July 1, 2004

Two theories

I saw this quote by Brad DeLong at a friend's blog, and just had to stick in a few words.

...can we please please please please please please PLEASE!! stop talking about Bush's "tax cuts." There are no tax cuts. There's a tax shift--current taxpayers pay less, and future taxpayers pay more. Only by pretending that nobody has to service and amortize the growing federal debt can you talk about Bush's "tax cuts." They aren't there, any more than a $5,000 increase in your VISA limit is an increase in your income.
Dave, I think Mr DeLong has let partisan rancor trump his usual knowledge and intelligence. His statement assumes that the economy, and tax revenues, are static. Which is sort of like you assuming that your company's sales will be the same whatever the price you charge.

By his reasoning, you gained nothing by buying your first house, since you burdened your future with both interest and principal payments. But in fact, your income grew, your net worth grew, the value of the house and the whole neighborhood grew, and mortgage payments did not blight your life and turn you into a shriveled old man.

Same thing happens in the big world. Remember what they said about Reagan's tax cuts? That our children and grandchildren will have to slave in poverty to pay off the 1.3 trillion he added to the National Debt? The critics carefully didn't burden our tiny brains with the fact that his term in office added $17 trillion to the national wealth. Sort of like borrowing 1,300 to make an investment that earns 17,000. Not bad.

And our economy has been growing in almost every quarter since. The national wealth is now something like $450 trillion. So the "crushing burden" left by Reagan has now shrunk to a rounding error. Of course I can't prove that Reagan's tax cuts and monetary policies led to our present wealth, but the tax cuts were done according to a theory, and the results fit what the theory predicted.

What's the theory? Suppose when you first bought a house you had also owned stock in a promising young company, maybe something like, oh, Microsoft. And suppose you could have sold the stock and bought your house for cash. Would that have been a good move? Of course not, better to have added some debt. The theory behind the tax cuts is that leaving money in the pockets of the American people is a good investment, much like keeping that Microsoft stock. The theory is that the payoff will be much bigger than the cost of the debt.

Of course that theory won't appeal to Mr De Long, since it assumes that the other theory is wrong. That one says that the money is best put in the hands of "experts" in government and the academy, (which is to say, people like Brad DeLong.) One of the ironies here is that if a Democrat were in the White House, DeLong would almost certainly agree that a wee bit of deficit spending is just what the doctor ordered for a slowed-down economy.

Posted by John Weidner at July 1, 2004 7:28 PM
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