tax cut

Brad DeLong delong at econ.Berkeley.EDU
Fri Mar 16 14:35:00 PST 2001

>Brad DeLong wrote:
>>>Christian Gregory wrote:
>>>>As for Bergsten, I wonder about the "national savings" argument. The U.S.
>>>>has been running current account deficits for 20 years, with and without a
>>>>fiscal surplus, and thru the Plaza accord and the reverse Plaza. What good
>>>>will savings do when the dollar tanks? Wouldn't it matter more what form
>>>>they're in than that they are there?
>>>These guys are a bit coy about admitting it, but I bet a lot of
>>>fiscally orthodox Dems - like Bergsten - wouldn't mind seeing a
>>>recession harsh enough to balance the current account and cure the
>>>U.S. of its profligacy. Structural adjustment comes home. They may
>>>not even put it this bluntly among themselves, but it's the
>>>logical outcome of their fetish for fiscal discipline.
>>No! We do not! "Balance the world economy up, don't balance the
>>world economy down," is our mantra...
>So how do you reconcile that with endless surplus-building and
>reductions in the federal spending share of GDP? Most Dems these
>days sound like what Keynes derided as "the Treasury view."

Remember that I (and a lot of other fiscally-orthodox Dems) are capital fetishists: believers in large positive externalities from investment through learning-by-doing, learning-by-using, and worker-employer quasi-rent sharing. Thus a low national savings rate terrifies us.

Thus we favor the policy mix proposed by Robert Solow back in the early 1960s: tight fiscal policy (to boost national savings); a redistributive tax system (to level out the distribution of income and create large fiscal automatic stabilizers); loose monetary policy on average (to counteract the tight fiscal policy); and delegation of the bulk of stabilization policy to the Federal Reserve.

Of course, this requires that (a) the Federal Reserve be competent, (b) the Federal Reserve have a sound and accurate view of what "maximum employment and purchasing power without accelerating inflation" means, and (c) the economy not have gotten itself so wedged that monetary policy is ineffective.

Neither (a), (b), nor (c) can be taken for granted. (Indeed, back in the spring of 1992, IIRC, Laura Tyson, Larry Summers, and Alan Blinder were all sufficiently alarmed by the then-ongoing "credit crunch" to say that it was time to restore fiscal policy to a more prominent stabilization policy role.) But *here* and *now* I think all three of them hold--but (c) does not hold in Japan, and (b) does not hold in Europe.

Brad DeLong

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