Defending Your Mankiw*, Not that he needs it

In an article titled Tax Cuts Won't Work, Newsweek's Daniel Gross argues against those who advocate tax cuts as remedy to the current financial crisis. But in a self-contradictory moment, he writes

And the way they read the relevant data, history, and experience, permanently reducing long-term tax rates has historically provided the best possible incentives to invest and spend. They may be right (emphasis mine).

Gross discusses Harvard's Greg Mankiw in ways that don't seem complimentary, which elicited a reply from Mankiw.

I take two issues with Gross.

1. Categorizing people as "Economists whose sympathies lie with the Republicans" and
2. mischaracterizing Harvard professors.

I am not one of those who sees the world as blue vs. red. There are Democrats who are fiscal conservatives (e.g. the blue dogs) and Republicans who embrace pork (e.g. ex-Senator Ted Stevens). Mankiw worked for W yet he is recommending "a gradual, permanent, and substantial increase in the gasoline tax". I did not fact check, but I cannot imagine that is in the Republican platform. Additionally, Mankiw has written that his opposition to proposed spending is for practical reasons; it is not possible for any government to spend that much money so quickly without inefficiency and waste.

During the 2008 presidential election, Republican campaign rhetoric painted Obama as an elitist, perhaps because he graduated from Harvard Law School. Gross implies that Harvard professors (and Mankiw and Barro in particular) are ensconced in a comfortable university lifestyle that has clouded their professional judgment. Obama is not an elitist because he is smart, nor is Mankiw distorted by his professorial income, which is most likely much less than many of his students who have gone on to well-compensated non-academic jobs. Tangentially, the Harvard economics department is not immune from pain.

As to the actual issue about whether or not tax cuts would help in these troubled times, I say yes. For Americans who live on anything resembling a budget, being able to keep more of your income will result in money being spent. Confidence has nothing to do with it. If you have a bill and you happen to have a few more dollars due to tax cuts, you are more likely to pay that bill.

Some people will take their tax savings and save rather than spend. Why is that a bad thing? Assuming they don't take the money in greenbacks and stuff it under their mattress, the money gets deposited in a savings account, or a CD, or whatever. The receiving institution can take that deposit and loan it out to someone who will spend it. Is this not a good thing?

Just for fun, my own stimulus bill would be structured as follows:

1. Do what it takes to keep banks working.
2. Cut taxes. I do not understand the trade offs between payroll tax cuts and income tax cuts.
3. Help state and local governments that are in imminent peril.
4. Spend on strategic projects that will help us survive over the next 50 years, such as energy, education, and transportation.

Veritas!

*the title is a riff on Defending Your Life, a movie starring Albert Brooks and Meryl Streep about dead people defending their lives in an afterlife tribunal