The Budget Debate, IX
By Arnold Kling
Jonathan Rauch has a nice summary of the issues in the Budget debate.
The economists note that if tax cuts are paid for through higher deficits instead of lower spending, the government borrows back from the economy the capital that it injects. The administration retorts that its dividend tax cut will improve the allocation of capital, increasing economic efficiency and thus growth. Fair enough, but few economists believe that the gains from efficiency would offset more than a small portion of the increases in deficits…
…Bush the gambler is betting that he will come out looking like President Reagan, whose deficits bought economic reforms and a stronger national defense.
He may. On the other hand, he may come out looking more like President Nixon, whose profligate fiscal policies (especially his 20 percent Social Security hike, ostentatiously implemented a few weeks before the 1972 election) have caused fiscal heartburn to this day.
Rauch’s piece may make it appear that there is a strong consensus among economists that the tax cuts will hurt economic growth. In fact, that is a delicate issue of political economy. Some economists, including Gary Becker and Milton Friedman, believe that tax cuts will induce the government to restrain spending below what it otherwise would be. Rather that treat government spending as fixed and the deficit as variable, they treat the deficit as fixed and the level of government spending as variable.
For Discussion. The Administration strategy is to be effusive about tax cuts but quiet about spending cuts. How will this play out, politically and economically?