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Am I A Keynesian?

Suzy Khimm has a post at the Washington Post’s Wonkblog that says if you’re worried about the fiscal cliff, you are by definition a Keynesian:

The reason the fiscal cliff is such a threat to 2013′s economy isn’t that it’s too little deficit reduction — it’s that it’s too much all at once, totaling about $720 billion, or 5.1 percent of GDP in a single year, which could throw the economy into recession.

Republicans agree on that. Democrats agree on that. And in agreeing on that, both sides appear to be embracing an argument that’s been rather contentious in recent years: that fiscal stimulus boosts short-term economic growth and budget cuts hurt it.

Well, I’m worried about the fiscal cliff and anyone who’s been reading here for the last few years knows I’m no Keynesian. Keynesians assume that cutting spending and raising taxes are equivalent as if all fiscal policy is created equal. Cutting government spending doesn’t concern me when it comes to the economy. It seems likely that if you just cut government spending by a large amount from one day to the next, you would see a contraction in GDP. You might even get an “official” recession if you define that as 2 consecutive quarters of shrinking GDP. But that’s because the calculation of GDP includes government spending. It would take some time before private investment rose enough to offset the fall in government spending. But cutting government spending would in my opinion be an improvement in our economic well being even if it isn’t realized immediately in the GDP numbers.

Tax hikes in the fiscal cliff on the other hand concern me a great deal. Almost all the research I’ve seen indicates that tax changes have a much larger impact on economic growth than spending changes. If government spending made the economy better we’d be in nirvana right now and I don’t think anyone can make that claim.

Of much greater concern to me regarding the fiscal cliff is the response. How the cliff is avoided will make a huge difference in future economic growth.

“The fact that going over the fiscal cliff would hurt the economy in the short run is, to me, basically saying stimulus would help the economy in the short run,” says Brookings economist William Gale. “The whole debate over whether the stimulus is a good idea is answered by those who say going over the fiscal cliff is a bad idea.”

Gale is among the cliff-divers who are pushing for policymakers to go over to force Republicans to accept more revenue. But he only wants to do so if Congress also passes a temporary stimulus measure to boost the economy in the short term — some combination of  ”payroll tax cuts, infrastructure investment and aid to the states … [that] would have a bigger ‘bang for the buck’ than extending the Bush tax cuts.”

Tax and spend liberal apparently isn’t just a cliche. Mr. Gale is right about one thing though. Extending the Bush “tax cuts” will not give much bang for the buck. That’s because they aren’t tax cuts. I don’t know of any economic theory that says that keeping tax rates the same is an economic stimulus.

Does the economy need stimulus? Well, I’m not a Keynesian so I wouldn’t use that term but the economy could certainly be growing at a faster rate. How do we accomplish that? If we accept the Romer research that says that tax changes have a larger impact than spending changes the answer to me is obvious. Cut taxes and spending at the same time. If you cut them by the same amount – and the changes are permanent – you should get higher growth. If you cut taxes more than you cut spending you might do better. Advocating that does not make you a Keynesian. Assuming that higher government spending is a stimulus is what makes one a Keynesian.