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Alan Reynolds is right..

by Amity Shlaes
February 1, 2010

Alan writes in National Review Online:

Republicans’ Keynesian Arguments

Republicans should stop using Keynesian arguments against Keynesian policies. The mantra that President Obama should “focus on jobs,” for example, was an open invitation for the GOP to be sucker-punched when Obama simply relabeled his second stimulus bill a “jobs bill.” To demand the president focus on jobs seemed like an endorsement of the president’s odd notion that he can “create or save” jobs by using borrowed money to expand government payrolls and transfer payments.

As I recently explained, “Whether the government pays people to work or to stay on the dole, it has to get the money by taxing, borrowing or printing money — all of which reduce real income and employment opportunities in the private sector. To imagine that borrowing from Peter to pay Paul is a way to create or save Paul’s job is to forget that Peter expects his money back with interest.”

Another unfortunate Republican talking point is that “recessions are the worst time to raise taxes.” Since the economy is out of recession far more often than not, that was an open invitation for the president to raise tax rates in 2011 because his central planners wrongly assume the economy will be growing faster in 2011 (3.8 percent) than in 2010 (2.7 percent).

Obama’s “upper-income tax provisions” cannot possibly raise even the $34 billion the budget hopes for in 2011. When Democrats then start looking for more loot, the Republicans’ Keynesian arguments about the timing of tax increases will prove useless so long as estimated economic growth exceeds zero.

As the health-care debate should remind us, the effect of taxes and transfers on the economy cannot be summarized by their effect on deficits. Mixing a higher tax rate on extra effort with generous subsidies to extra months of unemployment has an unambiguously negative supply-side effect on incentives and economic growth, and therefore on future budgets.

Alan Reynolds is a senior fellow at the Cato Institute.

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