Taxes Devastate, Cuts Improve

By Byron Schlomach, Ph.D.
Goldwater Institute
 
Tuesday’s Wall Street Journal editorial page engaged in a bit of triumphalism. The editors showed that their 2003 predictions of where monetary policy was leading were better than those of Ben Bernanke. Bernanke’s comments at a 2003 meeting of the Board of Governors make clear that lots of detailed knowledge can just as easily addle a brain as create clear thinking.

Methinks this might be the problem with the editorial page of the Arizona Republic as they opine on the economic devastation of budget cuts. Every dollar spent in the state budget is the most important dollar in the world to someone. But all the wailing over budget cuts tends to make one lose sight of the big picture.

The ability of enterprises to provide for economic opportunity and jobs is the big picture. Governor Brewer’s advisors and the newspapers are convinced that cutting spending will be worse than raising taxes. But then the Federal Reserve Bank of San Francisco recently published an article summarizing research on economic multipliers. It turns out that a dollar of government spending results in 70 cents of job-creating activity after two years. A dollar in tax cuts results in $1.30 to $3 of job-creating activity after two years. Put another way, a $1 cut in spending cuts job-creating activity by 70 cents. A $1 increase in taxes cuts job-creating activity by as much as $3.

So now let us engage in some triumphalism of our own. We’ve said all along that tax increases will hurt more than help. Once again, the evidence is on our side.
 
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.


Comments

  1. Dr Schlomach does not accurately describe the Federal Reserve Bank of San Francisco article. It is not a “summarization of research on economic multipliers” it is a summarization of “research on economic multipliers models.” What’s the difference? The difference is that the two studies used to compare spending vs. tax cuts are based on models of economic activity and how these models respond to different changes to taxes and government spending. These results contrast sharply with other models which show the opposite. Perhaps we will be able to see which model, if any, actually corresponds to the real-world in a couple of years when the stimulus package can be analyzed. Before that, it is quite premature for the Goldwater Institute to engage in triumphalism.

  2. Your assumptions are wrong on this. You state, “a $1 cut in spending cuts job-creating activity by 70 cents” but do not account for the fact that budget proposals include cuts resulting in government job losses.
    Tax cuts and budget cuts are different given that tax cuts do not result in direct job losses. Therefore the true cost or savings is different than the 70 cents.

  3. Conservative does not mean Republican says

    The fact is Jan Brewer, her advisors, and the various media groups need to at least address the prevailing economic opinion that says tax increases will hurt more than help. While it is true, Todd, that the SF Federal Reserve referred to theoretical models produced by econometricians, these models can provide a solid starting point for policymaking. Kudos to Dr. Schlomach and the GI staff for publishing what much of the mainstream media doesn’t want to hear.

  4. Conservative does not mean Republican says

    Actually Roger, if you read the SF Federal Reserve article, I think you’ll find that the models take government job loss into account. The SFRB article references “output.” Output includes both what is spent by the private sector and the public sector. Dr. Schlomach equates output with “job-creating activity” because the two are directly connected. Your criticisms are inaccurate.

  5. Conservative, is the Wall Street Journal no longer MSM? I’ll have to try and find the article since nothing was linked here.

    From what I interpreted in their post, they were not quoting the study by linking budget cuts to savings. If the study shows data regarding budget cuts (not tax cuts) I stand corrected.

    The purpose of my post is that many times, it is quoted how many jobs are lost with a tax increase but never quote job losses with equal budget cuts.

  6. Conservative does not mean Republican says

    The thing is, the Reserve article (http://www.frbsf.org/publications/economics/letter/2009/el2009-20.html) didn’t reference job losses directly. They basically argued that economic output (which determines how many people will be employed) increases over a 2 year period when implementing tax cuts. Conversely, increased government spending actually has a net loss in economic output over the same 2 year period. That’s why they advocate budget cuts over tax increases to shore up budget deficits. Either way we will lose economic output, but one causes more damage than the other. I don’t think this post ignores the fact that jobs will be lost under both scenarios, but I think we can agree that losing 1 government sector job is better than losing 2 private sector jobs.

