Taylor: Why Permanent Tax Cuts Are the Best Stimulus

John Taylor is not ready to give up on tax cuts, nor is he ready to adopt traditional Keynesian ideas:

Why Permanent Tax Cuts Are the Best Stimulus, by John B. Taylor, Commentary, NY Times WSJ: The incoming Obama administration and congressional Democrats are now considering a second fiscal stimulus package, estimated at more than $500 billion, to follow the Economic Stimulus Act of 2008. As they do, much can be learned by examining the first.

The major part of the first stimulus package was the $115 billion, temporary rebate payment... The argument in favor of these temporary rebate payments was that they would increase consumption, stimulate aggregate demand... What were the results? ...[C]onsumption shows no noticeable increase at the time of the rebate [see chart]. Hence, by this simple measure, the rebate did little or nothing to stimulate consumption, overall aggregate demand, or the economy.

These results ... correspond very closely to what basic economic theory tells us. According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased...

After years of study and debate,... the permanent-income model led many economists to conclude that discretionary fiscal policy actions, such as temporary rebates, are not a good policy tool. Rather, fiscal policy should focus on the "automatic stabilizers" (the tendency for tax revenues to decline ... and transfer payments such as unemployment compensation to increase in a recession), which are built into the tax-and-transfer system, and on more permanent fiscal changes that will positively affect the long-term growth of the economy. ...

What ... can Congress and the incoming Obama administration do to give the economy a real boost on Jan. 20? Here are a few fairly bipartisan measures worth considering:

First, make a commitment, passed into law, to keep all income-tax rates were they are now, effectively making current tax rates permanent. This would be a significant stimulus to the economy...

Second, enact a worker's tax credit equal to 6.2% of wages up to $8,000 as Mr. Obama proposed during the campaign -- but make it permanent rather than a one-time check.

Third, recognize explicitly that the "automatic stabilizers" are likely to be as large as 2.5% of GDP this fiscal year, that they will help stabilize the economy, and that they should be viewed as part of the overall fiscal package even if they do not require legislation.

Fourth, construct a government spending plan that meets long-term objectives, puts the economy on a path to budget balance, and is expedited to the degree possible without causing waste and inefficiency.

Some who promoted the first stimulus package have reacted to its failure by saying that we must now switch to large increases in government spending to stimulate demand. But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices, and where expectations of future income and employment growth are low.

The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.

I'll note in passing that the New Keynesian model incorporates expectations of the future, and accounts for complex dynamics as well as any model, so the criticism in the last paragraph is really about policy justified by traditional Keynesian theory, not the more modern version. But more to the point, I don't think anything he said rules out positive net present value investments in infrastructure. We should make these investments in any case if we want the economy to grow robustly, now just happens to be a good time to have the construction and maintenance work done since people need jobs, inputs to production are relatively cheap, and the political atmosphere is accommodating.

Update: Paul Krugman:

Conservative crisis desperation: So we’re having a crisis, reflecting the policy failures of the past 8 years. But the usual suspects insist that the crisis is all the more reason to persist with those policies — indeed, make them permanent.

Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all.

And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook:

The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.

Translation: la la la I can’t hear you.

Meanwhile, at a panel discussion with Rich Lowry of National Review, I heard the latest argument against the Employee Free Choice Act: now would be a really bad time to make union organizing easier, because it would hurt business confidence in a recession.

Recession, recovery, whatever: it’s always proof that the Bush years should continue forever.

Comments

[ndk]

These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.

Neither does his approach. He fails to account for the increased real borrowing costs for the Treasury that such anticipatory markets would surely impose, or the possibility that individuals will expect to have to pay more taxes in the future and cut present consumption to compensate. They already surely expect to pay more taxes in some form to repair the Fed and Treasury's balance sheets. This would further quash their propensity to spend.

[mmckinl]

What is needed is Medicare for All. This would free up budgets everywhere while the spending would be quick, efficient and in general a boost to the repair of the mood of the public.

Infrastructure should be funded by ongoing tax structures such as the gas tax so that projects have dedicated streams of income over long periods to plan and implement projects as it once was before the Republicans decided that the gas tax should never be raised. How many years has it been now that Federal gas taxes haven't increased ?

