DeLong Smackdown Watch: Mark Thoma Edition
Mark Thoma:
Economist's View: The Case for More Fiscal Stimulus: As a big critic of those who claim that tax cuts pay for themselves, I have been hesitant to embrace the "government spending pays for itself" defense of using government expenditures to stimulate the economy. With tax cuts, there does appear to be some offset, but it is not large, i.e. on net, tax cuts increase the deficit by quite a bit (revenues of 10-15 cents on the dollar is, I think, a generous estimate of the dynamic effects). It's a theoretical possibility that a cut in taxes will pay for itself, but the empirical evidence just isn't there.
The people making the claim about government spending are careful to note that it only applies to very depressed economies, and government spending paying for itself in the long-run is a certainly a theoretical possibility in that case. And events in Europe are suggestive that a careful empirical investigation will support the claim…. Some things do pay for themselves, and then some. A business investment had better do that…. So I don't mean to imply the claim is outlandish per se, not at all. It may well be true. I just don't have the evidence I need to make a strong statement.
One more note. I also don't really like the framing. It's not what's intended by those making the argument, and they are careful on this point. But careful or not it makes it seem as though the spending is only worthwhile if it does, in fact, lower the long-run deficit. But there are benefits to, say, putting people back to work that are not captured by this sort of expenditure/tax-return analysis…
