Tax cuts don’t stimulate

Posted Feb. 16, 2009, at 8:27 p.m.

As the House and Senate prepared to resolve differences on the new stimulus bill, Sen. Olympia Snowe, R-Maine, commented to the press: “I have consistently advocated … a package that will truly stimulate this economy, not an omnibus bill bloated with frivolous spending.”

Unfortunately the fruits of her labors fail even minimal tests of fiscal prudence. If one concedes, as almost every serious economist now does, that deficit spending is essential to revive our economy, one must get the biggest bang for the buck.

Snowe, Susan Collins, R-Maine, and Arlen Specter, R-Pennsylvania, bucked their party and allowed a bill that was better than nothing to pass. Nonetheless, the actions and rhetoric of the so- called centrists worsened an already overly parsimonious and imperfectly targeted House


Of particular concern to Republicans and conservative Democrats is the possibility that many of the jobs created by the stimulus program will be “government jobs.” Some Republicans will fund state governments hiring private contractors for road and bridge repair. Nonetheless, they

recoil at the thought of federal aid to states to hire more teachers or public health officers.

Sen. Ben Nelson, D-Nebraska, even tried to remove a $1.1 billion program to fund public research into what drugs are most cost-effective. Fortunately he was unsuccessful. Big drug

companies objected to the program, but it will reduce the long-term costs of entitlements, a favorite concern of many fiscal conservatives.

The centrists did succeed in inflicting major damage in other areas. With Maine facing a huge budget shortfall, Sens. Snowe and Collins imposed draconian cuts on what Paul Krugman has correctly labeled the most effective and most needed parts of the plan. In particular, aid to

state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus local governments are cutting back on essentials, so the social value of this spending would be high.”

Republicans often cite as gospel truth the claim that “government does not create wealth, only the private market does.” Such a sweeping assertion would have surprised Adam Smith, whose classic defense of markets included many examples of how government — and only government — can contribute to the prosperity of a market economy. In his day, the private sector had little incentive to build lighthouses but depended heavily on the warnings to mariners they provided. Even more so today a prosperous economic future requires basic research, community health services, education at all levels.

Washington Post columnist Steven Pearlstein adds that “What really irks so many Republicans is that all the stimulus money isn’t being used to cut individual and business taxes, their cure-all for economic ailments, even though all the credible evidence is that tax cuts are only about half as stimulative as direct government spending.”

The so-called centrist Republicans would have served a better purpose by attacking the Democrats’ least effective tax ideas. Cuts in middle class taxes or the AMT may be appropriate as part of general tax reform, but they are minimally stimulative and do not belong in this package.

Frivolity, like pornography, is in the eye of the beholder. I won’t defend every aspect of the original House package, but Republicans lose credibility by treating frivolity as a disease of the public sector. Subsidies to Hollywood have been a favorite whipping boy. Fair enough, but these pale in comparison to the money wasted by corporate America’s own fantasy purveyors, advertisers. U.S. corporations pollute our airways with demeaning and deceptive ads that add unnecessary cost to our products, foster corporate monopoly, and undermine the “sovereign

consumer” of market myth.

Today’s conservatives persist in measuring any government initiative against the ideal standard of a purely competitive economy. Firms are small, information is freely disseminated, and there are no barriers to entry. The modern corporate world hardly lives up to that standard — if it ever did.

Gone are the self-correcting markets Milton Friedman celebrated. In their stead stand powerful investment banks and manufacturers that rig the market and dump their failures on the rest of us.

Today we need John Maynard Keynes’ irreverent intellectual spirit as much as a reconsideration of his economics. When the facts change, so should the views of any genuine maverick.

John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at