Wednesday, January 08, 2003

It's Creepy and It's Kooky, Macro Economy!

With respect to the proposals in GWB's new economic "stimulus" plan, some critics have commented on the oddness of proposing long-term solutions to short-term problems. Senator Ted Kennedy's reaction (quoted in this Reuters story) is typical: "To use the need for an immediate economic stimulus as an excuse to enact costly new permanent tax breaks for the wealthy is a cynical and disheartening ploy," said Democratic Sen. Edward Kennedy of Massachusetts.

The critics are correct from the perspective of old-school Keynesian fiscal policy. The recommended fiscal policy response to a slumping economy usually involves one-time spending increases or tax deductions, not "permanent" changes in the tax code. But guess what: using fiscal policy to deal with macroeconomic cycles is a poor idea anyway. It is incredibly, almost insurmountably difficult to get the size and timing of legislative responses to correspond to the ups and downs of the economy. By the time it's apparent that a fiscal policy response would have been helpful, the window has most likely closed. Current spending increases and tax reductions will have little or no impact on current unemployment rates. Their primary impact will likely be months down the road, when the economy might already have recovered on its own.

So if you want to judge the wisdom of new tax and spending proposals, short-run economic performance is not the correct measure. The appropriate criterion is the probable effect on *long-run* economic growth. And in that regard, GWB's proposals move us in pretty much the right direction, as some Cato scholars argue here, *assuming* they are eventually accompanied by spending cuts. That's a big assumption, unfortunately. Of course, most of GWB's supporters are casting their praise of his proposals in terms of the slumping economy because that's what people are concerned about right now. (But note that all the real praise from the Cato scholars is in terms of "growth," despite the misleading headline about "stimulus.")

As an aside, it's worth noting that the word "permanent" doesn't really mean much in this context anyway. In what sense is any legislation really permanent? Unless there is some kind of supermajority requirement for changing it, as is the case with constitutional provisions, all it takes to reverse a "permanent" law passed by a majority is another law passed by another majority. Short of passing a constitutional amendment, the 2003 Congress and president are utterly incapable of placing binding constraints on any future Congress and president - even if they are the very same people. Calling a tax cut or another change in the law "permanent" has all the power of making a wish with your fingers crossed. Those of us who favor tax cuts will just have to hope that future legislators are willing to stick with them.

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