Obamacrats Pursue Policies That Keynesians Would Spurn
By Jeremy Weltmer
Friday, July 23, 2010 2:57 pm
As much as scores of economists have refuted much of the framework of Keynesian economics, many of its tenets regarding the role of the government in stimulating the economy counter-cyclically remain widespread in discussions of policy. Yet even when deploying this framework, the proposal tendered by Secretary Geithner and President Obama to raise taxes on the highest-earners at the end of this year does not represent the greatest boost to the economy.
Under a Keynesian analysis, government should attempt to stimulate the economy during a cyclical recession by increasing aggregate demand. Usually, this takes the form of government-funded projects, but it can also involve transfer payments or other ways to increase demand. Naturally, government must pay for these policies, so Keynes would suggest a tax policy that has the least possible impact on demand.
Obama and his legislative cronies have asserted that taxes on those Americans who make the most have this sort of effect, often by invoking an image of some sort of tycoon or bank executive counting and hoarding massive amounts of cash. But as the New York Times reports
“the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data.”
So, in effect, taxes on the rich have the exact opposite effect of what sound Keynesian analysis would suggest: a tax increase has an outsize effect on demand by lowering the amount that those spenders would have to inject back into the economy.
Given that Keynesian economists (the last holdouts in the consensus that tax increases crimp growth and decrease tax revenues) must side against such a tax hike, one must consider why the Democratic leadership continues pursuing wrong-headed policy. Perhaps it comes from some Marxist notion of class warfare, perhaps it has to do with the fact that upper-income people tend to give more to the Republican rather than the Democratic party, but it is clear that it does not stem from a desire to make the American economy grow.