  7. About the articles relied on by the Reserve article – the Romer and Romer exists in a publicly available draft form. It is also worth noting that Christina Romer of this manuscript was part of the Obama economic team who analyzed the stimulus plan. In a report she wrote here:
    http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
    it shows spending as having a significantly higher multiplier than tax cuts. I bring this up because the Romer and Romer manuscript referenced by the Reserve article makes no statement of multipliers and the only actual statement from Romer on the multiplier affects contradict the Fed claim.

    The Blanchard and Perotti article I need to pay for which doesn’t seem necessary based on the abstract.

    The Mountfor and Uhlig is a “talking paper” from 2005 which in fact makes no claims as to employment or non-employment and is only relevant to fiscal “shocks” or surprise events.

    The two papers are interesting reads but neither seems to really strongly back up the claim being made. Unfortunately what we will now have is politicians in the state running around claiming 1 dollar of tax cuts creates 3 dollars of stimulus based on what seems to be fairly thin or even non-existent research. I know for the Goldwater Institute this means “Mission Accomplished” but for the rest of us this is unfortunate.

  8. James Davidson says

    We need limited government because it provides certain services that we either do not want the private economy to produce or that the private economy is not good at producing because of the free-loader effect. Yet a scope of government beyond basic limits is inefficient and always will be. Its decisions are not driven by making money or limited by losing money. As a school superintendent friend once said to me, “I get a bushel of money each year whether my schools are good or bad.”

    Whenever the government sector expands the overall economy is not better off. On the whole government cannot invest money as wisely as the market. If this were not so, the socialist economies would have been engines of innovation and experimentation and would have left the capitalist economies on the ash heap of history, to borrow from Reagan who borrowed from Trotsky.

    The historical facts are that the Napolitano administration increased spending substantially and always picked off enough Republicans to add to the Democrat minority and get her way. While the economy was growing leaps and bounds the bushel of money she took in each year covered up the splurge. But recession always exposes weakness in business, in an economy, and in government. I will guarantee you that nearly every small business owner has cut costs and is constantly looking for ways to cut further. I have and am.

    The conservatives are left to clean up the terrible damage that Governor Napolitano, the Democrat minority, and the Republican cross-overs caused. It is not easy.

    Raising taxes, particularly the sales tax or the income tax, is very foolish. Both will hurt the economy. A sales tax increase will particularly hurt the poor and the working class. The cuts in spending will be painful, but they are necessary. They are the direct result of Governor Napolitano’s inducement of Arizonans to rely on spending levels that never could be sustained.

    No one likes government lay offs. I have many friends who are teachers and some relatives who are teachers. They have not lost their jobs but some of them came close and all were worried. We all can sympathize.

    Now, however, is the time to shrink Arizona government to get it where it should have been but for Governor Naploitano’s spending kicked in. The liberals will carp and complain, but they made this mess. We need to have the guts to fix it.

  9. Conservative does not mean Republican says

    Well said, James Davidson. An understanding of history and how economies work show that government overreach has left deep scars in many countries. In our state’s case, there will be scar wounds from the repercussions of the Napolitano years. The fact is, we are forced to choose between the lesser of two evils: budget cuts or tax increases. Todd wants to pretend like there is a legitimate debate between which is right. While the political arena may still debate which is right, history and economics have consistently shown that is better to cut back the scope of government.

  10. Conservative does not mean Republican,
    Of course there is a legitimate debate. What are you talking about? Christina Romer herself cited in the Fed letter makes exactly this point. Maybe you just don’t bother to read things that disagree with your views so you think matters are “settled” when in fact they are very far from.

    What is stunning is that the Fed letter points to Romer when she even says that in down times tax cuts have a low multiplier affect because people and businesses save the much of the money instead of spending. The 3 times multiplier affect would only hypothetically occur when times are great and the government unexpectedly makes a large tax cut.

  11. How stupid can ideological purity get? says

    Utter poppycock by Schlomach.

    and he knows it too.

    Nice fundraising piece though.

    Send him more money so that he can help dismantle state government, then complain about the lack of services.

    Just another conservative Goldwater Institute carpetbagger.

    Yup. Just a carpetbagger. That is what Barry would have said, but probably less politely.

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