Paul Krugman really hates tax cuts which is something that I find pretty weird for a Keynesian. Here’s his latest post showing that the 2013 Obama tax hike coincided with more private sector job creation than the 2003 Bush tax cut. He concludes that this “didn’t work” for Bush and that Jeb isn’t learning from big bro’s mistakes with his latest tax plan.
I don’t see the correlation though. There is obviously a lot more to the economy than tax policy. And in 2003 we had a deficit that was actually smaller than the Obama deficit. Yes, if one were using standard Keynesian models then a larger budget deficit should result in more employment. So, the Obama deficit added more jobs, which, given how much larger it was, is not really a surprise.
What this chart basically shows is that Bush was a little bit of a Keynesian and Obama was a big time Keynesian. Which makes me wonder if Paul isn’t arguing politics more than economics here? Does it really matter that much how we get more countercyclical policy whether it be tax cuts or spending? After all, tax cuts can be just as effective at raising the deficit as a spending increase. And we know that deficits add net financial assets to the private sector which improves private balance sheet health and adds to incomes. The difference is that you’re taking the discretion away from the government and putting it in taxpayer hands. So, what’s not to love?
NB – Yes, I am aware that spending increases can better target those with a marginal propensity to consume, but we also have to be honest here. There is no chance in hell that a big spending package would pass in today’s Congress. So, tax cuts of some type are probably our best bet….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.