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Tuesday, June 01, 2004

Refuting David Brooks 

David Brooks' column in this morning's Times is directed to those of us who disparage the Bush tax cuts. He tries to defend the cuts, but if you take a minute to think about it, you'll find his arguments don't hold up. Brooks articulates the four main objections to the tax cuts and then addresses them. Let's take the objections one at a time. In Brooks' words:

The first [objection] is that you don't cut taxes in a time of war. This is the least persuasive. Some outside economists say the cuts created or preserved 1.5 million jobs. It's hard to see how the war effort would have been enhanced with those people out of work. If we had wanted to create a sense of shared sacrifice, which we should have, it would have been far better to institute an ambitious national service program.

Brooks assumes here that the people who argue against tax cuts in time of war do so ONLY because they wish to create a sense of shared sacrifice. This is nonsense. The main reasons that people argue against wartime cuts is that wars are expensive. When a government spends more money than it takes in from tax revenues it runs budget deficits, which, if uncorrected, are bad for the economy. Although Brooks neglects to mention that point here, he does get to deficits in his analysis of the fourth objection.

The second objection is that the cuts were poorly designed. They were drawn up in the midst of prosperity and then wheeled out in response to recession. Even Decision Economics' Allen Sinai, a big supporter of the cuts, says the stimulus could have been stronger if more of the cuts had been distributed down the income scale. The White House lacks a compelling response to this.

Although he doesn't let it distract him from his conclusion, it is cool that Brooks admits that the cuts were poorly designed. He is right to question the impact on the economy of a tax cut skewed overwhelmingly to the wealthy. This is because the level of economic stimulus created by tax cuts depends on the distribution of those tax cuts over the income scale. If someone in the middle class gets a tax cut, he will probably spend the excess cash on a product or service he needs or wants, but would have been unable to buy otherwise. Spending his tax cut money strengthens the economy because the money goes to the firm that provided the product. If tax cuts create sufficient consumer spending, firms will be able to hire more workers, reducing unemployment.

Rich people, on the other hand, are generally able to buy most things they want before they receive their tax cut. While they may spend some of the money on big-ticket items, most of it will be invested, rather than consumed. Buying stocks or bonds with tax cut money increases the rich person's future net worth, but has no immediate effect on the economy. This is especially true if the investor puts his money in foreign assets, which offered better returns than domestic assets in 2001 and 2002.

The third argument is that the cuts should have been temporary. White House folks argue persuasively that given the rolling series of blows — the bubble, the corporate scandals, the war jitters — a short-term stimulus would not have worked. "You were not going to get a sustained recovery from something temporary," Friedman says.

I completely agree with Brooks that temporary tax cuts are not stimulative. Consumers who get one-time tax cuts are just as likely to save as spend them, and saving them does not directly stimulate the economy. If the consumer believes that the cuts are permanent, however, he will be more likely to spend today, because he knows he can save a greater portion of his future income by paying less taxes tomorrow. All very true. Tax cuts stimulate the economy only if they are spent, and will be more likely to be spent if the recipients believe the cuts are permanent.

But wait! In discussing objection two Brooks admitted that most of the tax cuts went to the rich, who will be less likely to spend. If giving the cuts to the rich makes those cuts less effective, whether or not middle-class taxpayers believe the cuts to be temporary is beside the point. Brooks' point would have made perfect sense here if it wasn't inconsistent with the paragraph he had just written.

The final and most serious argument is that whatever the short-term benefits, the tax cuts have left us with a long-term fiscal mess. When you ask administration folks about the deficit problem, they argue that it isn't caused primarily by the cuts, but by rising health care costs and the aging baby boomers. That's true, but it evades the fact that the tax cuts made the situation worse.

Very reasonable of Brooks to point out that the long-term ramifications of the deficit are a real mess. I posted on that on May 7. However, his idea that the deficit is "caused primarily...by rising health care costs and aging baby boomers" is just nonsensical. Deficits are not caused by one thing or another, they occur whenever government spending exceeds taxation. Bush was given a surplus and chose to turn it into a deficit by blowing the money on missile defense, tax cuts, and war. Deficits do not just happen. They are the result of policy and choices. Gore may have sounded like a loser when he talked about the social security "locked-box" (the SNL skit of that debate WAS pretty funny), but there is nothing unreasonable about putting surpluses away for the future, rather than giving them to the rich.

Brooks' argument is kind of a mess. He creates a straw man, admits the tax cuts were poorly planned, ignores that poor planning in his very next paragraph, and distracts us from what he admits is "the most serious argument" by playing word games. His writing style makes him seem really reasonable, but today's column just doesn't hang together.
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