JONATHAN CHAIT JUNE 15, 2011
-
Read Later
READ LATERAvailable only to subscribers. SUBSCRIBE TODAY
-
Listen
ARTICLE AUDIO
- Font Size
The Wall Street Journal opinion page accuses President Obama of flip-flopping on tax cuts:
This holiday from committing liberal history began in December with the White House-GOP deal that extended the Bush tax rates through the 2012 election and added a payroll tax cut on employees to 4.2% from 6.2%. These proposals came from the same Democrats who only months earlier had increased payroll taxes to finance their health-care bill and routinely claim that tax rates don't matter to the private economy. But then, 9.1% joblessness and 1.8% growth have a way of concentrating the political mind.
The Journal here is conflating two completely different beliefs. One idea is that marginal tax rates are extremely important in determining the incentive of workers, investors and entrepreneurs; raise marginal tax rates too high, and they won't bother to work hard or innovate. The extreme version of this dynamic, called "supply-side economics," deems these incentive dynamics so crucial that they determine the entire course of the economy.
A completely different idea here is Keynesian economics. That idea holds that, when the economy is depressed, it makes sense for the government to encourage people to spend more. The government can do this by cutting taxes temporarily, thus putting more money into the hands of consumers, or by spending the money directly.
The two concepts have nothing to do with each other. The first idea is concerned with the supply of labor, focused on marginal tax rates(the tax rate on your last dollar of income), especially for the rich, and applies to any set of economic circumstances. The second is concerned with the demand for labor, takes no account of marginal tax rates, encourages tax breaks for lower-income workers who are more likely to spend, and applies only to recessions.
The Obama administration, like most economists, has never put much stock in supply-side economics. Most economists believe that marginal tax rates affect supply a bit, but the effect is small, especially at current tax rates. (We might be running into trouble at 50% or higher.) That's what the Journal means when it says Obama thinks "tax rates don't matter to the private economy" -- it's a wild exaggeration, naturally, but an exaggeration of a basic truth. At the same time, Obama has followed orthodox Keynesian response to a severe depression, which is to run high-short term deficits in order to stimulate demand. Obama did include a payroll tax hike in the Affordable Care Act -- on high-income earners, to take effect starting in 2013, by which point the economy was presumed to be in recovery mode.
In the Journal's telling, Obama has flip-flopped -- he opposed the Bush tax cuts, and now he's proposing tax cuts? But of course the 2009 stimulus had tax cuts, too. Obama has favored and continues to favor short-term Keynesian tax cuts, and continues to oppose George W. Bush's permanent supply-side tax cuts. I genuinely couldn't tell you whether the Journal editorial page simply fails to understand the very basic difference in economic doctrines, or is simply pretending not to understand in order to concoct a political narrative to use against Democrats.
18 comments
If the confusion is intentional, then the editorial is a low-blow Machiavellian move. If it is not, then it is a cardinal error on the part of of the dotty supply-siders at the WSJ editorial page to conflate their anti-empirical doctrine with Keynesianism. Once again, Jonathan, there has been no Keynesianaism under Barack Obama, as Paul Krugman has written. Cuts in state and local spending have zeroed out the stimulus.
- liberalref
June 15, 2011 at 2:24pm
Tis a tough call but I'd say it's the - they just don't understand economics option, which is amazing as it means that the people who read The Wall St Journal Op Ed are also stupid and they're managing your pension. But then again, Obama has "cleaned up the mess" in the financial industry, which is also amazing as the still unregulated derivatives market is now 600 Trillion or 10 times the value of every good and service produced on earth. Time for another puff piece from Noam on Summer's genius. I think there's enough stupid to go around.
- IggyPop
June 15, 2011 at 2:24pm
"I genuinely couldn't tell you whether the Journal editorial page simply fails to understand the very basic difference in economic doctrines, or is simply pretending not to understand in order to concoct a political narrative to use against Democrats." I genuinely cannot say either. I totally think they're capable of pulling off the latter, but I'm also sympathetic to the idea that the Stephen Moore's of the world could easily confuse economic doctrines. I hereby petition Mr. Chait to begin "Life in the Mind of Stephen Moore - A Continuing Series."