[a]

Taylor in January *2008*:

"In other words, there was a Great Moderation in economic performance, which could be explained by a Great Regime Shift in monetary policy, which in turn could be explained
by a Great Awakening in monetary theory."

[a]

I'd comment further but it would mean my comment would be deleted, so I have to let everyone draw their own conclusions about whether Taylor is a person whose advice is to be valued.

[One Salient Oversight]

I'm not too concerned about permanent taxcutitis, so long as it is accompanied by permanent spendingcutitis.

Or is he saying deficits don't matter?

[Michael Turner]

If that was an NYTimes op-ed, why did the link take me to exactly where I expect to find this kind of opinion these days? I clicked on it, I was whisked up by a tornado in the intertubes, and plopped down with a big *whump* right into economics munchkinland: the WSJ online op-eds section. I'd just as soon have been sent directly to the domain of the Wicked Witch of the West, aswarm with flying Republican attack monkeys: NRO.

". . . government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices . . . ."

Uh, pardon my cheekiness here, Mr. Dr. Perfessor at Stanferd: yeah, those were the causes, but -- so what? Does it matter so much now what the causes were? We had a housing bubble, fed by a financial system that bet on that bubble and which is now in crisis because of those bets going bad, and we had high energy prices because of high global aggregate demand, stemming in large part from a wealth effect due in no small part to . . . the housing bubble! (Well, credit bubbles generally, but all inflating together, so pretty much the same thing.)

So what are you saying, Taylor? That now we should go back to having inflated home prices? Reinflated (somehow) with the GOP panacea: a *credible* promise of permanently lower taxes? You still have the problem that those home prices made no sense, don't you? So they'll still come down, won't they? (Not to mention all those not-yet-paid-off SUVs with much lower than expected resale value now.) So you'll still have deflationary expectations out there, won't you?

Besides, since when can any democratic (hence mutable) government credibly promise any such thing as permanent tax cuts? Wasn't the "credible" part always the problem with Krugman's idea of pulling the Japanese economy out of its long slump with a credible inflation target? In economic theory, perhaps, Krugman was absolutely right. But no rational voter in Japan believed that the system there was capable of following through on any such economic promise, for any significant length of time (which is key to the mechanism). Japan simply lacked an adequately strong and independent policy fortress from which such measures could be enacted and defended. Keynesian-rationalized spending through pork barrel politics -- now THAT the Japanese voter could believe was a dependable government deliverable, because they could see it happening every day.

I don't know where this guy's coming from, exactly, but people around here where he dropped me are pretty dang short and squeaky-voiced, and too many of them look suspiciously like Kevin Hassett, if not Arthur Laffer. Get me on the yellow brick road outa here, please.

[bakho]

People spend according to their permanent income.
For people who are NOT making a lot of money and NOT paying a lot of taxes, a tax cut is NOT going to increase their effective permanent income by a whole lot of money.

Tax cuts do nothing to solve the distribution problem or pay for things like health care and education which are not affordable for the lowest paid workers. To make them affordable requires public investment in public systems.

[save_the_rustbelt]

One thought:

The middle class will get very little value from any tax cuts.

The middle class needs a robust private sector job market.

And how do we get there?

[memory]

Allowing the tax cuts to expire would take us back to the crushing taxation of the Clinton years, and we all remember how those rates dragged the economy down. The distributional effects are also obnoxious, as noted above.

And besides, I don't believe the Permanent Income Hypothesis. At least, speaking for myself, I don't have enough confidence in my knowledge of my future income to spend my chickens before they hatch.

NDK comments:
"They already surely expect to pay more taxes in some form to repair the Fed and Treasury's balance sheets. This would further quash their propensity to spend."

So true, at least in theory.

But as for:

"and we had high energy prices because of high global aggregate demand, stemming in large part from a wealth effect due in no small part to . . . the housing bubble!"

Actually, high global aggregate demand isn't going away; at least, not unless China and India go away.

[bakho]

Shorter John Taylor:
Give our nation's wealth to fools who get snookered by financial Ponzi schemes. That is how the wealthy have spent the "permanent" tax cuts they were given by the Bush administration.

