiments, with more humility.

“To summarize, if the federal government had collected its historic average of 18.3 percent"

-If wishes were horses, beggars would fly. The Federal government could not collect "its historic average of 18.3 percent" during the worst recession since the Great Depression without massive tax hikes (preferably, on payroll).

Kleinbard was Chief of Staff of the JCT from 2007 to 2009. He's not held that job for over six years. He's hardly non-partisan---he's solid left-- and the book you reference was published in 2015.

How so when he has said again and again that we need more stimulus.

and Romer says tax cuts are the best form of stimulus...so much so that even Obama's stimulus included tax cuts.

Are you kidding?

Here is what Romer recently said about tax cuts at the zero bound and lessons learned from the fiscal crisis:

https://www.imf.org/external/np/seminars/eng/2011/res/pdf/DR3presentation.pdf

Harun,

Here is a quote from the Romer presentation cited above:

"Given the magnitude and persistence of the demand shortfall in a major crisis and the limited possibilities for policies that shift intertemporal incentives, much of discretionary fiscal stimulus is likely to take largely conventional forms, such as broad-based income tax cuts, increased transfers, and higher government purchases. My second lesson is that the evidence that has come out of the crisis has made the case that such conventional fiscal actions stimulate the macroeconomy even more compelling than it was before.
Because we have had to turn to fiscal tools, the crisis has sparked a great deal of work on the short-run effects of fiscal policy. As Robert Solow stresses in his remarks in this session, we should not be trying to find “the” multiplier: the effects of fiscal policy are highly regime dependent."

So then you support Rubio's tax cuts?

we should not be trying to find “the” multiplier:

Shoot them all and let God sort them out.

Cliff, Evidently you didn't read the paper and the quotes, so I will include more:

'The first lesson is straightforward: we need fiscal tools for short-run stabilization. Before the crisis, there was broad agreement among macroeconomists and policymakers that short-run stabilization was almost exclusively the province of monetary policy. Monetary policy is more flexible; it is more easily insulated from political pressures; and it can more easily be put in the hands of independent experts. We thought that the zero lower bound would bind infrequently and not sharply; and that in the unlikely event that it did bind sharply, monetary policymakers had other tools they would use in place of reductions in the policy interest rate.2
We now know that this view was wrong. We suffered shocks larger than what almost anyone thought was within the realm of reasonable possibility. The constraint imposed by the zero lower bound turned out to be huge (for example, Rudebusch, 2009). And central banks did not use tools other than the policy rate on a scale even remotely close to large enough to make up for the loss of stimulus caused by the zero lower bound."

The first lesson is straightforward: we need fiscal tools for short-run stabilization.

The emergency erupted in September 2008 and economy stopped contracting in May 2009. How 'short run' does she have in mind? You could have suspended tax withholding, I suppose. The point of the porkulus was just what?

"We thought that the zero lower bound would bind infrequently and not sharply; and that in the unlikely event that it did bind sharply, monetary policymakers had other tools they would use in place of reductions in the policy interest rate"

-And they did.

"We now know that this view was wrong."

-Liar! Liar! Liar! Liar! Liar! Liar! Liar! Liar! Pants on fire!

"where the tax cuts would pay for themselves"

Tax receipts exceeded 2001 spending all but one year under Bush.

So what?

Fag

Again, buy your own damn cigarettes.

My opinions of cigarettes are the same as those of the Islamic State.

If we are near full employment then isn't the Keynesian thing to do raise taxes? Why does Tyler consistently misrepresent the idea of counter-cyclical fiscal policy? Is it because he is intellectually dishonest? Or is this another obvious troll posts from Cowen?

Just reaching full employment might not qualify as enjoying economic expansion.

But we have reduced spending relative to the depths of recession.

As implied above, I am about in the same place as Tyler on straight, non-offset, tax cuts in 2015

Growth Fairy tells you that this will not increase the deficit?

Growth Fairy vs. Animal Spirit!

Cage Match!

One night only!

Tickets available at all outlets!

Monster Truck show at intermission!

Tyler says it will, doesn't he?

