By | Friday, January 21, 2011 Leave a Comment
I took Introduction to Macroeconomics at the University of Massachusetts at Amherst over 25 years ago. More importantly, the class was offered at 8AM. That meant that I slept through most of the lectures. So I was more than a little nervous that I may have made some embarrassing errors in yesterday's blog. I asked a friend of mine who is a professor of economics at a major university to read the posting and let me know if I had gotten it right. Turns out I did. I guess somnambulistic learning actually works.

His message, in addition to confirming my analysis, added some valuable insights. Though he has asked to remain anonymous, he has given me permission to publish his reply here. It follows:
[Your blog entry] is well written and economically sound. Your discussion of the marginal propensity to consume (MPC) is exactly on point. Of course, it is not the preferred option to raise taxes in a deep recession; ideally, we want all citizens to spend more money to get things moving again. But we also have public debts to pay, and we might even want to tax one group to redistribute to another (i.e., taxing a group with low MPC to redistribute to a group with higher MPC). If our fiscal health were otherwise robust, however, it would have been reasonable to extend the Bush tax cuts for another year or two. 

But our fiscal health is anything but robust. We have a large structural deficit at the moment, in substantial part (but not entirely) due to the Bush tax cuts, enacted as we commenced a full decade of war. Even with the economy going full bore, current tax rates are not sufficiently high to cover government obligations. 

Surely our successful friends, who no doubt made their money in business, understand that a business cannot continue to run negative balance sheets forever; eventually it will feel the icy fingers of the invisible hand clutching at its throat. Why don't these individuals want to apply similar logic to government spending? Sure, the U.S. Government won't go out of business. But some years from now, it will be forced to pay off its debt by heavily taxing younger workers, slashing promised benefits, and/or running high rates of inflation to reduce its real debt. All of these are less palatable and more painful than raising taxes a bit now on citizens with low MPC and low marginal utility of income. 

Editorially speaking, my strong impression is that the key political advocates for cutting taxes (e.g., House and Senate Republicans and the think tanks that supply their talking points) understand all of the above; they don't for the most part genuinely believe that cutting taxes for top earners raises net tax revenue or greatly stimulates the economy. Their goal, rather, is to keep the government in a perpetual state of deficit so that it's almost impossible to expand the scope of government. This is the so called "starve the beast" strategy. Well-meaning people can certainly have a principled argument about whether the government is too big, too small, or just the right size. But using disingenuous arguments that “taxing the rich hurts all of us” to keep the beast in a perpetual state of starvation is not a principled way to have this discussion. 
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