At the end of Aug. 10, American Nobel Prize winners in economics signed an open letter. The Nobel laureates whose names appeared on the statement were George Akerlof, Kenneth Arrow, Lawrence Klein, Daniel McFadden, Franco Modigliani, Paul Samuelson, Robert Solow, Douglass North, William Sharpe and Joseph Stiglitz.
Intemperate language revealed a deep partisan commitment in suggesting that Bush administration policy on taxes involved a "reckless and extreme course that endangers the long-term economic health" of the US. Further, they asserted that US President George W. "Bush believes that tax cuts benefiting the most wealthy Americans are the answer to almost every economic problem."
ILLUSTRATION: YU SHA
This was a redux of a petition solicited by the Economic Policy Institute that attacked the initial plan for tax reform. As then, the content and intent of their remarks involve a thinly-veiled partisan critique of economic policy posing as objective analysis. It also reveals that the signers are wedded to Keynesian economic policies that place a misguided focus upon demand as the source of economic growth.
There is no reason to expect that the Nobelist-signatories have changed their stated preference for short-term nostrums over the long-term aims of the Bush tax reform. They apparently favor a "stimulus" plan that provides temporary spending and tax measures to expand demand, including transitory incentives for investment.
However, there is little historical evidence that such ploys either boost growth or lead to new jobs that can survive. And following this logic, there should never be any reductions in corporate tax simply because they cannot have immediate effects. And the proposal for a permanent dividend tax cut should not be opposed since it does not form part of a short-term stimulus.
Admittedly, part of the sales pitch behind the Bush plan was to spark a recovery from sluggish economic growth. However, its real intent and expected impact is to bring permanent changes in the tax structure as the foundation of sustainable long-term growth. Ironically, the petitioners use these motives as a point of critique. It would seem that their complaints might have focused on the effectiveness of the policy rather than merely suggesting that its long-term focus is somehow misguided. Similarly, they raised complaints that passing the tax cuts may weaken the near-term budget outlook. However, it is misleading to suggest that tax cuts alone can cause projected chronic deficits.
As it is, tax revenues are but one side of the fiscal coin. There must be greater restraint on the rate of growth of government spending, especially on pork projects and homeland security spending inspired by scare-mongering. Reducing governmental expenses and wasteful spending can and should offset a significant part of lower taxes.
Lowering tax rates should not be undertaken as a tool for short-term stimulus. Temporary changes in spending decisions that are withdrawn later will have limited effects or perhaps ignored. If they do work, it is likely that they will introduce distortions in the economy by encouraging misspending on investments. Any cuts should be permanent so that economic decision makers can incorporate the changes into their long-term planning horizon.
Instead of aiming to boost consumption, tax cuts should be directed towards encouraging long-term business investments by reducing the burden of taxes on corporations. Other areas would aim at encouraging more corporate spending on capital and R&D activities.
The petition also raises the shibboleth of revenue neutrality whereby tax increases offset tax cuts. However, revenue-neutral tax reform is an oxymoron. Any serious attempt to reform taxes should involve abandoning the taxation principle of "neutrality" in securing tax revenues. Trying to offset rate cuts in some areas by raising them in others does not allow for overall business activity to rise in a sustainable manner.
It would be better if the good professors demanded that there be quick and radical simplification of taxation to have a system easy enough for the average citizen to understand. Even more important is that tax reform should involve a reduction of the distorting effects of taxation whereby individuals and enterprises face disincentives for taking risks or increasing productive efficiency. To this end, government officials should not be guided in choosing cuts by targeting specific activities or sectors.
Instead, reductions should be across-the-board so that special interests are not served or that the misguided logic of some bureaucrat or politician can highjack the choices. And they should be permanent so that economic decision makers can build them into their long-term planning horizons. Faced with lower corporate and personal income tax rates, companies can invest more and consumers can spend more on a sustained basis. Reducing taxes on corporate income and capital gains would improve the bottom line for companies, boost shareholder wealth and allow businesses and households to spend more. Lower tax burdens allow business profitability to rise and put them in a position to gain a better competitive position in the global marketplace. Best of all, with businesses and households able to save more, there will be a natural decline in interest rates to encourage long-term commitments of spending in other sectors of the economy.
Surely it was not the intention of the Economic Prize or of the Nobel selectors for recipients to use their status to act as shills for a specific political party. The sin of the singers of the petition in question would have been slightly more forgivable if they had not relied upon the discredited theory and ignominious failures of Keynesian policies when applied to cure economic ills.
Christopher Lingle is a visiting professor of economics at Universidad Francisco Marroquin in Guatemala and global strategist for eConoLytics.
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