It would be. However, as Tyler notes, Krugman and others are currently arguing that we are *not* near full employment, but rather stuck in a demand-side liquidity trap that is preventing the economy from reaching the potential aggregate demand. That is why they call for fiscal stimulus on the spending side (saying that monetary policy won't work at the zero bound.)

Tyler says we are near full employment, but wants to know what those who disagree on that score would say about Rubio's plan.

Tyler is not misrepresenting anything. Is your reading comprehension that poor, or are you yet another obvious troll?

Isn't there an argument floating about that the way through the liquidity trap is to eliminate the zero lower bound?

This. Keynesians argue that when we are near full employment we should not be trying to stimulate the economy. Tyler's first two sentences reveals that he himself is a Keynesian and thereby answers his own question.

But the Straussian reading of the post is that it is not an attack on Keynesians, but rather a way to lower the status of "those people".

I'd say the rejection of plans like Rubio's isn't necessarily economic and my guess is that Krugman would agree with you on the economic merits. The disagreement is surely political. Krugman's belief is that large tax cuts are used to deliberately drive up the deficit so that the resulting fiscal "crisis" can be used as a reason to dismantle the welfare state. So if you don't want to dismantle the welfare state, as Krugman clearly does not, then you also don't want to accept large tax cuts under the guise of economic stimulus. Its the mirror image of why Republicans reject fiscal stimulus . . . they reason the extra spending will never end.

"rejection of plans like Rubio’s isn’t necessarily economic"

Of course, Krugman's main reason to reject it is because it is a GOP plan.

It's really rude of the left to do that kind of thing, when the right never does.

Kenyan logic requires fiscal stimulus in a recession AND fiscal tightening when the economy heats up. The advantage of increasing spending as a stimulus rather than cutting taxes, is that it is much easier, once the economy starts to heat up, to reduce spending as opposed to increasing taxes. The ARRA was time limited, and did not lead to a permanent increase in spending. Reversing the Rubio tax cuts would likely prove far more difficult.

The first two words of your comment led me to expect a very different thrust.

I'm more amused by those like Joe Biden who blamed the recession on unfunded gov't spending for which the cure apparently, was MORE unfunded gov't spending.

Me too. I was expecting some kind of Obama related rant.

"...it is much easier...to reduce spending as opposed to increasing taxes."

That would only be true if there are strong politcal preferences in favor of lower taxes compared to higher spending. In this case, the Keynesian policy that maximizes voter utility would be to cut taxes during recessions and offset that by cutting spending during booms. That suggests that Rubio's tax cuts should be accompanied by attaching time limits to currently permanent spending or that all new spending should automatically have time limits.

There's a difference between counter-cyclical action (temporary spending, temporary tax cuts meant to boost short-term deficits) and creating long-term structural deficits. This is why selling the early Bush tax cuts as Keynesian stimulus was wrongheaded.
Of course, Tyler knows this very well and is having fun trolling.

Erm, if we are indeed nearing full employment, then Keynesians would say that huge fiscal stimulus (whether tax cuts or more spending) is unwarranted and counter-productive. Remember, Keynesian and NeoClassical approaches say basically the same thing at full capacity - the differences emerge when output drops below potential. Either TC knows this, or his understanding of basic macro is the square root of what I thought it was.

He knows this. Tyler explicitly mentions, Krugman and most other Keynesians are alleging that we are stuck in a demand-side liquidity trap, which implies that fiscal stimulus would be helpful-- note that Krugman and others are explicitly calling for fiscal stimulus right now, just preferring spending side.

Krugman et al. are perfectly free to say that we are near full employment. That is what Tyler has been arguing, but given that Krugman and others reject that, they do seem a bit consistent.

Tyler seems to be completely consistent in this post. Your reading comprehension, on the other hand, may need some work.

Does Bernanke still support fiscal stimulus?

I might side with the moderate independent at this point.

Perhaps his "full employment" is colored by an aging population and skills shortfall? What is "full" might not be close to old estimates of potential GDP.

Funny how all the well-then responses don't talk about GDP and downward revisions to growth.

Selling federal spectrum would be good too, like land.