- Jonas
June 15, 2011 at 2:53pm
Of course it is difficult to be very precise in an op-ed, but given the WSJ track record, failure to understand economics seems the more likely cause. Unfortunately Mr. Chait also makes a fundamental error in that reducing payroll taxes does not affect the demand for labor from its Keynesian cause (at least not directly), rather it affects the demand for goods which to the extent American labor is involved in their production or distribution might affect the demand for that labor. The only way the government can directly affect the demand for labor is to hire people or to pay others to hire people. These tax effects are second best at best.
- krvogel49
June 15, 2011 at 2:59pm
While I have the floor, I would like to say that I think that you, Jonathan, anti-empirically downplay the reality of regulatory capture, even as conservatives and libertarians highball it unreasonably. It isn't true that we only have fossilized examples of such capture, for instance, the capture of the Interstate Commerce Commission by the railroads well over a century ago. Gretchen Morgenson, who is not exactly a right-winger, has co-authored a book in which she details how Fannie Mae and Freddie Mac were captured by interests with huge stakes. http://www.becker-posner-blog.com/
- liberalref
June 15, 2011 at 3:12pm
You misunderestimate the pragmatism of the business community, Ig. Sure, there are ideologues in this community like the Koch-heads, but also, there is a lot of shrewdness there. J. Chait has been writing that series for years right here at TNR, Jonas. Stephen Moore has been one of his favorite straight men for a long time now. That series has been much better than the Ohio nonsense.
- liberalref
June 15, 2011 at 3:54pm
Having seen a few times when the graphs shown on the editorial page of the WSJ actually refute the point being made, I have to wonder. I don't think they don't "know" economics. I am sure if you gave them SAT questions on economics they would do well. It is just that Stephen Moore and Arthur Laffer among others, would qualify for absolute fanatic status. They are so sure of the "Club for Growth" philisosphy that they just assumed graphs would show what they were saying. When I hear Stephen Moore go on about taxation and leave out payroll taxes, I think he knows what he is doing. Supply side-ism is close as anything to a cult. A cult member believes in levels of truth. It is for instance OK to lie a little about the financial contributions that members of a cult have to do in order to get the prospective member to join. Because that is the higher truth. So the above quote from the WSJ is an acceptable lie to the editorial board as long as it serves the purpose of the higher truth of the incerdible awesomeness of supply-side economics.
- MikeB.
June 15, 2011 at 4:07pm
Gosh, they spend half their time complaining that Obama never compromises, then spend the other half of their time complaining that he's inconsistent when he does compromise. Not to mention a very regrettable tendency to ignore time -- the payroll tax cut is to stimulate growth now, the payroll tax increase is to pay for services in 2014 (when the economy is supposed to be better). I don't think anyone is claiming "tax rates don't matter" so that's a complete strawman. And the "9.1% jobless rate" just happened, so they can't have been concentrating anyone's mind until just now. I think it's all just an excuse so he can beat up Obama.
- AllanL5
June 15, 2011 at 4:10pm
Wait according to the WSJ, didn't extending the Bush tax cuts make the magical uncertainty fairies disappear and "job creators" could kick into high gear?
- MikeB.
June 15, 2011 at 4:14pm
It's not a breath mint or a candy mint. It's, "Two, two, two mints in one." The WSJ doesn't understand basic economics AND, as card-carrying member of the right wing, is willing to say anything to construct an anti-Obama political narrative.
