Paul Krugman has a post on his blog relevant to some of the discussions about taxation that have come up here before. Against conservative notions that government spending might somehow make the economy less efficient — because government, according to conservatives, always spends money less productively than private individuals — Krugman writes:
When we’re asking whether it’s better to have the government stimulate the economy or to try to stimulate private spending, we’re asking among other things whether a marginal dollar spent on public goods is worth more or less than a marginal dollar spent on private consumption. And there’s nothing, even in Econ 101, that clearly favors private spending on private goods over public spending on public goods.
In other words, the attempt to claim the authority of economics for the idea that stimulus in the form of tax cuts is better, at a microeconomic level, than stimulus in the form of infrastructure spending is a case of bait and switch. Don’t fall for it.
In other words, the debate about whether to spend money on public goods has little to no relationship to the debate about whether money is better spent by government or private individuals when it comes to private goods. The only relevant controversy linking the public and private use of that dollar, I presume, is the controversy of values and priorities: how would we prefer to spend that dollar?
This reminds me that I still have not found a satisfactory account of why tax increases would necessarily harm the economy in a time of recession — as distinct from any other time. If in a time of recession we need government spending on public goods, partly because spending on private goods has significantly slumped, why would a dollar taxed from someone in the top 5% harm the economy were it spent on something like, you know, bridges, roads, or other infrastructure projects?
This is, I should add, a genuine question. I think the answer to this question is important because we’re going to be hearing a lot of economic arguments in 2009 that take the following form, “Since we’re in a recession, X follows.” I want to be very skeptical of such arguments — and to educate myself enough so that I understand the implicit reasoning — and, perhaps, logical flaws — behind such confident claims.
Otherwise, we must rely on arguments from authority — and the arguments of economists, at that! — which is a crippling position from which to form opinions.
Lee, you write, “If in a time of recession we need government spending on public goods, partly because spending on private goods has significantly slumped, why would a dollar taxed from someone in the top 5% harm the economy were it spent on something like, you know, bridges, roads, or other infrastructure projects?”
I have a problem with the way you framed that question, because it implies there is a direct connection between the hypothetical tax hike and the spending on infrastructure. There would be a direct connection if the United States were obligated to balance its budget — but in fact, we don’t have to raise taxes in order to increase spending. Everyone in America knows we can spend the money on infrastructure WITHOUT raising taxes, and we can also raise taxes and then spend the extra revenue paying down the debt RATHER than increase spending — which we’re eventually going to have to do, at least in theory.
So the cost/benefit analysis is more complicated than just weighing the cost of reduced private spending against an increase in public spending.
In my view, the more important cost/benefit analysis is: How do we weigh the cost of raising taxes (on anyone, rich or poor) versus the benefit of paying down the debt? Or, to put it another way, how do we weight the cost of a dollar of federal debt against the benefit of keeping that dollar in a taxpayer’s wallet?
I thought this part of Krugman’s quote was fascinating:
“When we’re asking whether it’s better to have the government stimulate the economy or to try to stimulate private spending, we’re asking among other things whether a marginal dollar spent on public goods is worth more or less than a marginal dollar spent on private consumption. And there’s nothing, even in Econ 101, that clearly favors private spending on private goods over public spending on public goods.”
I suppose another follow-up question would be, if it’s better for the economy to spend rich people’s money on infrastructure and other public spending, rather than letting rich people spend their money on yachts, Madoff’s money management extravaganza and other nonsense — why isn’t raising taxes on the rich always a good idea? Krugman says he, like most other economists, doesn’t think taxes on the rich should go as high as 90% — as they were under Eisenhower — but why would that necessarily be a bad thing?
