Declaring tax cuts to be The Right Stimulus, the WSJ oped crowd continues its tradition that tax cuts are the cure for any problem by claiming:
At least the politicians are beginning to understand that the Federal Reserve can’t flip its easy-money switch and immediately end the credit crunch, forestall home foreclosures, and leap tall buildings at a single bound. Chairman Ben Bernanke implied in a speech yesterday that big interest-rate cuts may be coming, and bond markets immediately sold off. Currency traders may also have their say, especially if the European Central Bank decides to tighten. Monetary policy can’t do everything, and it becomes dangerous if it tries to do too much.
Something tells me that Alex Tabarrok and Brad DeLong will disagree. Easy money can lower interest rates, which will both encourage business investment and lead to more dollar devaluation – the latter encouraging more net exports. So it is not clear to me what the WSJ thinks is doing “too much”.
When it comes to fiscal policy, the WSJ is rather hypocritical:
Mr. Summers is pushing a version of single-entry Keynesian bookkeeping, which holds that if the government hands out cash to workers they will spend it and “stimulate” the economy. But the money the government would thus “inject” in the economy has to come from somewhere. That is, it has to be raised in taxes or borrowed, which means it is taken from someone else in the private sector. Under more accurate double-entry bookkeeping, this stimulus is likely to be minuscule. As for “spending it,” we tried this a few years back and it didn’t work very well. As part of the grease to pass his 2001 tax cuts, President Bush agreed to a $300 rebate ($600 per couple) urged on him by Senate Democrats. As the nearby chart shows, the economic gain was short-lived to the extent there was any at all. Several economists have also done research suggesting that the bulk of that rebate was in fact saved, not spent. That’s virtuous, but it isn’t a “stimulus.”
The last bit of this basically says that temporary tax cuts do not raise consumption but permanent ones do. Fine but do we wish to permanently lower national savings, which is what making the Bush tax cuts permanent would do – assuming away Ricardian equivalence which would basically say no tax cut would encourage aggregate demand growth. The first part of this says that higher government spending will created deficits, which means higher taxes in the future. But are the oped writers of the WSJ so brain dead not to realize that the same long-run government budget constraint applies to their proposal too?