- roidubouloi
June 15, 2011 at 4:23pm
I'm not sure I understand what you're trying to say there Liberal. My point is that Obama made a huge mistake by delegating the crises mgt to Rubins/Summers/Geithner. Who are lauded on this site but are primarily responsible for the disaster we're in. Please see this exchange with Michael Hirsh: http://www.harpers.org/archive/2011/03/hbc-90008013 " Born became a Cassandra about the dangers of unmonitored otc derivatives. Her story is telling because of the utter contempt with which the best and brightest of Washington–Robert Rubin, Larry Summers, Alan Greenspan–treated her. She was railroaded out of the cftc, ignored, mocked, and lampooned." "After the financial disaster of 2008, Stiglitz was full of ideas about reform. While the Obama administration tried to induce the banks to lend more and develop workout programs for underwater borrowers, Stiglitz wanted to give mortgagees the same kinds of rights that distressed corporations get under Chapter 11 of the bankruptcy code, which would allow a judge to reduce the debt subject to a mortgage in the same way he can give creditors a “haircut” in a Chapter 11 proceeding." " Though it is clear by now that Wall Street played a giant confidence game with the world, disguising bad and often fraudulent mortgages as highly rated securities, selling scam derivatives by the trillions of dollars, it is also clear that there will be no spate of prosecutions as there was after the S&L crisis, or during the insider-trading scandals of the ‘80s..." "Led by Summers and Geithner, Obama’s economic team resisted almost every structural change to Wall Street—in particular, Volcker’s plan (initially) and Arkansas Senator Blanche Lincoln’s idea to bar banks from swaps trading." If this was a Republican administration you'd all be screaming from the rooftops that it was all about protecting the rich, same ol Republicans and their paymasters... Where would we be if the likes of Stiglitz and Born weren't marginalized by that unholy neo-liberal gang that TNR loves so much?
- IggyPop
June 15, 2011 at 4:42pm
It all seems too simple to me. Some taxes are worse on the economy than others (payroll taxes vs. estate taxes) and some expenditures are better for the economy than others (unemployment vs. foreign aid into the pocket of a foreign leader). I happen to think top rates do not damage the economy and I happen to think 15% capital gain and dividend rates suck investment out of start up businesses into the established stock market where it whirls around without creating jobs. We had low job growth with the those lower rates and we did fine with the Clinton rates.
- Nusholtz
June 15, 2011 at 4:43pm
Chaitlessness, so many errors in your article, not worth the time to respond. One question for the group: - Keynesian stimulus premise states that Gov spending will create sustainable private sector growth in excess of what the private sector could do unfettered. And that the benefits of the growth more than offset the cost of additional debt. - Since Gov stimulus has never created sustainable private sector growth or offset the cost of debt - why do you believe this myth? Liberals are worse than supply siders --- at lease the supply sider have some basis in fact (on what shifts a supply curve).
- mr_rationale
June 15, 2011 at 6:19pm
mr_rationale Government spending combats the ripple effect from a source of collapse in the economy. If a substantial sector of the economy lays off employees, the laid off employees spend less, which impacts the participants in a larger economy, who spend less, which impacts on more and more. Unchecked, it grows. Spending can stem such growth of economic loss. Tax cuts don't do sh*t in that situation.
- Nusholtz
June 15, 2011 at 7:26pm
Wrong again, rat. See the results of the greatest Keynesian stimulus in history: World War II. Wrenched us out of the Depression and set of a sustained boom. And very little of the spending was even for domestic consumption or investment in domestic production.
- roidubouloi
June 15, 2011 at 11:29pm
Hey Roid, Don't forget in that huge GDP growth time 1941-1945, the top marginal rate for income tax was a confiscatory 98%. Yet we are still debating the idea that only lower top marginal rates on income tax equal growth. And we will continue to do so as long as the uber rich can hire people to make that point for them, and people who worship trust fund babies like Rat exist.
- MikeB.
June 16, 2011 at 6:26am
Sorry rat-for-brains, Roid's got your number this time around. The Journal's editorials are obviously just another cog in the Republican political propaganda machine now. Wondering if they actually understand economics is like wondering if a space shuttle can make toast.
- GSpinks
June 16, 2011 at 8:41am
"Since Gov stimulus has never created sustainable private sector growth or offset the cost of debt..." In addition to roid's excellent point, there's also the matter that wherever sustainable private sector growth has existed, government is to thank for creating it. Government is responsible for every bit of private sector job growth because it educates the workers owners build their businesses with, paves the roads workers drive on, regulates the banks the owners keep their money in, makes sure our food, air, and water don't make us sick, and pays the police that keep the houses, the skyscrapers and the factories from being burned to the ground. That's my answer to every one of these new breed of anarchist Ayn Rand worshippers; government creates freedom, and if you don't like it, go try out your anti-American theories in a country that'll take you. This one's busy building the future.
- janus
June 16, 2011 at 9:45am