By Simon Johnson
The president and congressional Republicans have reached a deal that would cut taxes “for all Americans.” Their argument is that this package will stimulate the economy, create jobs and help lead to economic recovery and sustained growth.
This proposal, which seems likely to pass Congress, is not a good idea. Why? (To see me explain these points in a five-minute video, click here.) Vice President Dick Cheney said, loud and clear, in 2002: “Reagan proved deficits don’t matter.”
But Mr. Cheney was completely wrong with regard to the implication that there are no economic consequences of sustained fiscal deficits.
I suggest you talk to the Greeks (now in the International Monetary Fund’s emergency ward) or the Portuguese (who are headed in that direction.) For that matter, listen to any policymaker in the European Union – they are all focused on bringing down deficits in a credible manner. And watch the European financial markets – people there are doubting and testing the fiscal credibility of all governments throughout the euro zone.
In fact, try persuading any responsible policy analyst anywhere in the world outside the United States that cutting taxes in the United States from current levels will boost growth so much that the cut will pay for itself” and end up reducing or at least controlling the fiscal deficit (the proposition of the Laffer Curve). You will be met great skepticism.
If the I.M.F. could speak truth to authority in the United States, it would tell you this most forcefully.
This does not mean that we should immediately move to cut our fiscal deficit – efforts to panic us in this regard are completely misplaced. Ironically, some of the fear-mongering emanates from the same part of the political spectrum as the vociferous demands for lower taxes; there are no true fiscal conservatives in America. Again, here, too, is a sharp contrast between the United States and anywhere else in the world.
But our “fiscal space” is limited – we cannot afford to blithely increase our national debt. It can be done – and should be done given the parlous state of our economy and our disastrously high unemployment levels. But it must be done carefully, so we get as much stimulative effect on jobs as possible for our debt-increase dollars.
Cutting taxes for the very rich is an ineffective way to stimulate the economy in the short term (for a detailed discussion, see this post by my colleague James Kwak). On this there is widespread agreement, including from the pages of The Wall Street Journal, where Robert Frank, a careful student of the rich and famous (and editor of The Journal’s Wealth Report and author of “Richistan”), said: “When I ask wealthy business owners and entrepreneurs why they’re not hiring, they rarely mention taxes. They say consumer demand. And jobs.”
Three much more effective ways to support consumer demand and jobs would be:
Really extend unemployment benefits. There is nothing in the proposal on the table that will help people who have already been unemployed for 99 weeks – see this explanation from Nevada.
Don’t lay off teachers anywhere in the country. The broader goal, of course, is to increase teacher quality, which is not easy and takes time (see the film“Waiting for Superman”). But firing teachers at any level of K-12 education makes no sense in the short or medium run.
Immediately hire more people to teach in community colleges. The unemployed – and those at risk of being fired – need new skills, particularly around information technology and the ability to run businesses. Give the long-term unemployed the opportunity and incentive to attend these classes. Help them get jobs – or start their own businesses. Even if those companies fail, the entrepreneurial experience will keep them in the labor force and enable them to enhance their skills – and become more productive employees when larger companies decide to start hiring in earnest again.
This post appeared on the NYT Economix blog this morning; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.