Bush policy gave huge tax cuts to an investor class that already was awash in too much investment capital. What did the investor class do with it? They created an unsustainable financial bubble on top of an unsustainable housing bubble. They took investment dollars and inflated the prices of financial vehicles to levels that do not support return on investment. They misallocated huge sums of our nation's wealth because they were looking for a quick profit and easy money. They are not willing to make the long term investments that will lead to future private sector jobs. That is the role of government like it or not.

STR is correct. We get a robust private sector jobs market by transforming our economy and manufacturing sector to produce 21st century products with 21st century technology using 21st century energy. To get there requires leadership and investments that will lift us over the barriers to forward progress. Abdicating responsibility to fools who invest our wealth in the equivalent of lottery tickets is bad policy.

[chriss1519]

"Fourth, construct a government spending plan that meets long-term objectives, puts the economy on a path to budget balance, and is expedited to the degree possible without causing waste and inefficiency."

So simple. Cut spending along with taxes. See? Simple.

Where shall we start? Social Security? What would be the stimulative impact of cutting SS benefits, or sending SS funds to the stock market? Certainly we could sacrifice the Medicare program on the altar of low taxes? I won't be so silly to mention the inviolate discretionary Military spending.

[ken melvin]

Bushes I and II used Stanford Economists. Clinton, now Obama, - Berkeley. So far Berkeley is the winner hands down. This guy begins to sound ridiculously clueless after "According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani".

[kharris]

"First, make a commitment, passed into law, to keep all income-tax rates were they are now, effectively making current tax rates permanent. This would be a significant stimulus to the economy..."

In other words, "Adopt the policies of the party I work for." The bit about it being a "significant stimulus to the economy"? They always say that.

The problem with permanent tax cuts as a stimulus tool, as has been pointed out often enough that Taylor could reasonably be expected to address the point, is that as tax cuts are used repeatedly, you run out of taxes to cut. Taylor wants us to rely on automatic stabilizers, which is a fine idea, but automatic stabilizers don't require adjustments to the tax rate. It seems to my jaundiced eye that he is doing the usual tax-cut shuffle, but trying to maintain credibility at the same time.

Let me ask the macro experts - don't taxes work more forcefully as automatic stabilizers if they represent a larger part of the economy at full employment? Don't we get a bigger swing in our fiscal stance with higher taxes, all else equal?

It seems true that the housing sector is a big part of our current problems, but that means resources need to move from housing to other parts of the economy. Government spending in sectors outside housing can facilitate that shift. Low expectations of future income can be offset in some households by putting household members to work at government funded projects.

Taylor, like Holtz-Eakin, seems to have let exposure to GOP politics undermine his honor. To the extent that any of the points I've made here have any validity, Taylor is more aware of them than I am, but looks the other way. This all seems too much like one more sales job for standard GOP policies.

[reason]

But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices, and where expectations of future income and employment growth are low.

BUT THAT IS NOT THE IDEA IS IT! We know it doesn't address the cause, but the symptoms are desperate. (It is like saying cauterising a bleeding soldier's limb does nothing to stop the war.)

[reason]

And the permanent income hypothesis does not explain the fall in household savings in the US (unless it shows that American's are chronically over-optimistic). He is another who hasn't noticed that the real problem is the foreign deficit and the disfunctional financial system. I don't see him addressing those at all.

[Lee A. Arnold]

EXAMPLLES OF POOR SCIENTIFIC REASONING:

"These results ... correspond very closely to what basic economic theory tells us."

"After years of study and debate...led many economists to conclude"

"approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market"

SOME USEFUL QUESTIONS:

(1) Why does Mr. Taylor think "promoting long term growth" is the same thing as getting out of this recession?

(2) Where does Mr. Taylor explain how Dubya gave the biggest tax cuts in history, but it didn't do much to promote long-term growth?

(3) Why should we listen to people simply because they run economic models disconnected from reality?

(4) Are there ANY economists running the party-line with even a shred of credibility remaining?

[wcw]

Hey, thanks for the reminder that the US right wing continues to demand ideological fealty to fiscally impossible programs.

