Why Are Keynesians of All People Calling for Tax Increases in a Crap Economy?


If there's one area of human activity that is more fully soaked in politics than politics, it's economics.

Over at National Review, Mercatus Center economist and Reason columnist Veronique de Rugy points to the latest instance of the triumph of ideology over intellectual consistency. President Obama, along with most congressional Democrats and liberal pundits (including Nobel Prize winner Paul Krugman) are calling for increasing taxes on Americans making over $200,000 a year. They do this in the name of Baron Keynes.


the standard Keynesian theory recommends against raising taxes during [an] economic downturn since it will hurt economic growth and, as such, makes it even harder to get debt burdens under control….

Given the weak economy, where are the outraged Keynesians complaining about the unsoundness of raising taxes in this situation? I know there are plenty of them asking for more spending. If you remember, I asked that same question during the European austerity debate, when many pundits…were complaining about European governments' mostly-pretend spending cuts while never mentioning the large increase in taxes that took place in these countries….

Whether one thinks that tax rates should higher or lower in the long run, right now isn't the time to increase them.

More here.

The short answer to why neo-Keynseians are in favor of tax increases now is because they are first and foremost political creatures.

Back in 2010, everyone agreed that if all the Bush rates expired, the feds would haul in about $3.9 trillion over a 10-year period. If only the rates on the $200,000-plus crowd expired, the extra amount would be around $700 billion over the decade, or around $70 billion a year. That's a lot of money to everyone but the federal government, which spends close to $4 trillion a year. Simply put, the push to change tax rates on the wealthy isn't about revenue, or about getting the government on anything approaching sound fiscal footing.

Rather, it's largely a symbolic gesture that is political in nature and effect. That it goes against basic Keynesian theory yet is espoused by neo-Keynesians tells us more about them than it does about good ol' J.M. Keynes.

That said, it's time for the limited-government crowd to get its act together. The time for simply saying the answer to every problem is to reduce rates is at best half-right. The GOP—and many conservatives and libertarians—for too long refused to focus on the spending part of the equation. More than Democrats, the Republicans sanctified deficit spending, to the point that under Bush spending rose far faster than revenues did. And you just didn't hear enough folks on the right complaining, because it was politically expedient for them not to. Libertarians were the ones playing Cassandra. And while liberals and conservatives like to blame libertarians for all the ills of the planet, they are the ones responsible for a federal government that is not simply an embarrassment of debt but a real impediment to economic growth.

Back in 2011, I interviewed David Stockman, the former congressman who served as Ronald Reagan's first budget director. Stockman made the mistake of taking good old Dutch at his word—that Reagan really wanted to cut the size and scope of government. Stockman helped make the case for certain tax cuts and program snips but then got in trouble when he persisted in pushing to cut what he considered useless spending by what he stills calls the "welfare-warfare state" (hey, he'd been in Michigan State's Students for a Democratic Society).

Stockman told me that he thinks we should have far smaller government than we do. He earned Reagan's ire for pointing out the defense spending was particularly prone to egregious overruns and wastefulness because nobody wants to be seen as weak on military spending. But Stockman says that if we're going to insist on getting more government than we're willing to pay for—if we're going to borrow 40 cents of every dollar the feds spend—than it's the moral thing to do to raise taxes to pay for it. It's just not right to push the tab on our kids and grandkids. And chew on this: If we actually had to pay for the government we are getting, we'd probably start thinking very quickly of ways to cut it. Because we know we're not getting what we pay for, even at a 40 percent discount.

That's a political calculation too, I suppose, but it's not a b.s. symbolic one like the one peddled by today's Keynesians.

Read the Stockman interview here. And watch by clicking below.