Fiscal Stimulus Without Deficits

Mark ThomaMark Thoma wrote a great article over at CBS Money Watch, Yes, Growth Can Be Boosted Without Raising the Deficit. But I think it is critical to understand why this isn’t generally a self-evident point. Conservatives always claim that their problem with government action has to do with the budget deficit. Despite the fact that they have been the biggest deficit spenders, Republicans always campaign against deficits. That’s because it sells. The people don’t like the idea of deficits — it goes against the Protestant Work Ethic and the idea of living within one’s means.

But conservatives could not possibly care less about deficits. And they’ve been very clear about this. Back in 2004 — while the Bush administration was racking up huge budget deficits for tax cuts and wars — Dick Cheney said, “Reagan proved that deficits don’t matter.” But it is more fundamental than a single quote. Every time that the Republicans offer up a new budget, the first thing in it is huge regressive tax cuts. This is followed by lots of happy talk about how these regressive tax cuts will so stimulate the economy that the budget will be balanced. Republicans have been pushing this supply side nonsense for 40 years and it has literally never been true.

So when Mark Thoma notes that the government can provide fiscal stimulus without raising the deficit, it doesn’t much matter. Now, it could matter. But that would take a press that cares enough to cover it. And the press clearly does not. If it did care about the truth, the press would have been all over Republicans for the last two decades for their idea of balancing the budget through tax cuts. It’s really pretty simple. It’s like an indebted person saying, “I’m going to pay my debt by quitting my job!” But pointing that out would apparently be too partisan for the press. So they just report this hogwash in a “neutral” way.

Thoma’s ideas for stimulate the economy are very good, however. And what’s interesting about the two ideas that he talks about is that they really should appeal to conservatives. This is because they would only work in a depressed economy. So as soon as the economy improves, these ideas lose their credibility. The first is simply to raise taxes. People (especially rich people) don’t consume all of their money; they save some portion of it. If their money is taxed, the government will spend all of it, thus providing more economic activity. Note that this is true now, because we have lots of unused capital. But in a booming economy, the saved money would be invested in he economy.

The second idea is to redistribute income. Poor people spend all the money that they get just to make ends meet. In fact, they often spend more — with loans. Rich people do not spend all the money that they get. So taking from the rich and giving to the poor will actually improve the economy. Note also that it provides an incentive to business owners. The way things are now, at the slightest hint of a downturn, businesses start laying people off. But if the owners knew that their taxes would go up if unemployment went up, they would have an incentive to hang onto employees.

Clearly, I’m thinking that Thoma’s two ideas could be systematized. You could have the top tax rate 39.6% when the unemployment rate was 5% or less. But have the top tax rate go up 0.1 percentage point for every 0.1 percentage point that the unemployment rate gets above 5%. But it is a pipe dream. Regardless of what conservatives say, they are against taxes on the rich. That’s really all there is to say. But Thoma does provide some good information to counter these ridiculous claims that we can’t do any fiscal stimulus because of the budget deficit.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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