Thursday, October 4, 2007

Has Mark Thoma Sipped from the Supply-side Kool Aid?

Mark Thoma features the Iraq War surtax proposal endorsed by James McGovern. As a member of the deficit hawk wing of the Democratic Party, I like this idea. Mark objects:

While it's certainly true that someone will have to pay for the war at some point - somebody, someday, somewhere will have to give up something to pay the bills - raising taxes right now is not good short-run economic policy given the current weakness in the economy. Driving the economy into a recession would show sacrifice, but that's not the best way to show our support.


If this had been written by someone in the White House, I’d expect Mark to actually mock this suggestion. But this is Mark making the statement and as much as I respect his insights on these matters, it’s my turn to do some mocking. Sure we have seen some recent weakness in aggregate demand growth. But is an increase in national savings necessarily recessionary? Has easy monetary policy lost all of its potency? After all, lower interest rates could encourage more investment as well as even more dollar devaluation with its encouragement of more net exports.

14 comments:

  1. This is not the first time Mark Thoma has said, IIRC, that even at current levels any increase in income taxes will reduce growth.

    I won't read his mind, but we could be in a political situation where any increase in taxes on the wealthy will instantly and immediately lead to large capital outflows, capital flight.

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  2. i have never been much of a deficit hawk, but i am beginning to suspect it might indeed be possible to bankrupt the country after all.

    all it takes is politicians and economists who are convinced... each time separately of course... that it is never a good time to raise taxes.

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  3. Th issue of increasing, or decreasing, taxes is too often spoken about in a general way as though all tax payers were being discussed. Mysteriously when "reform" is implemented in the form of some revision of the tax laws it results in lower taxes for the wealthiest tax payers. As professional economists have any of you who discuss these issues ever seen the truly wealthy in their natural habitats. If they can afford several multi-million dollar homes, a stable of exotic cars, and frequent superb vacations during the year, then why wouold one worry about the effect of raising their taxes? Or, is it only the lowly working class that can be counted upon to pay yet more taxes? This is not a theoretical issue with a hypothetical outcome. Taxes, and the deficit for that matter, are reality and have consequences. In some cases higher taxes can reduce profligate spending. In other cases higher taxes mean hardship and privation. But these outcomes are reality, and the discussion of tax code revisions should take account of the reality.

    I'm curious to know what Thoma means when he says, "that's not the best way to show our support."
    Support for what? Is it the maddness in Iraq, or the plight of the working class faced with their disproportionate share of taxes?
    The only way to demonstrate support for the members of the armed srvices is to keep them out of useless and deadly excursions. The way to support that sector of the population that provides the manpower that makes our economy spin is to reduce their financial burden and ask those that benefit most from the economy to start to support it in a more significant way.

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  4. Thaddeus Stevens (1792-1868), speaking of the Civil War financing Internal Revenue Act of 1862:

    "While the rich and the thrifty will be obliged to contribute largely from the abundance of their means . . . no burdens have been imposed on the industrious laborer and mechanic . . . The food of the poor is untaxed; and no one will be affected by the provisions of this bill whose living depends solely on his manual labor."

    Corporatizing, privatizing, deficit financing of war has effectively turned this, and others, upside down

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  5. Is Mr. Steven's running for President, or any other high office. He'll get my vote, assuming that he is (or was as the case is) not the deceitful dirt bag that most of our present day crop of candidates seem to too often be.

    Relying on the insights of the departed is not so far fetched. You may note that John McCain was quoted, this morning, as having suggested that he would choose Alan Greenspan to over see tax code revisions, whether Greenspan were dead or alive. While I too like the sound of Greenspan, Dead or Alive, it would seem more appropriate to a flyer on the post office wall. Sir John's comment tells us much about his commitment to the working class, and the need for his beong commited. I don't get it. The guy has now stuck his foot in his mouth several times in quick succession and still he is given serious consideration for the office of President. Do Republicans see McCain as a way to make George W. look better by comparison? Remarks abouot this being a Christian nation. Some stupidity about mormons not being christians. Who is he trying to reach? But I do like the ring of, Greenspan, Dead or Alive.

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  6. the mccain quote about greenspan seems to be a replay of a quip that got mccain points last time out.

    what i wonder is if a real economist can explain in a few words why "someone will hav to pay for the war at some point.. will have to give up something to pay the bills."

    is it not the case that "someone" right now is giving up at least potential consumption so other people can create the goods and services to run the war?

    it may be that at some future time those present someones will present "us" with a bill in the form of bonds to cash or just pay the interest on, but that is a separate issue... and one which, for example, could be addressed by an estate tax to tax the income of the present people who didn't pay a (current) income tax for the war they presumably voted for?

    then, the idea that it is always the case that it is never a good time for a tax increase... the fragile economy, you know, seems to me to be an argument that needs careful but vigorous refutation. is that out there and being ignored, or is there some trick to perpetual deficit financing that i don't understand?

