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The Wrong Reason for the Right Policy

August 1, 2012 by Ike Brannon

Republicans rightly reject the precepts of Keynesian Economics — although many are willing to reverse course if it suits politically. To wit, the Bush Administration argued vociferously for the 2001 tax cuts by insisting that the weakened economy needed the “stimulus” from the refund checks people would be receiving. I thought then (and continue to think) the tax cuts made sense, but not because they were an effective short-term stimulus. More important is the need to have the top marginal tax rates on workers, businesses, and saving as low as possible, so as to give us the highest growth rate achievable. So how are Republicans combating the President’s push to repeal the Bush tax cuts for people and businesses earning over $250,000? Not a few Republicans are appealing to the short-term contractionary effects it will have on the economy. To be fair, some of this is being done almost ironically by taking the estimates used by Obama’s own economists to tout the positive impacts of the 2009 stimulus and using them to model the contractionary impact of repealing some — or all — of the tax cuts. (If we do live in a Keynesian world, then be afraid). But Republicans need to talk more about low tax rates in the context of economic growth. It’s a tough task: The difference between, say, 3% and 4% economic growth is staggering in the long run but can seem hardly worth whatever sacrifice is being considered in the short run. Anders Aslund, of the Peterson Institute of International Economics, made that point in a talk he recently gave to a group of wonkish staffers on Capitol Hill. His native country of Sweden embraced a statist, socialistic economy in the 1960s and paid a dear price for that decision. Economic growth in Sweden has averaged one percentage point below the rest of Western Europe for 20 years. At first no one complained, and the Socialist government remained unchallenged in the ballot box. But after a generation of investment fleeing, along with the entrepreneurs and talented workers, the people began to look for a way out, and the Socialists were voted out of office. Soon after that election the Swedes had their own financial crisis and the bond market hastened the government’s plan to reform the economy, but with much less political opposition than they anticipated. Nearly everyone understood that a country like Sweden, operating in an open market like the E.U., could do very little to shelter most of its companies from the vicissitudes of market competition. The generous welfare benefits began to be pared back, taxes started to fall, the country privatized its Social Security program, and the country gradually began to prosper again. Today, Sweden has a budget surplus, unemployment nearly a percentage point below the U.S., and a corporate tax rate more than 10 percentage points below the U.S. rate. At the nadir of the Great Recession, some Swedish unions volunteered to take wage cuts to maintain their competitive edge in the global marketplace, a development that would be almost inconceivable in the U.S. The additional percentage point of growth Sweden has recaptured in the last 20 years has brought with it a sense from within (and outside of) Sweden that the country is going in the right direction, something few would say about the U.S. A steadily growing economic pie makes all sorts of battles easier to negotiate. Senator Robert Packwood, one of the key architects of the 1986 tax reform, once remarked that one of the reasons they managed to gore so many oxen in the final legislation was the serendipity of the reform taking place in the fifth year of an economic expansion, when tax revenue was rising smartly and showed no signs of stopping. The economist Benjamin Friedman argued in his book “The Cause and Consequences of Economic Growth” that strong growth affords a society the opportunity to address serious non-economic problems as well. The enemy of my enemy is also my enemy? In 2000 the National Organization for Women demanded an international response to the Taliban’s repression of woman, by use of military force if need be. They dropped that position on September 12, 2001, when they realized their wish was about to be granted — but for the wrong reasons. So I am a little hesitant to chide Republicans for supporting lower tax rates by raising the specter of a Keynesian contraction were we to raise taxes. But the truth should be reason enough to support lower tax rates, even if it means making hard decisions down the road about reforming entitlements or jettisoning tax expenditures. And make no mistake: That is precisely what needs to be done if we ever hope to recapture that extra percentage point of economic growth.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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