To think, a guy smart enough to have the Taylor Rule named after him wrote this. Amazing.

[anne]

[Why Permanent Tax Cuts Are the Best Stimulus
By John B. Taylor - New York Times

is actually

http://online.wsj.com/article/SB122757149157954723.html#printMode

November 25, 2008

Why Permanent Tax Cuts Are the Best Stimulus: Short-term fiscal policies fail to promote long-term growth.
By JOHN B. TAYLOR - Wall Street Journal]

[robertdfeinman]

There are at least a dozen discussions similar to this one floating around on this site and others.

They all are avoiding the ugly truth. There was a vast international Ponzi scheme that emerged for a variety of factors and those players who were late getting in to the game, or stayed too long are now going to be left holding the (empty) bag.

There is no way to fix this. Artificial value has disappeared and won't come back. So what really is being discussed is who is going to be the sucker. Right now it would appear the the stockholders of the biggest firms are first in line to take a hit.

Those being protected include the bond holders and other lenders, the top staff of the institutions (Paulson's wealth is still substantial) and various foreign lenders, whose continued participation is needed.

Also on the losing side are low level staff at financial institutions and other firms caught in the undertow (like GM), as well as homeowners and pension fund investors.

Once it is understood that there is no way to preserve the inflated value then the discussion can turn to the real issue of whose ox gets gored, instead of masking it with a bunch of pseudo-scientific "economic" theory.

[Corban]

Business: Profit = Revenue - Expenses
Gov't: Change in Surplus = Change in taxes - Change in expenses

Permanent tax cuts must be accompanied by permanent reductions in expenses, or else you're basically borrowing into oblivion.

[Est]

Establish affordable national health care, and eliminate all taxes for everyone who has less than 50K in income. Permanently eliminate all regressive taxes (sales, property, inflation, etc...)

[bob mcmanus]

"(1) Why does Mr. Taylor think "promoting long term growth" is the same thing as getting out of this recession?"

Lee Arnold, I suggest you read the Romer & Romer 2007 NBER paper. They give an answer to 1 & 2. Whether it is sufficient...

My guess is that Taylor can see which way the wind is blowing. Obama is "postponing" tax increases, Pelosi is demanding tax cuts be in the stimulus package. Hell, Dean Baker this morning (see right column) says "tax increases are not stimulus."

I never really expected the Bush tax cuts would be allowed to expire. I hoped, but I kinda guessed Republicans in high places would manage to create the economic conditions that would make tax increases, in what is apparently a near-universal economic consensus about the contractionary effect of tax increases, very very difficult. Maybe, not likely but maybe, we will get some symbolic punishment of Wall Street. And perhaps something legislatively targeted at deficits. But nothing marcoeconomically significant.

Reagan, Friedman, Norquist, Cheney have won.

[bob mcmanus]

Obama to Outline Cuts to US Budget ...Yahoo

[Bruce Wilder]

jbt: "Here are a few fairly bipartisan measures . . ."

Maybe the key word there is "fairly", and, maybe the incoming Obama Administration's technocratic conservatism does bring these proposals within range of the Democratic as well as the Republican Right. Which is unfortunate and dangerous, and to be regretted. Maybe Taylor's support for a workers' tax credit is the bi-partisan part.

Mark Thoma wants to defend the honor of the New Keynesians against Taylor's permanent-income "modernism". That would put Taylor in 1957, the year Friedman published his seminal work on the subject. Ironically, Christina Romer, incoming CEA chair, is "Class of 1957 Professor of Economics" at UC Berkeley. Professor Romer has had warm words of praise for the prescriptive policy norms of the Eisenhower Administration, which holds the post-WWII record of three recessions in one Administration, and for William McChesney Martin, Chairman of the Federal Reserve at that time, and the last Bourbon Democrat loyal to fond memories of Grover Cleveland's economic stewardship.

Taylor's recommendations are not surprising, coming from someone committed to ignoring, or regretting, everything that happened over the last 50 years, let alone the last eight. And, we are so ridiculously and self-destructively right-of-center on economics in this country, that he might even be right about the bi-partisanship.

