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When Simon Johnson speaks

December 9th, 2010 · 2 Comments

We listen..

Not that this is any surprise, to be honest. We’ve mentioned similar stuff plenty of times, but we’re no Simon Johnson, you know, this Simon Johnson..

What’s wrong with cutting taxes?

Simon Johnson

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The president and Congressional Republicans have reached a deal that would cut taxes “for all Americans.” Their argument is that this package will stimulate the economy, create jobs and help lead to economic recovery and sustained growth.

This proposal, which seems likely to pass Congress, is not a good idea. Why? (To see me explain these points in a five-minute video, click here.)

Vice President Dick Cheney said, loud and clear, in 2002: “Reagan proved deficits don’t matter.” He was right that Ronald Reagan showed the Republican Party that you can get away with running significant deficits as a result of tax cuts – exactly the strategy of President George W. Bush.

But Mr. Cheney was completely wrong with regard to the implication that there are no economic consequences of sustained fiscal deficits.Talk to the Greeks (now in the International Monetary Fund’s emergency ward) or the Portuguese (who are headed in that direction). For that matter, listen to any policy maker in the European Union – they are all focused on bringing down deficits in a credible manner. And watch the European financial markets – where people are doubting and testing the fiscal credibility of all governments in the euro zone.

In fact, try persuading any responsible policy analyst anywhere in the world outside the United States that cutting American taxes from current levels will stimulate growth so much that the cut will pay for itself and end up reducing or at least controlling the fiscal deficit (the proposition of the Laffer Curve). You will be met with great skepticism.

If the I.M.F. could speak truth to authority in the United States, it would say this most forcefully.

This does not mean that we should immediately move to cut our fiscal deficit – efforts to panic us in this regard are completely misplaced. As it happens, some of the fear-mongering emanates from the same part of the political spectrum as the vociferous demands for lower taxes; there are no true fiscal conservatives in America. Here, too, is a sharp contrast between the United States and anywhere else in the world.

But our “fiscal space” is limited. We cannot afford to blithely increase our national debt. It can be done – and should be done given the parlous state of our economy and our disastrously high unemployment levels. But it must be done carefully, so we get as much stimulative effect on jobs as possible for our debt-increase dollars.

Cutting taxes for the very rich is an ineffective way to stimulate the economy in the short term (for a detailed discussion, see this post by my colleague James Kwak). On this there is widespread agreement, including from the pages of The Wall Street Journal, where Robert Frank, a careful student of the rich and famous (and editor of The Journal’s Wealth Report and author of “Richistan“), said: “When I ask wealthy business owners and entrepreneurs why they’re not hiring, they rarely mention taxes. They say consumer demand. And jobs.”

Three much more effective ways to support consumer demand and jobs would be:

Really extend unemployment benefits. There is nothing in the proposal on the table that will help people who have already been unemployed for 99 weeks – see this explanation from Nevada.

Don’t lay off teachers anywhere in the country. The broader goal, of course, is to increase teacher quality, which is not easy and takes time (see the film “Waiting for Superman“). But firing teachers at any level of K-12 education makes no sense in the short or medium run.

Immediately hire more people to teach in community colleges. The unemployed – and those at risk of being fired – need new skills, particularly around information technology and the ability to run businesses. Give the long-term unemployed the opportunity and incentive to attend these classes. Help them get jobs – or start their own businesses. Even if those companies fail, the entrepreneurial experience will keep them in the labor force and enable them to enhance their skills – and become more productive employees when larger companies decide to start hiring in earnest again.

Tags: Opinion

2 responses so far ↓

  • 1 Bill // Dec 12, 2010 at 1:48 am

    More left-wing claptrap. Just for starters, the “tax cut” is not a cut at all, it is the status quo rates that have been in effect for almost 10 years. In fact, the estate tax is going from 0% to 35% so it is a net-net tax increase. The rest of this article is so biased to the left that I don’t know where to start. I guess Castro and Chavez would agree 100% with Mr. Johnson.

  • 2 admin // Dec 12, 2010 at 3:08 pm

    Bill, Simon Johnson is the former chief economist of the IMF, hardly a left-wing radical (you should hear what Chavez has to say about the IMF). We’re getting tired of people calling things bad or wrong because they perceive (rightly or wrongly) that they don’t come from their side of the political spectrum. This is not a political blog but an economic one. The argument made by Johnson is that an (extension of a) tax cut for wealthy people is an inefficient way to stimulate the economy, because the richer people are, the more they are likely to save. For the same (rather uncontroversial) logic, unemployment benefits give a much bigger bang for the buck as these people will spend most (if not all) of it. In the Netherlands, a country at present doing significantly better economically compared to the US (so there is even less precautionary saving and more inclination to spend, if anything), the equivalent of a tax cut was provided for the WHOLE working population (not just the rich). Guess what. Only some 20% was spend, the rest saved. The correlation between the propensity so save and income is pretty well established and quite uncontroversial in macroeconomics, Bill. Personally, we don’t give a toss about whether something is (perceived as) right-wing or left-wing. We have only two criteria, whether it’s evidence based and works.