TAX AND SPEND?….NO, IT’S TAX

TAX AND SPEND?….NO, IT’S TAX OR SPEND….Pandagon says that Republicans don’t understand Keynesian economics:

As far as I can tell, Republicans have one and only one reading of Keynesianism that comes from the shortened second day of Econ 001 – government spending can revitalize the economy. It just so happens that the rest of it is politically inexpedient, and they have a preferred method of spending that can be sold any time, regardless of the circumstances…tax cuts.

Yeah, tax cuts, tax cuts, tax cuts…..

The lesson of Keynes is that governments can help economies out of a recession via deficit spending. Essentially, the government is trying to keep overall demand in the economy high by replacing the spending that consumers and businesses aren’t doing.

And it has to be deficit spending because it doesn’t do any good to simply tax money away from consumers and then spend that same money via the government. Total spending stays the same, and since government expenditures tend to be less efficient than consumer and business expenditures, the overall effect would actually be moderately damaging to the economy.

Needless to say, you can run a deficit either by spending more or taxing less, so which should you choose? There are two big considerations: (a) because there are lags built into any big economy, you want the stimulus to happen as fast as possible, and (b) you want the stimulus to be temporary. When the economy recovers, the deficits should go away.

That’s what makes the Bush tax cuts such a disaster: it will take a long time ? probably on the order of 18-24 months ? for their effects to be felt, and hopefully the economy will be recovering by then anyway. And of course, the tax cuts are permanent, which means we’ll be running deficits forever, even when the economy is strong.

In other words, spending programs are generally better and faster ways to stimulate the economy than tax cuts. And this time around we don’t even have to deal with one of the biggest problems with Keynesian spending programs, namely that it’s often hard to find useful, short-term projects to spend money on. Federal money could be spent on helping states out of their budgets crises and on increased unemployment benefits, and thanks to 9/11, money could also usefully be spent on the war with Iraq, on vastly increased homeland security measures, on reconstruction efforts in post-war Iraq, and so forth. All of these things are both immediate and temporary by their nature, and when you add them all up and throw in the usual pork projects (bridges, water treatment plans, etc. etc.) you could easily have a stimulus package that amounts to several hundred billion dollars.

If there was ever a time when a pure Keynesian spending program was the best solution to a slow economy, this is it. It’s too bad that Republicans have allowed their fundamentalist ideology to blind them to it.

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