Republicans, who plead for both making permanent the taxcuts that doubled the national debt over the course of the last Administration, and also plead for balanced budget fiscal policy really deserve to be scorned.

[kthomas]

Rubbish. Total rubbish.

We send men and women and arms to Iraq and Afghanistan, and this tool wants permanent tax cuts!

[roger]

I wonder if Mark Thoma would publish an article by an economist arguing for permanent wage and price controls? Yet he will link to a man who completely ignores the market like nature of the political system (has he ever heard of a thing called a lobbyist?) to advocate for a permanent, cross my heart and hope to die, tax rate. Right. Which would immediately be bored into by every rich guy and business that wanted a tax break. That is advise that is so ridiculous it must be dishonest. But then again, it comes from the Wall Street Journal.

So, where are the articles about permanent wage and price control, now? I'd love to see you link to one, Mark.

[T. Stevens]

We clearly need more infrastructure spending because the government is so efficient in prioritizing.

[Annie]

"and plopped down with a big *whump* right into economics munchkinland: the WSJ online op-eds section. I'd just as soon have been sent directly to the domain of the Wicked Witch of the West, aswarm with flying Republican attack monkeys: NRO."

Such vile rottness. Nothing but lies, lies, lies.

[Annie]

"Bushes I and II used Stanford Economists. Clinton, now Obama, - Berkeley. So far Berkeley is the winner hands down."

More vicousness and lies, just for the sake of being vicious.

N = 4; R^2 = 1 implies statistical significance? Now that is laughable beyond belief.

[Bruce Wilder]

T. Stevens: "We clearly need more infrastructure spending because the government is so efficient in prioritizing."

I think we pretty clearly need more infrastructure spending, but I don't see what the difficulties the political process has in prioritizing public investment have to do with that perceived need.

[bakho]

This post is not to praise Taylor, but to bury him.

The wealthy have lost so much in the market this year, they won't pay much taxes anyway, so might as well leave the rates the same. The politically smart move is to let them expire on their own and force Republicans to defend "the failed policies of the Bush Administration".

[macburger]

They all are avoiding the ugly truth. There was a vast international Ponzi scheme that emerged for a variety of factors and those players who were late getting in to the game, or stayed too long are now going to be left holding the (empty) bag.

Another unintended consequence of saving the system. Those who created abetted, and provided ideological cover and support to the rape and destruction of the economy, without any shame or ridicule get to peddle their wares again. See, the system did not collapse. So we are right!.

Some questions should be settled, even if it involves rabid partisanship or expense. Or the perpetrators get to reenact their atrocities again.

Accountability is not just for justice, it settles contentious questions. Bygones be bygones is not a viable policy to deal with these scum.

[Lee A. Arnold]

bob mcmanus, help me to understand this. From its abstract, Romer and Romer 2007 appears to focus upon "exogenous" tax policy related to long-run growth, not upon countercyclical measures.

This doesn't support Taylor's conflation of the two kinds of policy.

And their main finding, that the "exogenous" type of tax increase is highly contractionary, does NOT prove the opposite, i.e. it does not prove that tax decreases are highly expansionary.

It also of course does not address the notion of whether other kinds of things besides tax policy are expansionary.

It also does not prove that a pre-arranged expiration date would be contractionary. My prediction is that the Bush Tax Cuts will expire in the year they are supposed to, 2011.

[moo]

Does a temporary tax cut work as a stimulus? Not possible, if we assume omniscient actors and thereby imagine bubbles and recessions away. A better answer: It depends on the tax. See William Vickrey's essay: Fifteen Fatal Fallacies of Financial Fundamentalism – Fallacy 9. Everybody who can't sleep because of the budget balancing “problem” should read the whole thing anyway.

[anne]

http://krugman.blogs.nytimes.com/2008/11/25/conservative-crisis-desperation/

November 25, 2008

Conservative Crisis Desperation
By Paul Krugman

So we’re having a crisis, reflecting the policy failures of the past 8 years. But the usual suspects insist that the crisis is all the more reason to persist with those policies — indeed, make them permament.

Thus, John Taylor — a very good economist, when he wants to be — insists * that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all.

