Archive for June 14th, 2011

The libertarian position is that government should be totally neutral whenever there is a conflict between labor and management.

Unfortunately, politicians usually tilt the playing field in favor of unions, largely in response to big campaign contributions.

This issue has been in the news because of the Obama Administration’s thuggish move to block Boeing from building a factory in South Carolina, so this is a good time to post this debate I had with one of the guys at the Brookings Institution.

The fight in Wisconsin was the starting point for the discussion, and if you’ve been following that debate, you’ll very much enjoy this cartoon.

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Larry Summers served as Chairman of the National Economic Council for Barack Obama, so it is rather remarkable that he is admitting that the economy is in deep trouble and that America may be on the verge of long-term, Japanese-style stagnation. Here’s part of what he wrote.

From the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, similar to Japan in the period its bubble burst. During that time, the share of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. …Traditionally, the American economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post-World War II period — those of 1974-75 and 1980-82 — the economy was growing in the range of 6 percent or more, rates that seem inconceivable today. Why?

So what does Summers propose as a solution? Well, there’s good news and bad news.

The good news is that he wants a tax cut. Indeed, he wants a fairly large tax cut. And while his column does contain a few throwaway lines in favor of government spending, he doesn’t have a laundry list of new programs that he wants to fund, so he’s not calling for a repeat of the failed stimulus from 2009.

The bad news is that he wants a Keynesian tax cut. More specifically, he wants a temporary payroll tax cut. As a knee-jerk advocate of lower taxes, it seems that I should be happy, but I want the right tax cuts for the right reason. More specifically, I want proposals that permanently reduce marginal tax rates on productive behavior – i.e., supply-side tax cuts.

Summers, by contrast, wants a tax cut that will encourage people to spend more money. But that’s the Keynesian approach, and it fails to realize that economic growth is when people earn more money. In other words, we need to produce before we consume.

A temporary payroll tax cut would reduce a marginal tax rate on employment, so there is some merit to Summers’ proposal. But it’s difficult to imagine businesses making permanent decisions to boost jobs and output on the basis of temporary tax policy. My main concern is that we would get very little bang for the buck from this proposal.

Here’s more of the oped.

Without the payroll tax cuts and unemployment insurance negotiated by the president and Congress last fall, we might well be looking at the possibility of a double-dip recession. Substantial withdrawal of fiscal support for demand at the end of 2011 would be premature. Fiscal support should, in fact, be expanded by providing the payroll tax cut to employers as well as employees. Raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well. At a near-term cost of a little more than $200 billion, these measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays.

I suppose I should be happy that Summers is moving in the right direction. This plan is much better than the 2009 stimulus. But if it gets enacted (and it is part of the discussions between Biden and congressional Republicans), don’t expect an economic renaissance.

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