Selling the Strategic Petroleum Reserve is usually a good idea, though the budget deal oddly values it at $87/barrel while saying that we're going to sell it now. Seems a bit dishonest.

Rubio's plan disproportionately gives money to the lowest quintile thanks to refundable tax credits. That feature, at least, should be praised by Keynesians that aren't just party hacks.

"Keynesians that aren’t just party hacks."

So, not Krugman then.

Rubio’s plan disproportionately gives money to the lowest quintile thanks to refundable tax credits

No. The credits are explicitly non-refundable.

"So it's perhaps no surprise that when I asked his team about this, they insisted that this was a mistake, and the credit was in fact much more limited. "Rules would be tailored to ensure that our reforms would not create payments for new, non-working filers," a Rubio aide told me in April.

The tax foundation's estimates are based on the mistaken assumption that the family credit would be fully refundable.

"The Tax Foundation assumed the proposal would make the new personal credit ($2,000 for singles and $4,000 for married couples) fully refundable," Burman wrote. "This assumption helps explain why the group concluded the Lee-Rubio plan would be highly progressive."

But that would be, as the Vox article points out, essentially a basic income.

It's unclear what exactly that means, especially since the aide insisted that the tax was nonetheless refundable. But one thing it definitely does mean is that millions of people who would've benefited from a simple $2,000 to $4,000 refundable credit won't benefit under Rubio's actual plan."
http://www.vox.com/2015/10/30/9642850/marco-rubio-john-harwood

Are we sure we like the idea of our electoral system rewarding politicians whose policy proposals are pure fantasy? Ie, what could possibly go wrong with that...

This has been happening for a while now.

"This has been happening for a while now."

Since 1789.

Like a good chess player, you seemed to have them forked but I will take a stab.

1. They also care about inequality and this might increase inequality.
2. Tax cuts are to hard to reverse.

They are not forked, for the reasons you give, among others.

Only "might" increase inequality?

1) Rubio's tax plan is not in line with his tribe's declared budget balancing priorities. 2) Why do we need to argue about whether Keynesians should accept it? All the Keynesian has to do point to #1.

Forget about whether a true Keynesian believes that maximizing stimulus (through max government spending and minimal taxes) is actually the correct move 100% of the time, no matter what else is going on in the economy.

I think the Tea Party has been marginalized and otherized successfully by the media and their opponents. They were the ones who wanted cuts to lower the deficit.

As we have seen from the latest budget, Democrats and Republicans now prefer to ignore this issue.

The problem with that is that the media doesnt vote, tea party types do. Democrats and Republicans have always ignored this issue, now is no different.

And the MPC for the 1% is what? With the world awash in cash but firms unwilling to invest in productive capital, adding more savings for the 1% does what? Marco Rubio's plan is George W. Bush's plan. And where did that get us?

Did you miss this:

Are we all ready to turn “C + I + G” into a mere “C + G”? I hope not.

I only ask because you use MPC rather than the Marginal Propensity to Spend.

"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." 2008 redux. What could go wrong?

Is this a rare Ideological Turing Test stumble from Tyler?

The answers clearly are:

1. Rubio is proposing permanent, not temporary, tax cuts. The leading New Keynesian lights were not calling for permanent spending increases, so there's no symmetry here.

2. Even if made temporary, Rubio-style tax cuts would give us less stimulus bang for our deficit buck than almost any other deficit-increasing policies. The merits of Rubio's proposal are almost entirely about their supply-side benefits.

3. The supply side problems we do have are mostly not the ones addressed by Rubio-style tax cuts. Are publicly-traded companies short of capital? No; they have high profits and lots of cash. Are we having a problem with high-productivity people not working enough because the tax man takes too much of their marginal product? No; these people work the longest hours already. This is not to say there will be no benefits whatsoever. It's just that this policy doesn't give us much supply-side bang for our deficit buck. The political merits of Rubio's proposal are almost entirely about the high earners who "deserve a break."

The supply side revolution we need involves more immigration, reform of coastal land use restrictions on housing density, and IP reform.

The supply side revolution we need involves more immigration, reform of coastal land use restrictions on housing density, and IP reform.

