Salim Furth: Two Kinds of Austerity
In “Look Closer: Tax Increases, Not Spending Cuts, Are the Harmful Austerity,” economist Salim Furth notes two kinds of fiscal austerity: tax increases and budget cuts. He finds that the negative short-run impact of tax increases on GDP is much more than the short-run negative impact of spending cuts.
A key paragraph:
A dollar increase in tax revenue lowers gross domestic product (GDP) by $2.10 over the same time period, while a dollar of spending cuts only lowers it 80 cents. (Those are short-run effects, and in the long run, economists expect that the private sector picks up any slack left by the government.) Greece has a lot of influence on these estimates, and without Greece the revenue effect falls to $1.30 and the spending effect to 40 cents.
This distinction between the two ways of reducing the deficit is important but it’s one that many critics of austerity–Paul Krugman is the main one who comes to mind–seem to have trouble making. Krugman tends to lump the two together. I’m guessing it’s because his Keynesian view of the world tells him that whether you do one or the other shouldn’t matter. But, unfortunately for Krugman’s view and fortunately for those of us who want a smaller government, Furth finds that it does matter.
Incidentally, you might have heard of Furth, as I first did, when Paul Krugman highlighted Senator Sheldon Whitehouse’s attack on him for making data up. It turns out that it was Whitehouse, not Furth, who reported predicted data as if it was actual. As far as I know, neither Krugman nor Whitehouse has ever retracted or apologized for their scurrilous attacks.
By the way, in the video above, I thought that Furth responded at the end with a lot of dignity.
HT to Steven Landsburg.