The position of Fraser Nelson and Guido Fawkes on deficits should hearten the left. Tax cuts are stimulative but spending rises even more so.
Keen blog readers will have been following the fascinating debate over deficit-findanced tax cuts between Danny Finkelstein on the one hand, and Fraser Nelson and Guido Fawkes on the other. The left should be heartened by the latter’s position.
Yesterday, Finkelstein, the fiscal hawk, wrote: “If the Tories were now to cut taxes immediately upon on entering office, what would happen? It would, erm, destabilise the economy, wouldn’t it.” Guido responded:
“bond traders understand that a growing economy supports their coupon payments, whereas a flat or contracting economy is a greater sovereign credit risk. A growing economy can afford to finance a budget deficit if necessary. An over-taxed, low to no growth economy can’t. High taxes, and Britain is a high tax economy after 13 years of Gordon, destabilise the foundations of a strong economy, driving enterprise into the ground or overseas. Guido remembers when this was ideologically core to Conservative thinking, it was when they won elections…
Today, the Fink replies:
“He is forced into that position by his view, cogently and frequently advanced, that tax cuts should always be proposed since they force the state to cut spending.”
But that’s not quite right. Guido does want tax cuts to be offset by spending reductions but, recognising that spending cuts are politically tricky, believes “in the realm of lesser evils” that deficit-financed tax cuts are stimulative. And he’s right – but spending rises are even better.
During the stimulus debate in the US, much was made of Congressional testimony by Mark Zandi, the Chief Economist of Moody’s Economy.com, an independent provider of economic analysis. In this updated report assessing ‘The Impact of the Recovery Act on Economic Growth‘, Zandi outlines the “bang for the buck” from different aspects of the US fiscal stimulus. While some tax cuts delivered increases in GDP beyond the amount pumped back into the economy, it shows that spending increases were the most efficient form of deficit spending.
The key to recovery is growth. Some tax cuts – like the Government’s VAT cuts or Obama’s tax rebates – can play a stimulative role. But as this independent study shows, government spending is the most efficient way to address the low aggregate demand that typifies the current recession.
33 Responses to “Finking about stimulus”
David
…or is that ‘The Public Works Fallacy’?
Either way, the author actually believes that employing people to do something useless is a way of boosting prosperity. It would be funny, but unfortunately it is a view shared by people with influence. Very worrying.
Josh
One of the biggest myths perpetuated in modern times is that deficit spending helps a depressed economy, and that reducing a deficit in the middle of a recession/depression is suicidal. The deficit during the final year of Herbert Hoover’s presidency was 4.5%. So much for being a contractionist. The deficit averaged 5.1% during the first 3 years of New Deal. Are you really suggesting that a difference of 0.6%, or 60 basis points, means the difference between depression and recovery? If so, why did America did tip back into depression after WW2, when a deficit of 21.5% was turned into a surplus of 1.9%, a swing of 2,320 basis points!!! If 60 basis points means the difference between depression and recovery, surely 2,320 basis points would do even more damage. But it didn’t. The post war recession lasted 8 months with an unemployment rate of 3.9%, compared to over a decade of depression with an unemployment rate that never fell below 14% despite massive fiscal stimulus.
Robert Barro has produced some research that suggests the multiplier for non-defence outlays is zero. Christina Romer suggests it could be 1.9. Don’t trust the perceived wisdom of economists. They are mostly useless, relying on sophisticated models that attempt to replicate human behaviour, relying on crackpot theories like the Efficient Markets Theory or Rational Expectations. The Keynesians, Monetarists, Marxists and New Classicals were moronic with a few exceptions. The Austrian School however called it right from the beginnning. The only solution is Austrian, as President Warren Harding proved when he cut spending by 33% and cut taxes at all levels during the 1920 depression, which lasted only one year despite no monetary or fiscal stimulus*
*If you argue that spending has a larger multiplier than tax reductions, then bigger spending increases than tax reductions would imply a negative multiplier, implicitly suggesting no fiscal stimulus.
Harry Harrison
@ Beardyweirdy
Measured on an internationally comparable basis, the UK has the highest tax burden of the G7. Higher even than France, which is quite something when you compare their public services to ours.
Major Plonquer
You clowns are still at it. Forget that it was the Left’s over-egging of the State that got us into this mess in teh first place. Forget that the UK can’t afford all your stupid non-jobs. Your arguement is all about how to make the pain SEEM less. Forget it.
Personally I don’t give a damn. I’ve abandoned the UK with my family, my business, my jobs and my wealth creation and moved to a country where they recognise and reward capitalist endeavour. China.
What amuses me is that you lot seem to think that Chinese peasants will continue working hard creating foreign trade surplusses just so they can continue to underwrite your bloated government spending. Take a look at the headlines in this morning’s China Daily: China’s holdings of US Treasury debt slashed.
If the people here won’t underwrite the USA why do you continue to believe they’ll underwrite the UK’s debt? In a year or two the UK won’t have the luxury of defeicit spending. You’ll have to live within your means and I don’t think Keynes is going to rise from the dead to save you.
Marcus Aurelius
And Will if we really have “low aggregate demand” why the jump in inflation. We have too much demand and too little production.
If you create millions of highly paid non jobs in equality commissars, five a day coordinators all you do is drive up house prices (they all want to live near the only good school) and drive down the currency (they buy BBMW’s and Panasonic flat TVs.
Record rise in inflation follows record increase in money supply, who would have thought it?