Sure. What California really needs is more crowding, especially with poor Mexican immigrants. I'm sure that will make it a better place to live.

As a Californian, I'll support it (as long as coastal doesn't mean wetlands, we have too few to support valuable ocean species).

By "coastal" I meant California and the Acela Corridor, not wetlands. Fair question!

Nothing we need involves any more immigration.

Yeah, we should maintain population neutrality by deporting lazy, entitled middle class Americans and replace them with hard working and talented Mexicans and Chinese.

That position doesn't seem like a vote magnet.

Who doesn't want a free (permanent) vacation to Mexico?

It would be nice if we could do more with fewer people, so that everyone could have something bigger than a tenement apartment to live in. I'm in favor of improving technology and education so the average person is productive enough to afford a single-family home on a quarter acre lot. Deliberately importing a lot of unskilled workers just sounds like a recipe for creating more welfare recipients in the future when they are replaced by robots. We should be aiming for low population density combined with a high-tech high-productivity workforce. This will provide a better quality of life for most people with less inequality to boot. I'd rather live in a future where everyone gets a quarter acre lot than one where we all live in tiny tenements in crowded cities.

"It would be nice". Sure, but is that at all realistic? (Plus, not everyone shares your desire to live in a single family home on a quarter acre lot) There's a reason the high tech sectors we have occur in San Francisco, Silicon Valley, Boston, and Austin, and it's because people all don't live in isolated quarter acre lots. There's a lot to be gained from frequent, improptu interactions between people. Have you read Triumph of the City?

They'll never be replaced by robots, most likely. I think we should be aiming for lots of housing, a high population, and a high-tech, high-productivity workforce.

There's lots of space available in the U.S. Less so in Japan, though.

Well, obviously nobody is going to FORCE people to live in SFHs on quarter acre lots, but it would be a preferable world if most people had that as an OPTION. The policy of importing a lot of unskilled labor is likely to lead to a situation where that isn't an option for most people, because it will drive up land values to the point that it becomes unaffordable.

Doesn't the reform of land use restrictions case support the case for less immigration?

Yeah, let's kick out of the amoral Russian scum.

Why do you have against Russians, dfea?

Brighton Beach has the highest rate of Medicaid, Medicare, and No-Fault fraud in the country. Probably tax evasion too.

That is not a coincidence.

Those are Ukrainians and Jews!

Pretty good answers.

"permanent, not temporary, tax cuts"

Permanent? You realize that could mean anything from 1-10 election cycles.

Tyler,

The rebuttal was given by Gauti Eggertsson: http://www.newyorkfed.org/research/staff_reports/sr402.pdf

Capital and wage tax cuts are contractionary at the ZLB in stand NK models.

Sorry, but no go: "For simplicity,we assume that the only assets traded are one-period riskless bonds..." See my post on this.

My guess some Keynesian will support Rubio plan and I suspect Matt Yglesias will write one up the next couple months. (He did for Romney years ago.)

For the current economy, we are living in the suckiest economy for 5.1% unemployment rate with no wage increases and low rates. If it is a supply problem for skilled labor, then what do you suggest to improve this without substantial increase immigration which is politically dead for both Parties. If we are not creating enough cooks, truck drivers, diesel mechanics or Wal-Mart workers, then do you suggest to increase supply?

The funniest thing in that Krugman column is the idea that Hillary and Bern haven't proposed anything unaffordable.

Sure, except for free college and continuing to expand the ACA.

and they want to expand SS.

So what's Cowen seeking in the Rubio administration, Treasury or the Fed? My guess is the Fed because I can't see Cowen selling Rubio's nonsense to the Congress and the public. It's early, but readers of this blog should start making their predictions: what job will Cowen get in the Rubio administration?

Because handing more money to the very wealthy is the least effective possible kind of stimulus per dollar spent, as opposed to tax breaks for the middle class and poor or any kind of spending increase. And because we have a gigantic problem with inequality that this plan would exacerbate.

If we're going to massively raise the deficit, let's do it by spending money on something useful, rather than on making our existing problems worse.

handing more money to the very wealthy is the least effective possible kind of stimulus per dollar spent

Really? Are the wealthy just burning the money? You do realize that money which is invested is also "spent" at some level,right? It's just spent on capital goods (stuff that increases productivity) instead of cans of tuna fish.

