Tax Cut Stimulus Mish vs. Krugman: Libertarians Dead Wrong?

Curious Mix: Mainstream media and Libertarians both believe the Trump tax cuts will stimulate the economy. It won't.

Here is Krugman's conclusion:

So now we have a stimulus from tax cuts and spending increases in an economy already down to 4 percent unemployment, where the Fed is already raising rates to head off potential inflation. That is, we’re looking at normal monetary conditions, where we’d expect a smallish multiplier.

I’m having a hard time figuring out exactly how big a stimulus we’re looking at, but it seems to be around 2 percent of GDP for fiscal 2019. With a multiplier of 0.5, that would add 1 percent to growth.

That said, I’d suggest that this is a bit high. For one thing, it’s not clear how much impact corporate tax cuts, which are the biggest item, will really have on spending. ....

So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal.

How People Spend Their Tax Cuts

13% Will Spend

According to LendEdu, the average monthly paycheck will rise by $130.76. Only thirteen percent say they will spend their tax windfall.

I have huge problems with studies like these, even if the respondents do what they say.

The essential problem is "average" is misleading. So much of the tax benefit is skewed to the top 10% that average calculations are worse than useless.

Income Brackets

The Median income bracket is $37,610. That income bracket will net $360 dollars or so, per year. That's a far cry from the LendEdu average estimate of $130.76 * 12 estimate of $1569.12 per year.

Household Income Brackets

  • Make less than $10K: Benefit under $1 per month
  • Make the median wage of $37,610: Benefit is $30 per month.
  • Make the 75% percentile wage of $65,250: Benefit is $72 per month
  • One has to make somewhere between $100,000 and $200,000 to see the "average" benefit of $130.76 per month.

Stimulus?

I fail to see how this stimulates anything. And it adds at least $1.5 trillion to the deficit.

To pay for this, Trump is now considering a very regressive 25-cent gasoline tax hike.

Tax and Spend Republicans

Republicans have now gone full circle. For details, please see Tax and Spend: Trump Proposes 25-Cent Gas Tax, My Alternative Plan.

Questions of the Day

At the median level, is an extra $30 a month really going to help anybody pay down bills, save for education, or save for retirement?

One has to get above the 90% level before there is any reasonable impact on anything, and even that assumes any "savings" will not blow up in smoke over increased inflation or negative stock market impacts.

Word About Savings

I fully support saving. People claim they will "save" most of the tax cuts. It's savings that provide funds for future growth.

The problem is the rise in deficit is in effect negative savings overall.

Why can't Libertarians see this?

Libertarian Friends Dead Wrong

Krugman stated "So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal."

I suggest Krugman is a blazing optimist. The long-term effect of adding $1.5 trillion to the deficit cannot possibly stimulate anything. Moreover, when the next recession hits, I believe the deficit will be double what most expect.

Libertarians hold these positions: Tax cuts are good. Deficit spending is bad.

Unfortunately, my Libertarian friends are so enamored with tax cuts they have zero regard for the net impact of increased deficit spending.

One-sided ideology has gotten in the way.

Tax cuts cannot be good if growth will not pay for the cuts. I am 100% certain that long-term growth will not pay for the tax cuts as structured.

I rarely side with Krugman, and I don't here, but he is more correct than those who believe these tax cuts will provide a big economic stimulus.

I am a Libertarian. My Libertarian friends who support these tax cuts are dead wrong. And they should know it.

Mike "Mish" Shedlock

Comments
No. 1-25
AWC
AWC

Most Libertarians I know support cutting taxes because it gives government less money to piss away on wars, social engineering and corruption. The libertarian angle is, economic prosperity should be a result of free markets and productivity, not artificial government stimulus programs. Not only does that government which governs least govern best, but that government that spends least spends best.

AWC
AWC

Taxes are really not much more than redistribution schemes. They aren't net productive.

Carl_R
Carl_R

The arguments in the section that says only 13% of the savings will be spent are specious. Let's look at the category "saving for a vacation". What will happen to that, based on the intent? If it's not raided and spent first on some other need, it will be, yes, spent on a vacation. Some of the other categories, such as "save for children's education" and "save for retirement" may involve a delay, but they, too, are intended to be spent. And what about "Save in bank"? Will the money remain there forever? Or will it at some point be spent? And finally, the biggest category, "pay down debt". Once the debt is "paid down", guess what? They will have the ability to borrow again, in the future, to, yes, spend, and many/most will do exactly that.
I have no idea what percentage of the tax cut will be spent, but I'm very confident that 13% isn't even close.

shamrock
shamrock

Couple any stimulus from tax cuts and spending increases with the depressive affects of tariffs, trade wars, and immigration cutbacks for a net negative.

Greggg
Greggg

I have never ever tell the truth on any survey. The only time I ever answer surveys is when I'm pissed off enough to answer the to the strange phone number appearing on the screen and it's usually before an election. Wanna know how some pols missed by so much? Probably because most people are just like me.