Thursday, December 11, 2008

Memo to Obama -- Tax cuts work much better than spending

A recent post from Greg Mankiw pulls together a lot of recent economic research by serious people, and finds, even to his surprise, that a dollar's worth of tax cuts can be two to three times more effective than a dollar's worth of additional government spending. This directly challenges Keynesian orthodoxy, which holds that spending is the key to stimulating the economy.

With the power of the internet, it's possible that good economics can drive out bad economics. Despite his liberal tax-and-spend rhetoric, Obama's team economic team may discover that the doing the right thing is the best thing.

3 comments:

waterlooen said...

Paul Krugman has addressed the multiplier study in his blog.

http://krugman.blogs.nytimes.com/2008/12/11/dont-know-much-about-history/

Whether his argument is valid or not, to me it at least highlights how incredibly difficult it must be to filter out just the effect of fiscal or tax policy from all the other GDP factors. Like predicting the weather. It is easier though, for me to get behind more simple concepts like - using tax policy to incentivize investment is always a good thing regardless of the background economy. And repairing broken down bridges is always a good thing, and might even help some in a weakened economy.

Scott Grannis said...

Mankiw mentions Christine Romer's work (soon to be a key economic adviser to Obama and highly respected in her field) and how strongly it supports tax cuts over spending increases to stimulate the economy. Krugman, unfortunately, has just about zero credibility left after his years as a partisan hack for the NY Times. And his Nobel Prize was a blow to the credibility of the Nobel committee.

Fixing bad bridges certainly can't hurt, and I supposed there are some out there. But I am impressed by the emerging research which gives the nod to tax policy over spending policy, since it just makes more sense to begin with.

Casual Businessman said...

Amen to your post Mr Beach Pundit! If for no other reason, tax cuts instead of government spending should be considered due to the argument that efficiency and expedience are of the essence. How expedient or effective does it seem to involve lots of beauracrats in the decision of where, when, and how to spend the money? Isn't the big government form of stimulus just a transfer of wealth with lots of friction? Oh wait, maybe that is the point. Change is coming.