This is question-begging. At full employment, yes, we would expect lots of opportunities for high risk-adjusted return on investment and for savings to flow to those opportunities through the financial system. Since we aren't at full employment, savings instead seem to continue to flow to low-yielding government securities. And this isn't just America either. Short-term government bond rates in Switzerland and Germany are negative meaning that enough people in the world face such terrible prospects for investment at home that they are literally willing to pay these governments a fee to hold their money in Swiss Francs and Euros respectively. Short-term rates in Japan are a flat zero.

This is not the picture of businesses fiercely competing in capital markets for the marginal dollar in savings. It is more like everyone implicitly acknowledging we are quite possibly screwed over the next 5+ years and governments are the only safe bets for savings. It is almost as if governments should start spending this money that is being lent to them almost for free in a way that might stimulate future investment spending or consumption...

The DOW hit a record high of 18,000 earlier this year. Plenty of people seem to think that the stock market is a great place to invest.

Or they are just following the herd with not much thinking going on at all.

So, there's a herd of people mindlessly investing in something NOT government bonds. The money is still being spent though, isn't it? If spending is spending, then it doesn't matter if the spending is on cans of tuna fish (consumption) or reams of copy paper (investment).

"So, there’s a herd of people mindlessly investing in something NOT government bonds. The money is still being spent though, isn’t it?"

The stock market is a secondary market so the money spent on shares of stock does not go into the purchase of capital goods -- it goes to the previous owner of a share of stock. This transaction does not factor into GDP. All it does is change individual balance sheets where one person trades cash for a riskier investment and the other side of transaction does the opposite. The time when a stock purchase may lead to direct investment in physical plant or equipment is during an IPO but these seem to be a fairly negligible source of funds for capital investment in the U.S. and have been for some time.

Money earned in the stock market isn't always re-invested. There are all sorts of reasons people sell stock - often to purchase a home, or a car, or when they are drawing on their retirement savings. I see no reason why people selling stock and spending the earnings shouldn't factor into GDP.

And even if it is reinvested, again, someone has to SELL the stock, so that person ends up with the cash, and either spends it or reinvests it. The only way it is removed from commerce is when it's going into some newly created investment, and that means an IPO, which means it goes to capital goods, which is just more spending on different types of stuff.

Really the only way to remove money from circulation is to burn it or bury it. If it's invested in anything, anywhere, it is cash in someone elses pocket.

Is money swirling around inside the wall st casino doing anything productive?

You say "swirling around" like it's absorbed into the ether, in a constant state of indeterminate flux. But any security that is bought has a seller, and the seller is going to either spend the money (spending!) or invest it in buying something else (which means someone else sold something and thus has more money to spend), and ultimately, it is really being spent somewhere, on something, even if that thing is just buying office supplies at some startup which is the ultimate destination. Money does not simply vanish from the exchange of goods and services because it is "invested". It's not like someone bought a hunk of gold and stuffed it under the mattress.

(Heack, if they bought a hunk of gold, the person who SOLD the hunk of gold would still have the money to go spend on something....)

@Hazel Meade: "Really? Are the wealthy just burning the money?"

No. They're either a) sitting on it or b) investing (in general as an economic class) abroad in developing countries where the growth potential is higher or in ventures that don't, for whatever reason, result in the creation of breadwinner-level, full-time middle-class jobs (as opposed to low-paying and/or part-time McJobs).

Foreigners invest in the US even more than Americans invest abroad.

I am wondering about the "shortage of safe assets." Is that a shortage of high quality Treasury securities in the aggregate, or a shortage of very short term Treasurys that have a liquidity premium?

Larry Summers proposed rolling over all Treasury debt into T-bills to drive the liquidity premium to zero. In that "operation twist," the equilibrium T-bill rate would rise, perhaps to a positive level. Lack of supply of the long end would reduce the term premium, and the yield curve would flatten. Corporations would issue less short term debt and more long term debt. With a lower long rate, it might stimulate long term investment.

