A textbook case of bad economics

If you were to go looking for a textbook example of a failure to understand the dynamics of recessions (and deficits), this piece of nonsense by Derrick Z. Jackson of the Boston Globe would be it.

First, government "stimulus spending" doesn't end recessions, the Democratic catechism to the contrary. It didn't end the depression. And it hasn't ended any of the economic crises we've gone through since then, either. Instead, what ends recessions is the technique successfully used by John F. Kennedy, Ronald Reagan, and George W. Bush: tax cuts, which encourage large numbers of people and businesses throughout the economy, rather than merely government and the businesses it favors with "stimulus" contracts, to spend money by allowing to keep more of their money to spend instead of paying it in taxes.

"Tax breaks for the rich," as the Democrats are fond of calling them, are merely tax cuts which allow the people with the most money to spend the most money, too. Although the point is often missed on the economic Left, one of the unique things people in this classification tend to spend their money on in greater qualities than anybody else is hiring people! Another is investing in their businesses, which tends to lead indirectly to people being hired.

For the government to spend like a drunken sailor makes deficits worse, and does not bring us out of recessions and depressions. On the other hand, for the government to generate more revenue while spending less certainly is a legitimate remedy for deficits, and does a far better job of stimulating the economy than spending large amounts of money the government doesn't have.

Is it true, as Jackson maintains, that tax cuts would merely dig the deficit deeper? History's answer is an emphatic- if somewhat qualified- no. It has been a long time since liberals have had a chance to laugh at the Laffer Curve, the economic principle behind the 1981 Kemp-Roth tax cut which was the cornerstone of "Reaganomics-" the combination of such strategically-planned tax cuts with parallel cuts in spending through which Ronald Reagan solved the double crisis of recession and mammoth deficits he inherited from Jimmy Carter (and, to be fair, which he, in turn, had inherited from Gerald Ford).

World War II, not the New Deal, brought us out of the depression. And tax cuts (combined, of course, with cuts rather than Obama-esque increases in spending) brought us out of the recession of the late 'Seventies and early 'Eighties. Granted, this will not always work; it depends on the data the Laffer curve displays at any given moment. But as a matter of fact and history, Jackson is simply wrong. Tax cuts (and especially "tax cuts for the wealthy") will not necessarily dig the deficit hole even deeper. Combined with prudent cuts in spending, history tells us that it often will produce not only jobs, but (counterintuitive though this might be) more rather than less income- because the growth of the economy caused by those tax cuts will increase, rather than decrease, the amount of tax revenues being taken in!

The way to dig the hole of the deficit deeper is precisely the traditional Democratic answer to recession: for the government to spend more money that it doesn't have. The effect is exactly the same as if you were to react to the problem of your money running out too far in advance of payday by spending more of it, and faster!

The real solution is to somehow manage to get paid more, and at the same time to spend less. Time and time again, strategic tax cuts (most emphatically including tax cuts for "the wealthy"), combined with thoughtful- and, if neessary, drastic- cuts, rather than increases, in government spending have gotten us out of recessions without breaking the bank in the process. But for government to simply go on a spending spree seldom adquately stimulates the economy, and makes deficits even worse.

Which is one of the reasons why the economic crisis is unlikely to end until Barack Obama moves out of the White House, and somebody closer in economic philosophy to Ronald Reagan moves in.

HT: Real Clear Politics