Greg Mankiw says more:
A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers. Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics.
Brad DeLong says less:
An UNFUNDED tax cut is not the best simple recipe for promoting long-run growth in American living standards. It is the best simple recipe for promoting long-term decline in American living standards. You see, the government has a budget constraint: if it does not tax now to fund its activities it must tax later, one way or another. And unknown, uncertain future taxes in the long run plus the medium-run costs of carrying the debt until those taxes are levied–they are almost surely a significant net drag on the economy.
I’m not sure why Mankiw calls his incredibly partial equilibrium analysis “textbook economics”. While Worth Publishing is displaying the Sixth Edition of his Macroeconomics, I still recall his first edition and how it described the 1981 tax cut as shifting inwards the national savings schedule. As such, fiscal stimulus increases the cost of capital and depresses investment demand.
Now if John McCain had some serious proposals to massively reduce government purchases, then we would not have Brad’s legitimate objection. But those proposed reductions in earmarks would not even offset McCain’s desire to increase defense spending. Greg Mankiw knows this but he leaves this reality out of his op-ed. Why?