There are plenty of "safe assets." It's just their prices suck.

"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."

Since Rubio proposes to switch to a territorial system of corporate taxation, it's not clear how much of a potential boost in investment spending would go toward the purchase of capital goods produced and located in the United States. This plan has very little to do with counter-cyclical fiscal policy.

"Since Rubio proposes to switch to a territorial system of corporate taxation"

This alone should make people support the plan.

Also, its not very difficult to raise tax rates if you need to do so.

Its not like these rates are etched in stone to never be changed again.

Kinda contra the whole thread, that "less tax" is permanent politics.

Hard to pull off though, in the long run, as we've seen.

Have to assume that some of the resistance is based on the dishonesty of it all. Rubio doesn't say he wants to raise deficits and IIRC he is typical of most Republicans in laughably claiming that he will cut deficits (despite his huge tax cuts) and the current level of federal debt is an outrage, etc. etc. Why we are all supposed to turn a blind eye to that level of disingenuousness is beyond me.

I think if it were Michelle Bachmann, she'd just say hack away (not that she could ever get Congress to do that). Others do have these contradictions.

The tax cuts cannot be that 'huge'. IIRC, federal income tax collections in toto are something on the order of 7.5% of gdp.

Selling off federal lands to fund a short term tax cut is a disgusting thought.

No, it's not disgusting, just strange, as it confounds assets and income. It would be perfectly proper to sell off federal lands if you put the proceeds in a sovereign wealth fund.

The real reason to sell the lands is to remove the dead hand of government and make the asset productive.

Its not that the asset is not productive, it's that there are systemic problems with status tenures, and public agency is not as talented as commercial enterprise in the timber business.

IIRC, about 12% of the land area of the United States is held by the Bureau of Land Management. Seems nutty to have all that grazing land, but contriving a formula to repurchase the grazing permits is likely to be a bear. Auctioning off the timber land (IIRC, 9% or 12% - I forget which) might be a good idea - if you could persuade state governments to take timber land off the tax rolls.

I'll make you a deal: half public sale, half full Wilderness designation.

Why? We already have gobs of wilderness held by the National Park Service and the Fish and Wildlife Service. The Forest Service is timberland. Those trees are crops. What you'd want to sequester and turn over to park services would be the old growth forest, but that's only about 2% of the total. As for the BLM land, it's grazing land, not pretty stuff.

It is not about pretty, it is about the need for natural reserves to support natural services.

Otherwise you might fail the test and have ecosystem collapse before you figure out how to build a stable ecosystem on Mars.

Oops, that soil fungus was important ...

It is not about pretty, it is about the need for natural reserves to support natural services.

This is a nonsense statement.

It would be worth it for the caterwauling when the welfare westerners realize they would need to buy grazing land instead of sucking off the public teat.

Let's see.

No tax on estates.

No tax on capital gains, interest, or dividends.

Who needs to argue about Keynes or Krugman or anyone else? What the plan does is entrench the wealthy families in the country into a tax-exempt aristocracy. I suppose that's what his supporters want, but it seems like a terrible idea to me.

What's wrong from a Keynesian point of view?

Well, for starters, Keynesian stimulus is not supposed to be permanent. Does anyone believe these cuts will be temporary? What do you think, Tyler? Ready to have them all repealed once we get to full employment? Think Congress will just do that?

No, wealthy families are enriched by their property holdings and business activity. The charitable interpretation would be that Rubio has bought into the idea that income earned from entrepreneurship and property holdings is generative in some way that income earned from trading on one's human capital is not, and that would outweigh whatever inefficiencies which might result from tax preferences for income from non-labor sources. He's just begging for some latter-day James Carville to hang this around his neck like a rubber chicken.

I'm going to throw out something based on my personal experience. It is that people who grasp a complex problem tend to suggest incremental changes. Sadly, it is those who don't really understand the problem who suggest wholesale change and revolution.

As related to the very complex federal tax system, I think appeals to simplicity might hide shallow effort more than deep understanding.

I think appeals to simplicity might hide shallow effort more than deep understanding.