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  7. In any organized societal setting, like a poliltically defined country, it is time to raise taxes when it is time to spend money so that the government can carry out its legislated responsibilities. Is that really a mystery to economists? The more important question is, when is a good time to legislate government responsiblity? Like when impoverished little kids need medical care. Or maybe when the local school has 35-40 kids in a class, or the teachers are paid so poorly that only partially educated people take the job. Oh, what about repairiing bridges so that they don't fall in the river when lots of cars are crossing over? See, there are really good reasons to spend money that requires taxation of the population.

    coberly, you are so right. The bill is in the mail, and this is one piece of correspondence that will show up. Who's to pay the bill? If we continue to allow only representation of the wealthy in our government there's not likely to be any good result.

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  8. coberly,

    'perpetual deficit financing' can be indicative of what, way back in the early 1970s, a guy named O'Conner called 'the fiscal crisis of the state'.

    It becomes structural and, as perpetually rising indebtedness, it's worth considering who and what hold that debt, what portion is external, debt service payments relative to exports, who pays and who is expected to pay the most and least... what the borrowing is used for.. some other such...

    and the U.S. begins to look a bit problematic.

    Rest of world is paying for our war against the world,,,but, as quantity modifies quality, I surely wouldn't expect that to be perpetual any more than I expect the dollar to remain hegemonic.


    Jack,

    Thaddeus Steven chaired Ways and Means, was the leading Radical Republican, as a deeply committed abolitionist was part of 'the underground railway' who also "defended and supported Indians, Seventh-day Adventists, Mormons, Jews, Chinese, and women" and, as noted, helped make sure that Civil War tax-financing was more than mildly progressive.

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  9. jack - as a general rule, you are right. I can think of two exceptions. One is the Keynesian proposition that we should allow for deficits during recessions and surpluses during booms. Now William Poole might rightfully argue that a good monetary policy can be a good substitute for countercyclical policy. Max Sawicky might have counter words to offer Dr. Poole. But let's say George Bush was right today when he talked about a strong and vibrant economy (never mind I laid into Bush over at Angrybear after he said that). Then the Keynesian rule would be to use fiscal restraint right now.

    Robert Barro has another argumnt - tax smoothing. If spending is temporarily high, then maybe we want taxes to be a bit lower than spending now as we will have surpluses later to buy off the debt now. That's a good argument but remember - the neocons want endless war. Also - everyone is predicting that health care spending by the government will be higher in the future than it is today. So Barro's tax smoothing argument says we should be running surpluses.

    Of course, George Bush just laughs all this off. After all, he refuses to listen to anyone who makes any sense.

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  10. Juan,
    That settles it. I'm writing in for Thaddeus. For good measure I'm choosing my favorite statesman, Max.
    Robespierre, as I have noted here in the past. At very least, these are "get it done" men who
    understand(understood) the needs of the working class.

    Are you familiar with the Great Man theory of political statesmanship? It suggests that all geo-political entities are entitled to a fixed number of great leaders. As a corollary to that axiom, it is held that the USofA had the good fortune of having its entire allotment of such statesmen converge during the earliest decades following its founding. We're now suffering the lopsided nature of that distribution.

    pgl,
    I wasn't taking any position concerning the balance issue as it relates to the budget. I was trying to point out that more or less taxation is secondary to a government's role in maintaining the good health and structure of the country. The government is there for a reason, and the reason isn't just to protect the wealth of the wealthiest. They may like to think that, but there are more of us than there are of them. Embedded in that point was the obvious suggestion that our government could find far better ways to spend the tax revenues that it collects, and that if it is going to squander the treasury of the nation better it be that portion supplied by those who have gained the most by its actions. Mine is not an economic perspective. It is more one of social morality/equality.

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  11. Jack

    someone else once said every country has the government it deserves.

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  12. That is especially the curse of democracy. The majority makes choices, but no one ever said that the majority of people have any reasonable understanding of life beyond its simplest character. In fact, when you listen to George W.'s latest pronouncements you get a sense that he is the people, the average shmo, so to speak. Unfortunately the average guy often gets himself in too deep without any understanding of the potential consequences of his actions. George is a bit worse than average, however, in that he is smugly secure in the certainty of his own righteousness. A dangerous personality characteristic. The results speak for themselves.

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  13. Jack,

    Yes, have heard of that theory but did not know the number was fixed and never cared for it anyway since it ignores the history-making ability of 'the crowd'. Guess that I take leaders, great and not, to be created by the particular social-historical conjunctures they rise from and are faced with.
    On that note, I recall a GWB 'coming out' of 1998(?) on C-Span. All the close backers at hand,,,among whom, George Shultz. Well, that was a 'bingo' moment, as in 'now I know who the next president will be'.

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  14. Yes, great men result from the fortuitous convergence of trials and tribulations. It can look as though they spring out of the crowd, but I think more likely they jump up and distinguish themselves when the time is ripe and the crowd has need for direction. But when there are no great men available at a given time, in a given place calamity ensues. The absence of greatness is itself a result of the times. Maybe the last several decades have seen a change in our economic and social environments which hinders the development of greatness and more currently promotes only the features which we deplore amongst our political class.

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