Murphy on Fiscal Austerity and Higher Tax Rates
By David Henderson
UPDATE: Market monetarist Lars Christensen responds.
As these quotations from [Paul] Krugman and [Christina] Romer illustrate, many of today’s proponents of Keynesian policy do not simply disagree with their critics, but go further by leading the general public to believe that only the Keynesians have scientific research on their side. This is simply not the case, as I now demonstrate.
This is from this month’s Econlib Featured Article, “What Economic Research Says About Fiscal Austerity and Higher Tax Rates,” by Robert P. Murphy.
Murphy, for those of who you might not have noticed, has become one of Econlib’s heavy hitters. In fact, I’ve commissioned more articles from him in my time lining up feature articles, than from anyone else. The count is now 15. I think this is one of his most important. Besides being a nice review of the literature on the effect of tax rates on economic growth, it’s an important exploration in the history of recent economic thought, specifically on the thought of Paul Krugman and Christina Romer.
On top of all that, Murphy makes a strong case for “expansionary austerity.” He writes:
One implication of this line of research is that a country with a growing public debt burden could benefit from a sharp reduction in government spending, even in the short run. This phenomenon has been called “expansionary austerity.”
He cites evidence from Canada and from the European Union countries.
Contrary to the claims of some of today’s proponents of both deficit spending and increases in the highest income tax rates, there is a large literature on the historical success of supply-side economics and fiscal austerity based on cuts in government spending. Although the findings of the relevant research are not unanimous, the case for Keynesian pump-priming is not as solid as some of the Keynesians claim. Indeed, in the cases of Paul Krugman and Christina Romer, their own past academic work shows why.