And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook:

"The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market."

Translation: la la la I can’t hear you.

Meanwhile, at a panel discussion with Rich Lowry of National Review, I heard the latest argument against the Employee Free Choice Act: ** now would be a really bad time to make union organizing easier, because it would hurt business confidence in a recession.

Recession, recovery, whatever: it’s always proof that the Bush years should continue forever.

* http://online.wsj.com/article/SB122757149157954723.html

** http://www.aflcio.org/joinaunion/voiceatwork/efca/

[observer]

Anne opines:

""Bushes I and II used Stanford Economists. Clinton, now Obama, - Berkeley. So far Berkeley is the winner hands down."

More vicousness and lies, just for the sake of being vicious.

N = 4; R^2 = 1 implies statistical significance? Now that is laughable beyond belief."

Anne, time to take your sense of humor in for service.

[im1dc]

robertdfeinman says...They all are avoiding the ugly truth. There was a vast international Ponzi scheme that emerged for a variety of factors and those players who were late getting in to the game, or stayed too long are now going to be left holding the (empty) bag...There is no way to fix this. Artificial value has disappeared and won't come back...Once it is understood that there is no way to preserve the inflated value then the discussion can turn to the real issue of whose ox gets gored, instead of masking it with a bunch of pseudo-scientific "economic" theory.

I concur and I believe the President-elect Obama indicated the same this morning during his press conference announcing his choice of OMB Director Peter Ortzag as his White House Budget Director.

During it Obama in effect said all that can be done is make this recession less painful not stop it.

[anne]

Please notice none of this is in any way my comment:

"Anne opines:

'Bushes I and II used Stanford Economists. Clinton, now Obama, - Berkeley. So far Berkeley is the winner hands down.'

More viciousness and lies, just for the sake of being vicious.

N = 4; R^2 = 1 implies statistical significance? Now that is laughable beyond belief."

Anne, time to take your sense of humor in for service."

[Patricia Shannon]

Yeah, look at how wonderfully the Bush tax cuts did for our country.

[anne]

Please notice none of this is in any way my comment:

"Annie says...

'and plopped down with a big *whump* right into economics munchkinland: the WSJ online op-eds section. I'd just as soon have been sent directly to the domain of the Wicked Witch of the West, aswarm with flying Republican attack monkeys: NRO.'

Such vile rottness. Nothing but lies, lies, lies."

[Patricia Shannon]

I noticed right away that the first comment was "Annie", imitating "Anne" for the sake of humor

[bob mcmanus]

"bob mcmanus, help me to understand this."

It's a complicated paper that apparently confuses better minds than mine. Sorry, I haven't the time to cut-and-paste the analysis. I'm still reading it myself.

Recommended, incidentally, is the MT interview over on the sidebar.

[S Brennan]

Do we really want to step back from the glory of the past 8 years?

Do we really want to revert to the widespread poverty that was our lot in 1969?

Hell no I say!

Thank God for men like John Taylor who willing to fight to keep tax cuts for the wealthy...the brave..the few. It's those brave souls who's wit, wisdom and panache that has led us to the majestic heights we now enjoy.

Across the globe the common people look in wonderment at the glorious achievements of our elite and wonder how they too could rape and pillage the world's leading economy and make it's treasures their own.

Why can't people see that the US's elite are held in awe across the globe.

Thank God for men like John Taylor, with men like them...and God's help, we'll soon be basking in the freedom from taxes that people in Sierra Leone now enjoy.

[cent21]

One might surmise, given the paltry rate of return on stocks since tax-cutting began in earnest (6.7% nominal annually on the S&P from 1980 to now), and the roughly tripling of federal debt as a fraction of GDP during that same time period, that the long term really does matter.

Note that the article doesn't say the law should be left alone, but rather that the temporary tax cuts that George Bush asked for should be made permanent.

Why on earth, if temporary tax cuts are no good and only permanent cuts change behavior, didn't George Bush ask for this when he drafted the law?

And the answer to that question is that George Bush was invoking Enron accounting to mask the size of the debt that would result from his tax cuts if they were called "permanent". IE, we've all been playing along on a ponzi scheme.

