Ross Douthat on fiscal policy in a recession
Just four years ago, it’s worth noting, an awful lot of Bush administration officials would have made roughly the argument that Klein makes above when defending their fiscal record. As liberals have enjoyed pointing out, Bush’s first term policies amounted to a kind of right-wing Keynesianism – and as of 2006 or so, the administration could credibly argue that its unfunded tax cuts and spending increases, while budget-busting in the short term, had played some role in pulling the economy up out of its post-Internet-bubble, post-9/11 doldrums.
Note, implicit in Ross’s statement isn’t that Glenn Hubbard, Greg Mankiw and Ben Bernanke – Bush’s CEA Chairmen from 2001 – 2006 – are publically avowed Keynesians. Indeed, they are.
No, Ross seems to suggest that there was some sort of backdoor endorsement of nominal rigidities going on. The endorsement, however, was completely front door. At the signing ceremony Bush declared
“When people have more money, they can spend it on goods and services. And in our society, when they demand an additional good or a service, somebody will produce the good or a service. And when somebody produces that good or a service, it means somebody is more likely to be able to find a job.”
This logic is simply not possible in a world with either Ricardian Equivalence or perfectly flexible wages and prices. In those worlds when the government cuts taxes, either people save every bit of it or the rising deficit crowds-out investment. You have to be a Keynesian to think this will work.
There is a debate over whether Bush’s economic team focused too heavily on reducing what they thought to be the long-term constraints on capital formation rather than addressing the immediate shortfall in demand. That is, some have suggested that the policy amounted to backdoor supply-side economics.
Indeed, that seems to be what Ross is reacting against
Yes, they’d piled up debt for a few years, but the important thing was that the economy was growing (not that quickly, but what wouldn’t we give for Bush-era growth rates today?), which in turn was gradually bringing the budget back into balance and laying the necessary foundation for future deficit reduction.
I don’t think that argument looks nearly as credible today.
To think that tax cuts in 2003 would help curb the deficit in 2010, you would have to be making a supply-side argument. That is, unless you thought the fall in demand from 2001 was enough to push the United States into a 9 year recession. Given that retail sales never actually fell in the 2001 recession – they just stopped growing for a bit – that seems like an extraordinary claim.
To think that tax cuts boost long-term growth enough to pay for themselves is not a Keynesian argument. The Keynesian case is that they boost growth only enough to get us out of a liquidity trap. Once we are out of the liquidity trap the Federal Reserve takes over as the regulator of economic growth.
So, it isn’t that the Bush economic team was a set of secret Keynesians. It is that some had supply side hopes for the Bush tax cut and those supply side hopes did not materialize.