The stimulus: tax cuts vs public spending
Watching the news last night, there was a lot on the pros and cons of tax cuts versus public spending. As one who has been following the debate on both sides of the border, it is interesting to note the convergence. The Canadian debate, up to the near-fall of the Harper government, was about whether the Canadian economy is actually going into recession, and thus whether there should be a deficit or not. Progressives have won a victory there, as deficits are back in style and now the debate is about how large the stimulus should be and what its contents are.
Unfortunately the media do not seem to sort out the good arguments from the bad. So pretend for a moment that recent Nobel laureate Paul Krugman is talking about Canada not the US when remarking on why tax cuts are inferior to public spending in a stimulus package:
[W]rite off anyone who asserts that itâ€™s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.
Hereâ€™s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets â€” and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, itâ€™s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts â€” and therefore costs less per job created â€” because a large fraction of any tax cut will simply be saved.
This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.