The awesome political challenge we responsible Americans face won’t fully hit us until after the recesision, when the economy is on the upswing — that’s when the steps we’ve taken to fight the recession will have to be rolled back. The fed will have to raise interest rates, spending will have to return to at least pre-recession levels, and taxes will have to be raised. The hardest part will be raising the taxes. The controversy will be over how much to raise taxes, and whose taxes will be raised. I believe taxes need to be raises A LOT, and the burden for paying these new taxes needs to fall almost exclusively on the rich. Republicans, as ususal, will fight for keeping taxes low — the irresponsible but crowd-pleasing path — and Democrats will have a hard time fighting them on an issue that has hurt Dems in the past. It’s up to us to stand firm in demanding these increases and to make the case, consistently and persuasively, that these increases are absolutely necessary.
Comment by Ian — December 23, 2008 @ 5:27 pm
Lee: I was also impressed when I read “…we’re going to be hearing a lot of economic arguments in 2009 that take the following form, “Since we’re in a recession, X follows.” I want to be very skeptical of such arguments — and to educate myself enough so that I understand the implicit reasoning — and, perhaps, logical flaws — behind such confident claims.”
Every since the economy started to really fall to pieces, we’ve seen two examples of politicians and/or beaurocrats going before Congress and the people and saying, “WE NEED YOU TO DO X, OR ELSE THE CONSEQUENCES WILL BE HORRIBLE!” The first example was the $700 billion bank bailout, and the second was the auto bailout. In both cases, a sense that we’re in an extraordinary state of emergency enabled politicians/beaurocrats do to things that would seem offensive under “ordinary circumstances.”
In the case of the $700 billion bank bailout, Congress specifically authorized the Treasury to spend the money buying up so-called “toxic assets” — then Paulson went ahead and used the money to buy capital stakes in the banks instead. Complaints that Paulson didn’t have the authority to change the plan so fundamentally post-approval were brushed aside by many (including myself) because economists such as Paul Krugman had been promoting the change, and because desperate times seemed to call for desperate measures.
But I’m not entirely sure the bank bailout has worked. As Lee has pointed out previously, it appears the money isn’t restoring the credit markets to acceptable levels.
The second example was the auto bailout. First Congress rejected a plan to loan the American auto companies money to stave off bankruptcy — then Bush went right ahead and offered to loan them money anyway. Again, complaints that Bush didn’t have the authority to offer this money after Congress explicitly said no were seemingly brushed aside by many (including myself) because economists such as Paul Krugman had been promoting the change, and because desperate times seem to call for desperate measures.
In both cases, the executive branch asserted its authority to do what it wants without Congressional approval or authority. They similarly used a state of emergency after Sept 11th to justify an unnecessary war, torture, and other policies and actions that have cost American lives and weakened our country.
Soon, Barack Obama will go before the American people and before Congress, and solicit support for a plan to spend something like $1 trillion stimulating the economy through government spending — even while we have a national debt that’s somewhere between $5 and $11 trillion (I don’t know which figure to trust).
I support Obama’s plans for massive spending — but I’m getting nervous about living in a country that is in a constant state of emergency — where long-held principles are “temporarily suspended” to avert the crisis that never ever seems to go away.
Anyway, I just wanted to add some of my own thoughts to your basic point that we shouldn’t let people scare us into abandoning our own sense of critical analysis and judgment.
Regarding the question of “why tax increases would necessarily harm the economy in a time of recession — as distinct from any other time.” — I agree, there’s not necessarily any reason to believe that tax increases would hurt the economy more during a recession than during any other time.
The question is, does raising taxes on the top 5% hurt the economy, period? The obvious “conventional wisdom” answer is that raising taxes does hurt the economy, because it takes money out of the economy, thereby depressing growth. The argument for higher taxes is that American MUST pay down the national debt or suffer horrible long-term consequences — and the benefit of paying down the debt is worth the cost in terms of economic growth today.
What makes the cost/benefit analysis different during a recession is that people are especially vulnerable during a recession, and the economy can spiral — so when things are going badly, it’s extremely important to do things to stimulate the economy, but when things are going better, it makes more sense to sacrifice a little economic growth for the sake of long-term viability.
But if a persuasive argument can be made that higher taxes doesn’t hurt the economy AT ALL — then that’s a great argument to marshall in a few years, when the big-time debate over tax hikes arrives.
Comment by Ian — December 23, 2008 @ 7:20 pm