Bob Murphy Pushing "Expansionary Fiscal Contractions"

     Bob Murphy has written a piece meant to show that fiscal austerity can be expansionary.

     http://www.econlib.org/library/Columns/y2013/Murphytaxrates.html

      Actually a large part of it seems to be simply carping on the idea that Keyensians like Krugman and Chrisitna Romer don't treat anti-Keynesain economists with enough respect. It seems that what Murphy has against Krugman-and he's almost as big a Krugman hater as Stephen Williamson though, admittedly, not with quite the level of ill humor in SW-is what Sumner has against him. what most Right of Center economists have against him: he's too mean to them.

     Evidently, they understand he has the right to disagree and say their wrong but what gets them is he often suggests they're not just wrong but absurd-and here they draw the line. In this piece, Murphy feels Krugman gives fiscal austerity short thrift:

     "Seeking to influence policymakers and inform the general public, professional economists have been publicly arguing with each other over the "fiscal cliff" in the United States and "austerity measures" in Europe. Several prominent Keynesian economists have written articles for the lay reader implying that it is simply a right-wing myth that tax rates significantly affect economic growth or that reining in the budget deficit with cuts in government spending might be a good idea during a recession. This is despite the sizable amount of theoretical and empirical research backing up such claims. Interestingly, some of this research was authored by today's loudest critics. "

      "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."

      "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."

      Say we're wrong but don't say we're absurd seems to be what Murphy, Sumner, et. al or after. You can't sneeze at fiscal austerity. I find this meme quite tiresome. I don't see Murphy prefacing every criticism of Krugman with how much he respects him and his work.    

     As to the meat of the argument, it's strange that Murphy is trying to argue both that fiscal austerity can be expansionary and that tax cuts can grow the economy. No Keynesian that I know of would every deny the second point, though not so much for many of the reasons that supply siders do. I mean which is it? Is fiscal austerity expansionary or not?

    Murphy spends a large part of the time making the case for tax cuts. He never talks about what kind of tax cuts he has in mind-what income levels get the tax cut, is it income taxes, or corporate, capital gains, or the payroll tax? Some of these certainly would get liberal support though others certainly wouldn't-like a corporate or capital gains tax cut.

     "The theoretical case for "supply-side economics" is straightforward: People respond to incentives. By allowing entrepreneurs, investors, and workers to keep a smaller fraction of their last dollar earned, hikes in marginal tax rates discourage business start-ups and investment and reduce labor supply. This is the logic behind conservative and libertarian warnings about proposals to address the long-run U.S. fiscal imbalance through large tax-rate increases on high-income people."

     According to the CBO the recent tax hikes on the rich should have a negligible effect on growth-.001%. Even if this drop in the bucket materializes it would be temporary to boot. Murphy has only one possible theory as to why fiscal austerity is stimulative-you guessed it, to please the bond vigilantes:

     "One not need believe in real-business-cycle theory to welcome the possible benefits of fiscal austerity. For example, if a government has run up so much debt that investors begin to question the government's solvency, interest rates may rise in anticipation, leading to a vicious circle. By adopting politically difficult policy changes to rein in the deficit, the government could send a signal to bond markets and achieve much lower interest rates, which would lower the servicing costs of the government debt and stimulate private investment. "

    We've been hearing about this coming attack in the U.S. of the bond vigilantes for 5 years now-since Bernanke's big expansion of reserves back in 2008.