Last week Paul Krugman made sport of a Mitt Romney malapropism on the campaign trail. Apparently Romney, on the stump in Michigan, had said, “If you just cut, if all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy.”
Krugman found in this remark a stirring of Romney’s secret heart. “[Romney] believes that cutting government spending hurts growth, other things equal,” Krugman wrote in his New York Times column. In other words, Mitt Romney is at bottom a Keynesian.
Now of course, Krugman’s column quickly got lost making creepy accusations of “stupidity,” “mendacity,” and “nonsense,” as it always does. Krugman even managed to misrepresent Romney advisor Greg Mankiw, who “[i]n an early edition of his best-selling textbook…dismissed supply-side economics — the doctrine embraced by the sainted Ronald Reagan — as the creation of ‘charlatans and cranks.’”
As anyone on the inside of the economics establishment knows, Mankiw has clarified this remark many times, saying that it referred exclusively to claims that tax cuts raise revenues and to nothing else – certainly nothing to do with spending. It’s become such a ha-ha line inside the Beltway that there are a pair of wonkish Washington, D.C. softball teams called “charlatans” and “cranks.” But Paul Krugman still wants to take the remark as the last word on everything.
At any rate, here’s the point of differentiation. Romney’s tax plan would reduce every rate of the income tax by 20 percent. And as Larry Kudlow iskeen to point out, here is how Romney justifies it: “By reducing the tax on the next dollar of income earned by all taxpayers, we will encourage hard work, risk-taking, and productivity by allowing Americans to keep more of what they earn.”
This argument is a supply-side one. The justification for tax cuts here is that they prompt people to expand their horizons in the world of work. The demand-side, or Keynesian argument for tax cuts is that they “put money in people’s pockets,” as the saying goes; in the Keynes jargon, they raise people’s “propensity to consume.”
The crucial difference between supply-side and Keynesian tax cuts is one of design. Supply-side tax cuts occur at the marginal rates of the income tax, whereas Keynesian tax cuts occur before those rates. Under a regimen of marginal rate cuts, the most remunerative thing to do is earn more income. Under non-marginal cuts, you get the full amount of the cut no matter if you work more or not.
Moreover, if marginal tax rates are high, and you get a non-marginal cut, you might even decide to work less than before. A non-marginal tax cut increases your income beyond what you’d been making in the past. If your last bit of work is barely paying — say taxed at 1980’s marginal rate of 70% — you can cut back on work and still see the same take-home pay as before.
It’s clear what makes a tax cut supply-side or Keynesian. Supply-side tax cuts prompt people to envision more income and thus go for earning it. Demand-side tax cuts increase paychecks without encouraging more work and production.
Here’s the president on his kind of tax cuts, referring to the recent reduction in the social security levy: “It means $40 extra in their paycheck. And that $40 helps to pay the rent, the groceries, the rising cost of gas — which is on a lot of people’s minds right now. LaRonda Hill — right here — told us how $40 covers the water bill for a month. So this tax cut makes a difference for a lot of families.”
Obviously the Keynesian variety. The president sees tax cuts — demand-side ones — as a sort of welfare program, whereas Romney sees tax cuts — supply-side ones — as a spur to economic growth. You might take the persistence of the Obama-style tax cuts over these last few years as a natural accompaniment to sluggish recovery.
These tax cuts were not meant to spark people into new initiatives, but to help people along during hard times. In turn, Romney’s tax cuts may be seen as an antidote to sluggishness, in that their purpose is to get the economy to recover into newness and to boom.
The president has complained his whole time in office that nobody gives him credit for cutting taxes. “What if a president cut Americans’ income taxes by $116 billion and nobody noticed?” as the New York Times once carried water for him. The electorate seems to understand that welfare is the province of the spending side of the budget, not the tax side. If you want to dole out help to people in trouble, do that with some part of the $3.8 trillion in yearly appropriations.
But if you want to get the economy moving, as the electorate also seems to get, you must reduce the barriers to initiative and production. That can only be done by lowering taxes on new, not already completed, work. The more President Obama finds it necessary to remind people that he’s a tax-cutter, the more he will reveal that the public instinctively understands that Romney’s supply-side tax cuts are the right kind for an economy in its current hesitant and truncated condition.