me; > "Except at low incomes, tax cuts are fiscally inefficient, i.e., they > stimulate aggregate spending less per dollar of increased deficit than > do increases in government purchases (on weapons, schools, etc.) Put a > different way, they increase the deficit more per dollar of stimulus."
David Shemano wrote: > Is your statement purely a logical result of theorems you accept, or are > there empirical studies you believe are compelling and conclusive? And if > the latter, which studies?< What I said is very standard Keynesian macroeconomics. For example, Mark Zandi, a GOP economist and Keynesian, made this point using empirical research. Krugman's introductory textbook reports his results. I haven't seen the phrase "fiscally inefficient" anywhere, but it makes sense as I define it. Most macroeconomists would use more down-to-earth language, saying that tax cuts (except for those benefiting lower-income folks) don't deliver as much "bang for the buck" as does increases in government purchases. What are the economic principle behind this commonplace statement? It's because an increase in purchases creates demand for business output _directly_ while cutting taxes only increases demand _indirectly_. The beneficiaries of the tax cuts don't have to spend every dollar that they receive (unless they're living paycheck to paycheck as many less-wealthy people do). Because they can afford to save more than lower-income people can, richer folks have a lower marginal propensity to consume than do the lower-income ones (while saving does not create markets for business). So handing them tax cuts doesn't have a big effect on total spending on domestic products (though it could increase the demand for ski vacations in Gstaad). Corporate tax cuts have also been notoriously ineffective since the early 1960s.They basically reward corporations for doing something that they'd do anyway. Since Monetarism went away, the main alternative to the Keynesian perspective has been the Classical one. They assume that the economy is always at full employment (so that 8% unemployment is due to mismatches between the skills that workers have and the skill demands of employers, etc. and not due to aggregate demand failure) and that every ounce of saving is translated into real (tangible) investment. If these assumptions were true, then the Keynesian discussion of the previous paragraphs would be irrelevant. If the rich have a low marginal propensity to consume, it doesn't matter, since whether the rich consume or save their extra income. Either way, it would cause demand to rise. However, since the economy is assumed to be at full employment, this tax cut would encourage inflation, while spurring interest rates to rise (since all else constant, the tax cut raises the government's borrowing). If the government's deficit grows, it "crowds out" private tangible investment and other private purchases. The economy is stuck at full employment (potential output). The so-called "supply-side" macroeconomics is a subset of Classical macro embraced by a small but influential group of politicians and journalists (but by few macroeconomists that I know of). This view in essence sees any taxes on the rich and corporations (and any other potential campaign contributors) as inefficient, i.e., interfering with the purity of the (imaginary) free market. Getting rid of those taxes therefore reduces inefficiency in the use of all resources (including labor-power), allowing potential output to rise. This perspective has never done well empirically. It's usually a covert, fiscally inefficient, and inequitable version of Keynesian stimulation (raising deficits to raise demand). Both Reagan and #2 cut taxes for the rich, raising demand and having little or more likely no effect on the growth rate of potential (full employment) output. -- Jim Devine / If you're going to support the lesser of two evils, at least you should know the nature of that evil. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
