As Paul Ryan's latest House budget is merely the Romney plan on steroids-what election; while Reince Priebus is right that the public views Republicans as both "stuffy old men" and "scary", it would be nice if their policy proposals would in any way reflect that-I guess it's no surprise that Taylor is doubling down on Paul Ryan's doubling down.
Taylor-again he's a "New Keynesian" which shows you what a wide net that label casts-claims that austerity is stimulative.
"According to our research, the spending restraint and balanced-budget parts of the House Budget Committee plan would boost the economy immediately. With the Budget Committee's proposed tax reform included, the immediate impact would be even larger. The entire plan would raise gross domestic product by one percentage point in 2014, equivalent to about a $1,500 increase for each U.S. household. Ten years from now, at the end of the official budget horizon, we estimate that the entire plan would raise GDP by three percentage points, or more than $4,000 for each U.S. household."
http://online.wsj.com/article/SB10001424127887324532004578362603354690818.html
It will lead to a raise in GDP of 3%-at least he and his colleague, John Cogan, make no extravagant claims. The value of an editorial like this is that both of these gentleman are credentialed economists so the GOP can claim that real economists support their absurd budget. Here he takes advantage of this standing by claiming that a "modern macoroeconomic model" supports the GOP budget:
"Our assessment is based on a modern macroeconomic model (developed with Volker Wieland of the University of Frankfurt and Maik Wolters of the University of Kiel) whose features include a recognition that the resources to finance government expenditures aren't free—they withdraw resources from the private economy. The model provides for other essential attributes of the economy—that consumers, businesses and workers respond to incentives, and they are influenced by their expectation of future economic conditions when making decisions today. None of these features is provided for in old-style Keynesian models."
Of course, there's nothing new in predictions for a huge jump in GDP in the face of tax cuts for the rich. These were made regarding Reagan's tax cut, Jack Kemp's proposals, George W. Bush's regressive cuts, Romney's tax proposals. Supposedly these "supply side cuts" will lead to a permanent rise in output.
They claim there's no reason to wait to start deep cuts, the quicker the better.
"The long-run economic gains from restraining government spending would not, despite what critics claim, harm the economy in the short run. Instead, the economy would start to grow right away. Why?"
"First, the lower level of future government spending avoids the necessity of sharply raising taxes. The expectation that tax rates won't need to rise provides incentives for higher investment and employment today."
As is typical, when the GOP and it's boosters discuss the Gospel of tax cuts they never consider distributional issues. Is the idea of higher taxes on the rich really going to stop most consumers from shopping. After all, it was George W. Bush's tax cuts for the rich that gave us the structural part of the deficit anyway.
"Second, since the expectation of lower future taxes has the effect of raising people's estimation of future disposable income, consumption increases today. This change comes thanks to Milton Friedman's famous "permanent income" hypothesis that the behavior of consumers reflects what they expect to earn over a long period. According to our macroeconomic model, the higher level of consumption induced by the House budget's effect on consumer expectations is large enough to offset the reduced growth of government spending."
"Third, the new budget's reduction in the growth of government spending is gradual. That allows private businesses to adjust efficiently without disruptions."
This seems to be an admission that a cut in government spending is contractionary during a deep slump. After using this macroeconomic model to give the GOP budget the prestige it doesn't deserve, they then throw aside the model to declare that the effects will be even bigger than it shows:
"Still, our macroeconomic model likely underestimates the positive impact of the House budget plan. The model doesn't account for the greater economic certainty that results from preventing the national debt from soaring to dangerously high levels and from stabilizing the federal tax burden. Nor does the model account for beneficial changes in monetary policy that could accompany enactment of the budget plan. Lower deficits and national debt would reduce pressure on the Federal Reserve to continue buying long-term Treasury bonds."
As usual they ignore that interest rates are at historical lows and that if there is ever a time for the government to borrow, it's now. They also hold up the 70s as a frightening spectre; isn't the spectre of 2008-2013 good enough? I mean the 70s were better than the time we live in now anyway. We had much higher growth, it even exceeded the rate of population growth. The 70s were actually a time of considerably lower debt and smaller deficits.
When I read this piece this morning I thought to myself 'This is a job for Krugman' and Krugman is already on the case:
"Ugh. And I say that advisedly. John Cogan and John Taylor have a piece in the WSJ (where else) arguing that the latest Ryan budget would actually be expansionary, because confidence! It’s as if all the experience of recent years, in which the confidence fairy has yet to make an appearance, hasn’t happened."
"But this is fairly standard; why the ugh?"
"Partly because the Ryan budget is so obviously ludicrous; it’s distressing to see credentialed economists lending support to the thing."
"But also because Cogan and Taylor make a basically dishonest claim about the state of research. Reading them, you’d think that anyone who believes that contractionary policy is contractionary is just a simpleton who doesn’t know about expectations:
Our assessment is based on a modern macroeconomic model (developed with Volker Wieland of the University of Frankfurt and Maik Wolters of the University of Kiel) whose features include a recognition that the resources to finance government expenditures aren’t free—they withdraw resources from the private economy. The model provides for other essential attributes of the economy—that consumers, businesses and workers respond to incentives, and they are influenced by their expectation of future economic conditions when making decisions today. None of these features is provided for in old-style Keynesian models.
"Actually, in a depressed economy the resources to finance government expenditures are free, because they would otherwise be unemployed. Mainly, however, the notion that Keynesians don’t believe that expectations of future conditions affect decisions today is … strange. Both old Keynesian and new Keynesian models — like Mike Woodford, whom they appear never to have read — are very much about expectations."
"In fact, the only interesting question here is why their results are so different from Woodford’s. My guess is that they have slipped in some assumption that won’t stand scrutiny, like the notion that the Fed will raise rates even with the economy deeply below capacity. (They’ve done that before)."
"Anyway, sad stuff to see, and a disservice to readers."
http://krugman.blogs.nytimes.com/2013/03/19/cogan-taylor-and-the-confidence-fairy/?gwh=AA93E58FFB93E654C3AB2FA9BDB241E1
The expectations game has been played in many different ways in support of bad policies. I figured that claim would also get Krugman as the New Keynesians do plenty of expectations. Of course, the Permanent Income Hypothesis is also worth questioning though not in this post. Maybe in another some time.
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