The negatives are many. They [Jason Furman and Larry Summers] claim that tax increases are savings; they assume that tax cuts and government spending increases are necessary to get us out of recessions; they assume that we are in an era of “secular stagnation,” that is, low growth; they claim that failure to increase spending on infrastructure, education, and scientific leadership is more of a burden on the next generations than the national debt is; and they think that extending unemployment benefits during recessions is a clearly good idea. Some of these claims are outright wrong, and the ones that are not clearly wrong are, at best, questionable.
This is from my “Furman, Summers, and Taxes,” Defining Ideas, May 1, 2019.
Another excerpt:
These are bright guys. I was an economist with Summers at President Reagan’s Council of Economic Advisers (CEA) when our boss was Harvard professor Martin Feldstein, and I saw up close how sharp he is. You would expect that from someone who had two uncles (Paul Samuelson and Kenneth Arrow) who earned Nobel Prizes in economics. I have never met Furman, but he was chairman of the CEA under President Obama. Again, these are accomplished guys. Don’t they ever think it might be better to have less government spending in areas where government has done badly and let people spend their own money? Apparently not.
Read the whole thing.
READER COMMENTS
John Alcorn
May 2 2019 at 8:38am
See also the systematic arguments and comprehensive evidence in a new book by Alberto Alesina, Carlo Favero, and Francesco Giavazzi, Austerity: When It Works and When It Doesn’t (Princeton U. Press, 2019.)
Here is the publisher’s summary:
John Alcorn
May 3 2019 at 1:20pm
By serendipity, the new issue of Journal of Economic Perspectives (Spring 2019) has an ungated article version of the book by Alberto Alesina et al. about austerity.
Alan Goldhammer
May 2 2019 at 11:31am
Good article even though I do disagree with your comment on infrastructure. I see very little private investment in this area other than some major toll roads. This does not address the practical issue of poor repair of surface roads in neighborhood areas where most of us do 90% of our driving.
I do think the cap on income subject to Social Security tax. There are an increasing number high earners who get this tax holiday every year (I was one of them when I was working and usually paid my yearly Soc Security tax by mid-July). I also think that the yearly COLA for Social Security needs to be addressed perhaps by lowering the income of recipients that is subject to Federal income tax. this would not penalize those who rely on Soc Security for all of their retirement income.
My bottom line is that it’s incumbent on government at all levels to justify how and why they are using tax revenues. I’m not averse to paying taxes, I just want a government that is acting in good faith. this is not happening at all levels right now.
Thaomas
May 3 2019 at 6:05pm
Let’s leave aside whether the bullet-point paraphrases of S&F are accurate, lets correct them.
“Tax increases are savings.”
Increases in taxes decrease consumption (~increase savings). In the specific example of increases in the wage taxes that “finance” Social Security and Medicare, the deadweight loss from less work effort in response to these tax increases are not likely to reduce total output and income to prevent the lower consumption from leading to increased savings. This increased saving will show up as a lower Federal deficit.
“Tax cuts and government spending increases are necessary to get us out of recessions.”
When, in a recession, monetary policy has limited itself to manipulating ST interest rates as a way of stimulating the economy and ST interest rates are as low as the monetary authorities are willing to make them, an increased deficit whether from tax cuts or increased spending can increase GDP. An implication of this is that an increase in the deficit that occurs from the fall in tax revenues and “automatic” increases spending in in a recession should not lead to either tax increases or spending reductions to nullify that increase in the deficit.
“We are in an era of “secular stagnation,” that is, low growth.”
It is a fact that the rate of increase in real GDP has been slower in recent decades than earlier. Some of this may be due to certain mistakes in monetary and fiscal policy such as attempting to limit increases in the deficit during recessions, allowing the price level to fall below its prerecession trend, having a target for nominal interest rates, especially if based on some historical idea of “normal.”
“Failure to increase spending on infrastructure, education, and scientific leadership is more of a burden on the next generations than the national debt.”
Increase spending on infrastructure, education, and scientific leadership (even if that increase the deficit) raises (or lowers) real income of the next generations, depending on whether the real rates of return on those investments is lower or higher compared to the real marginal cost of borrowing that the deficit entailed. (F&S implicitly assume and Henderson probably does not assume that the rates of return are higher than the cost of borrowing).
Nick R
May 6 2019 at 3:45pm
All very good points on David’s part that should be uncontroversial. What’s mystifying is how two “good” economists could so blithely ignore so many obvious problems with their analysis. David is far too polite to say so, but it’s hard to avoid the suspicion that they allow their partisan biases to straightjacket their thinking.
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