"William Poole: Deficits Can’t Increase Growth Unless They’re Caused by Tax Cuts
Cato Institute senior fellow William Poole offers us the latest version of the new right-wing fad for 1920s-vintage economic thinking:
Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.
One could imagine a world populated by beings who respond to government deficit spending by decreasing their own spending on a one-to-one basis in order to offset anticipated higher future taxes. Even then, it’s not entirely clear that you would get zero stimulative effect, but certainly it would be hard to conduct fiscal expansion in a planet populated by such beings. At the same time, it’s somewhat difficult to understand how these supremely calculating beings with no rate of time preference would ever manage to get involved in speculative bubbles or large debts in the first place. And it’s truly mysterious why this effect would exist during deficits caused by increased spending, but not by deficits caused by decreased revenues. And last of all, I find it baffling that a lot of people on the right persist in talking as if the stimulus plan was 100 percent spending and zero percent taxes when it was, in fact, almost 40 percent tax cuts—one of the biggest tax cuts ever. Perhaps if Obama had contrived to concentrate all the benefits at the very top of the income distribution he could get some credit as a tax cutter.
Paul Krugman offers some of the academic background on how we came to this point."Me: