Robert Solow’s Fiscal Advice to Barack Obama

The Solow growth model is the foundation of most modern theories of growth and dates back to a couple of papers written over 50 years ago by Robert M. Solow. So when Solow speaks, let’s hope anyone who wishes to become President listens:

“While cancelling the Bush tax cuts for upper income groups is certainly the right thing to do, I would not use the proceeds to finance a tax cut for middle-class people.” Instead, he would use the money “both for urgent needs now and for future deficit reduction,” he said. “The government needs that money and ought not to be using it to promote consumption [consumer spending.]” The retired MIT professor, who has not been advising Sen. Obama, said in a weak economy a temporary tax cut would have a limited stimulative effect and a permanent tax cut would widen an already significant long-run federal budget deficit, he said. Mr. Solow was quick to add: “I understand this” — backtracking on a promised middle-class tax cut — “is not a politically easy thing to do.” He remains an Obama backer.

Dr. Solow is correct – it isn’t easy telling the average Joe he will not get a tax cut when the Republican candidate is promising free lunches to everyone. As David Wessel points out, Bill Clinton ran in 1992 on a platform similar to that of Obama’s but decided not to cut taxes on the middle class once he became President. Sometimes saying no is the right thing to do.