No, it reflects the fact that few of us earn a living as tax lawyers and accountants. We do not benefit from rococo taxation. The problem is not 'complex'. Those preferences have attentive constituencies and all Democrats and about half of all Republicans are easily bought off.

Tax simplification is an incremental change, invoking innumerate "flat" taxes because they seem simple is lazy and dishonest.

invoking innumerate “flat” taxes because they seem simple is lazy and dishonest.

Contemporary portside discourse is generally reducible to witless and self-aggrandizing insults. I have to commend you for generating one that is both off-beat and gives voice to this attitude with lucid expression.

Show me a flat tax proposal that produces even 80% of current spending

But that would preclude revolution as being a viable possibility, which, if you have a knowledge of history, occurs relatively frequently.

@Tyler: "I am myself of the belief that we are fairly close to full employment, with full employment likely on the way,..."

How do you define "full employment"? That the labor force participation rate is at its socially optimal and maximal level? Also, are you factoring in quality of employment? That is, you think the mix of jobs available is socially optimal and maximal as well (i.e. maximizing opportunity for upward social mobility, sufficient to sustain the middle class, and not predominantly shitty, low-wage service and retail jobs)?

Or, do you just mean that we're at the highest level of employment possible given current market demand?

"That the labor force participation rate is at its socially optimal and maximal level? Also, are you factoring in quality of employment? That is, you think the mix of jobs available is socially optimal and maximal as well (i.e. maximizing opportunity for upward social mobility, sufficient to sustain the middle class, and not predominantly shitty, low-wage service and retail jobs)?"

-All these are much more vague, meaningless, and hard to define than full employment. And Tyler said we're "fairly close to full employment" (which, no doubt, we are), with full employment likely on the way (reasonable).

Alright, asshole. Since "full employment" is so simple to define, please do so. Educate me.

I did a post on it:

https://againstjebelallawz.wordpress.com/2015/08/01/nairu-the-natural-rate-of-unemployment-and-full-employment/

That is an incredibly low bar. "what is wrong with his plan, other than the millions of plans that are better." If a house is on fire, peeing on the fire is, I suppose, better than doing nothing. But that doesn't make it optimal.
Taking vast sums of current US budget dollars, and then doing one of the worst thing with them - giving them to the rich - creates a massive opportunity cost. Defense funding can be stimulative, but it would still be stupid to do another Iraq war, and a profound waste and loss of opportunity.
Build bridges, build HSR, invest heavily in R&D in a wide range of new energy policies, re-channel some of the Mississippii to restore the Delta and slow the disappearance of the Louisiana coast - all these things are better than giant tax cuts for the rich.

Build bridges, build HSR, invest heavily in R&D in a wide range of new energy policies, re-channel some of the Mississippii to restore the Delta and slow the disappearance of the Louisiana coast – all these things are better than giant tax cuts for the rich.

-How do you know?

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.

So as long as it's only the second worst plan on offer it's just fine?

I don't speak for new Old Keynesians, but this argument makes no sense from any theoretical standpoint I know of.

The additional income accruing to the tax cut recipients would equal the government's additional borrowing. Basically the wealthy would accumulate sovereign debt, as in Italy.

Of course the tax cut recipients would consume and directly invest some, and wouldn't want all their savings in sovereign debt. So markets would have to adjust, in complex ways, including internationally. I think those adjustments would subtract from real demand at least as much as the tax cuts directly added, but that's a long story.

When Ronald Reagan was president, federal tax revenues were about $800 billion. Now they are about $3 trillion. Please explain.

Investors prefer certainty. When taxes are going up, they are certain profits will be smaller. When taxes are cut, profits may also go up. Investors, firms will make more capital investment in an atmosphere of increased profitability, especially when taxes are not an issue.

Please explain? Ever heard of inflation?

Is there any basis for the assumption that Tyler slips into his argument - that "the wealthy will take their new surplus of funds and invest most of it" (rather than put it in T-bonds for example)?

"on what grounds should the prevailing Keynesian approach reject the fiscal policies of Marco Rubio?"

The simple answer is "on the same grounds that they reject hiring people to dig holes and then fill them in again."

Just because a policy would provide fiscal stimulus does not make it good policy.

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