Monday, October 27, 2008

This One

John McCain and his surrogates keep asking: which economist would promote tax increases at a time like this? Well, if structured intelligently, then, THIS ONE.

What's surprising is how confused Mr. McCain is about his economice ideologies. The concept of fiddling with taxes and expenditures on the fiscal side to affect the economic equilibrium at the macro level and combat recessions is a Keynesian (read: "liberal") one. Now, for those tax cuts to be most effective, in the Keynesian framework, they should be targeted in the ways that do most to stimulate consumption (i.e. to the middle and lower classes), so that inventories are mopped up, and thus intended investments are made instead of being diverted into unplanned inventory accumulation. This is a pretty standard principles approach. A more sophisticated approach might suggest that markets and their prices are not well-coordinated between factor markets and product markets, leading to "good" (high demand) equilibria, and "bad" (low-demand) equilibria. Random events can knock a "good" economy into a "bad" equilibrium, but government can use fiscal policy to offset those distrubances.

So, let's look at the supply side. Tax cuts are good, but ONLY if the government debt is held constant. Candidate McCain's proposals would cut taxes but wouldn't reduce spending enough to control the deficit or the debt. Most studies suggest that the proposals of each side would have equal impacts on the debt, and both would actually expand our debt, and that assumes Mr. Obama gets his way on health care and other subsidy programs, which is doubtful. McCain on the other hand is more likely to get the types of spending he wants, because he has the authority to keep troops in harm's way, and thus hijack the congress into approving more spending for those wars - denying funding is a politically indefensible position for any member of congress.

So, assuming McCain's and Obama's taxation and spending proposals would have equal effects on the debt if both get the spending increases and cuts they want, there is no net long-run difference in the two candidates' impacts on the economy. However, if we look at the political realities of their spending requests, McCain is more likely to get the increases he wants. Obama is not. Expect a filibuster on health care and other types of entitlements and education spending that Obama has proposed, and for there to be compromises on these areas of his agenda. It seems to bet the case that some of these political realities have not been taken into account in the estimation of the impact of each candidate's economic plan on the long-run economy.

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