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 it’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.

Here’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 — 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, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created — 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.

4 comments

  • Krugman: “nobody really believes that a dollar of tax cuts is always better than a dollar of public spending”.

    Yet another reason why the Harper budget, as developed by Lynch and co. and promoted by media, is so much hot air.

    Nobody sensible believes it, but they do it anyway. Chock up more notches on the ‘stubborn’, ‘counter-productive’, and ‘political pandering at the expense of the economy’ scale.

    keep it coming Marc, trust others are also having good kicks at the rusty cans being tossed out by Harper’s gang.

  • Let’s not forget to include quotation marks and the phrase “so-called.” As in: “The federal government has announced $X billion in tax cuts for so-called ‘stimulus’ measures.” Hey, it worked with the so-called “fiscal imbalance.”

  • Paul Krugman’s argument is correct. He is correctly critical of those who argue about the *average* utility of government vs private expenditure.

    But his argument cuts both ways. Nobody really believes that a dollar of government expenditure is always better than a dollar of private expenditure either.

    What we do need to look at, apart from the multipliers, is how quickly marginal utility diminishes for government vs private expenditure.

  • What I find amazing about the supply-siders’ argument for continually cutting taxes is their complete disregard for any point of diminishing returns. For these naive folks, cutting all taxes to zero is the ultimate good. Yeah, let’s just do away with government and we’ll be better off. Riiight.

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