[cent21]

One might surmise, given the paltry rate of return on stocks since tax-cutting began in earnest (6.7% nominal annually on the S&P from 1980 to now), and the roughly tripling of federal debt as a fraction of GDP during that same time period, that the long term really does matter.

Note that the article doesn't say the law should be left alone, but rather that the temporary tax cuts that George Bush asked for should be made permanent.

Why on earth, if temporary tax cuts are no good and only permanent cuts change behavior, didn't George Bush ask for this when he drafted the law?

And the answer to that question is that George Bush was invoking Enron accounting to mask the size of the debt that would result from his tax cuts if they were called "permanent". IE, we've all been playing along on a ponzi scheme.

[Barkley Rosserr]

Regarding complex dynamics, neither the permanent income hypothesis approach of Taylor, nor the more garden variety versions of New Keynesianism properly deal with the problem, although the latter is in better shape to do so.

[Richard H. Serlin]

"But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump"

First there are many causes and many problems. There's a lot to address. But also, if a person got fat from stopping playing rugby because it severely injured his back and knees, then should we say that walking and swimming are bad solutions because they don't address the cause of the problem which was stopping playing rugby? So we should advocate that they go back to destructive rugby playing to lose weight instead of healthier and safer swimming and walking, because swimming and waking don't address the cause of the problem which was stopping playing rugby?

[Richard H. Serlin]

The person shouldn't have been so dependent on rugby (housing appreciation) to keep his weight down in the first place. Let's try to change that fundamental.

[Too Much Fed]

Instead of permanent tax cut, what about a permanent wage increase except for those making $275,000 a year or more???

[Too Much Fed]

"But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices, and where expectations of future income and employment growth are low."

And, the REAL causes are TOO MUCH DEBT and NEGATIVE REAL EARNINGS GROWTH for most people BUT NOT THE RICH like john taylor. Because of policies like his to suppress jobs and wages, more and more debt can be produced for the benefit of the SPOILED AND RICH like john taylor.

Why can't this guy's job (and mankiw's) be outsourced??? We can tell them it will help keep interest rates low.

[Too Much Fed]

permanent income hypothesis???

What about the permanent income suppression thru outsourcing, legal immigration, and illegal immigration hypothesis???

Oh right, that does NOT apply to bankers and college economics professors!!!

[kthomas]

permanent-income model....?

Where's the Permanent come from? If you've ever been unemployed (and I'm failry certain most of the people on this board have not), then you know there's nothing permanent about one's income. Seems to me the additition of cheap credit (now dead) is what made this theory so plausible to it's believers.

[kthomas]

Too Much Fed, bravo! You stole my thunder, man.

[paine]

paul snaps at
hoover zombie taylor...

i like it... i like it

lets feed a fast nominally rising taylor
thru a taylor rule ...eh ???

perminent tax cut hypothesis

roll on trickle down roll on

like you have for 30 years

a "racket "???
you betcha

[Richard H. Serlin]

Mark,

You mistakenly have this piece as being from the New York Times. As you'd expect from this kind of crap, it's from the Wall Street Journal opinion section.

[Lafayette]

A Manifest Destiny

MT: We should make these investments in any case if we want the economy to grow robustly, now just happens to be a good time to have the construction and maintenance work done since people need jobs, inputs to production are relatively cheap, and the political atmosphere is accommodating.

Sounds good, given the present context. But, as I’ve posted elsewhere, whereas construction jobs will certainly reduce high unemployment (~10%) in that category; it is peanuts addressed at a very minor percentage of total employment.

One would hope that a larger palette of colours would be used when designing an “economic recovery”. Once again, the issue is this: “Is Obama transformational or just the Change-guy”. The former requires real, probing rationale arriving at New Directions for the economy and therefore the country. The latter is just tweaking the Federal budget, then sitting back whilst the economy repairs itself.

Which it will inevitably do anyway, without the deft touch of any gurus from the National Economic Council. We are mesmerized by the menacing specter of the Great Depression, which took a decade to redress. A Great Depression is not what we are in today, which is just a Big Mess that must be re-regulated more effectively. We are comparing apples and oranges, when the only similarity is that they are both fruit.

