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Monday, April 05, 2010

Department of Huh ?

OK I know it's at the Washington Post, but Ezra Klein's photo is right there.

Dylan Matthews writes

Even studies that warn about the contractionary effects of tax increases, such as this one (PDF) from Christina and David Romer, focus on how increases blunt growth by deterring savings and investment, which new consumption taxes would actually encourage.

I comment

Have you actually read the Romer and Romer study ? I haven't, but I know that David Romer called it "hyper Keynesian." OK a hint -- Keynes was not worried about excessive consumption.

The point of the Romer and Romer study is as close to the opposite of your claim as is possible. They conclude that tax cuts unaccmpanied by spending cuts cause increase demand and, in the short term, increased output. This happens according to R and R because they cause increased consumption, that is, reduced saving.

Note this view has been expressed as policy on the advice of C Romer -- Since she became chairwoman of the CEA there has been a huge gigantic tax cut (and various smaller ones). Taxes weren't cut in spite of the fact that the tax cut was expected to reduce saving rates. That was the point of the tax cut component of the stimulus bill.

The Romers definitely did not attempt to estimate the effects of increased taxes and spending with a constant deficit. That is the topic of the post. It has nothing to do with their analysis.

Don't mix up short term and long term. Don't mix up effects given historical monetary policy and effects given optimal monetary policy. Learn some basic Macroeconomics. Or how about reviewing economics 101.

Moving on to public finance 101, I note that a constant flat consumption tax should, in theory, have no effect on saving. That doesn't mean it wouldn't. The logic is that we save in order to spend in the future so we will pay the flat constant consumption tax sooner or later.

Theoretical predictions about the effect of a progressive consumption tax on saving are not at all clear.

Finally it is odd that Matthews doesn't note that his fellow Washington Post correspondents argue that the deficit can't be eliminated by raising taxes. This is odd, since the current huge recession is largely due to the recession and is 9% of GDP so according to their calculations it would be eliminated if the USA had OECD average tax rates.

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