Sigh. Here we go again. First it was our capitalist society deemed gone as Newsweek magazine declared, "We're socialists now." This time - it's the death of supply-side economics, according to Newsweek Senior Editor Daniel Gross.
To sum it up, Gross declared tax cuts obsolete, a theory that only works on paper, in a time when employers come and go and institutions aren't stable like they once were. For his "Money Culture" column, in an article headlined "Tax Cuts Won't Work" posted on Feb. 13, Gross made that point using a Harvard professor, thought to have a secure job, as an example.
"Back in the day, and in many of the past episodes of postwar recession, the typical American worker resembled a Harvard professor-not in brains or wit, to be sure, but in the shape of her economic life," Gross wrote. "Many-not all, but a lot-enjoyed long, relatively secure job tenures, steady incomes, and generous employer-provided health and retirement benefits. But the economy has changed significantly in recent decades. And the circumstances that might prod our professor to start spending those tax cuts immediately might not apply to everybody else. The typical worker-white-collar, blue-collar, no-collar-doesn't have anything like tenure or a guaranteed job."
Gross admits there is something to be said about how efficient tax cuts are compared to other means of stimulus - but in this economic climate, times are different and psychology might result in a tax-cut recipient doing something other than stimulative spending.
The flaw with Gross' philosophy: He focused on tax cuts for individuals and not tax cuts for business - which, as a recent Detroit News editorial pointed out, are proven method of stimulating the economy.
"Tax cuts are proven to be far more reliable than spending programs for strengthening the economy. The Bush administration's tax cuts in 2001 kept the economy growing through the Sept. 11 attacks, two wars and Hurricane Katrina. Had Congress and the administration done a better job of monitoring the mortgage markets and Wall Street, those tax cuts would still be doing their job today."
Although Gross didn't offer an alternative to tax cuts, the rule of thumb often used by the Keynesians is that for every dollar of "stimulus" spent, x (usually an amount larger than a dollar) of stimulus occurs - the theory championed by Moody's Economy.com economist Mark Zandi.
Still, the tax cut method of stimulus is often dismissed as "tax cuts for the wealthy" or "tax cuts for big business." The United States has the second highest corporate tax rate of industrialized countries in the world, where there's plenty of room for tax cutting there - which would certainly lure international corporations to United States if that were cut.
The notion that a payroll tax cut wouldn't be stimulative, as Gross suggested in his piece that had him playing psychologist and not business writer - is flawed because he's assuming tax cuts won't work at all in this economic environment. However, Rep. Louie Gohmert said it would have a different effect recently, in a presentation of his Keynesian payroll tax-cut proposal at the Heritage Foundation recently.
"If everybody got everything back - think about yourself - if you'd got everything back that you'd spent so far into the government, in individual income tax and didn't have to pay anymore for the rest of the year, do you think you'd have a merry Christmas? Can you imagine the economy this year if you had that kind of ... there'd be cars bought, auto dealers, auto manufacturers bailed out by all the cars being bought, homes, buildings being built. It would be fantastic."