Of course, the Big O (Obama) is under great pressure to “do something”. The question to ask is, “OK, but what?” Tax rebate?, Keynesian style expansion?, monetary expansion?, lower i-rates? … all the above all at once or in stages?

Now that the money-grubbing plutocrats are leaving Washington, it is time to put our thinking caps on. And, it is entirely possible that we in this forum have as much thinking-power as anybody in Planet Washington to come up with some interesting solutions for the future.

I suggest three Great Work-sites that need reconstruction and renewal. They are Energy, Education and Health Care:
• Energy because we are so wastefully self-indulgent in its usage, we must change behaviour. And we must unhook ourselves from the carbon-molecule. Renewable energy sources can take up some of the slack, but they cannot do much in terms of replacing present power plants based upon coal, gas or oil (i.e., the carbon molecule).
• Education in America is not up to par. OECD global studies place American secondary schooling in 14th place (as regards reading, writing and problem solving). Not only is the quality of a secondary-school education mediocre, but tertiary education is truly more expensive than elsewhere. Meaning that too many kids either try and quit or they don’t even try for a postsecondary school education that will give them credentials for the New Millennium Jobs. If America as a nation does not rise to this challenge, those jobs will not be created here but elsewhere. So, I suggest that Education up to a postsecondary level of abilities is a key Infrastructural Objective.
• Health Care seems to be the new administration's priority. I predict we shall be discussing this in the next election in 4 years, since the situation, based upon tweaking the Present HC-system, will have only provided universal coverage for Remedial Care with no convincing provision of Preventive Care. So, we shall be stuck with an aging, obese and over-weight population (which is presently 60% of us) that will force the continued run-up of the total HC-bill. Oh, we’ll have Universal Coverage, but that will not mean necessarily that all people will get total Health Care insurance (like Medicare/Medicaid). American Health Care is fixated on high-cost Remedial Care, when far cheaper Preventive Care should be our objective.

Creating jobs in the above three Infrastructural Works will not only diminish unemployment. It will get America re-orientating itself towards its Manifest Destiny. That of a more equitable America in terms of opportunity.

That’s my three bits. Any other interesting ideas?

[himaginary]

There are many Prof Krugman fans here in Japan. But some are arguing that his recent claim seems to be inconsistent with what he said in past, such as:

So the current strategy can work in the larger sense only if it succeeds in jump-starting the economy, in eventually generating a self-sustaining recovery that persists even after the stimulus is phased out.

Is this likely? The phrase "self-sustaining recovery" trips lightly off the tongue of economic officials; but it is in fact a remarkably exotic idea.

(from http://web.mit.edu/krugman/www/SCURVE.htm)

In fact, this past claim seems to be rather close to what Prof Taylor says now.

[Lafayette]

him: In fact, this past claim seems to be rather close to what Prof Taylor says now.

A "self-sustaining recovery" is any economic expansion that does not need repeated kicks in the arse. Expansion that gets an economy back to pre-recession levels of unemployment and GDP is "recovery". There is no contradiction in terms.

The "self-sustaining" does not apply to constant economic growth out into the future. To do so, one would have to repeal the law of economic cycles and not even our esteemed Nobel Laureate is about to do that. He knows better, one must assume.

[himaginary]

Well, no one believes that "jump-starting the economy" means cancelling the boom and bust cycles foerever. If somehow the fiscal stimulus could -- as Prof Krugman put it -- hold the economy until the cavalry arrives, then the mission is accomplished. The problem is, -- again, as Prof Krugman put it -- cavalry may be a long time in coming. That's why Prof Krugman, 10 years ago, advised us that we Japanese should not expect the economy to recover from large fiscal stimulus, and that we should resort to unorthodox monetary policy. But now, he advises you that you Amercian should not expect the economy to recover from unorthodox monetary policy, and that you should resort to large fiscal stimulus, without the prospect of cavalry arrival.

Will somebody please explain this to me?

[Hydra]

Tax cuts as stimulus depend on which side of the Laffer curve we are on, no?

Anyone really know where the marginal tax rate is that truly decreases revenue?