We're All Keynesians Now

The Republican Party is getting very defensive about the idea of raising taxes on the rich (which is apparently being referred to as the Buffett Rule - kudos to progressives for actually coming up with a good name). In addition to their class warfare mantra - which even they seem to recognize is weak - they're out en masse today arguing that it's a terrible idea to raise taxes in a recession.

And I really, really wish the mainstream media actually knew something about economics because that principle is straight up, flat out Keynes. Keynes argued that fiscal measures - government spending AND tax cuts - could stimulate the economy in a recession. The flip side, of course, is that cutting spending and/or raising taxes during a recession can be a drag on the economy. So, today at least, Republicans are Keynesians.

However, is it correct? No. And here's why. The idea of using government spending and/or tax cuts to stimulate the economy is to increase demand (i.e. spending in the economy). When it comes to government spending, the spending increases demand directly - which is why government spending is more effective than tax cuts. When it comes to tax cuts, however, demand is only increased if the person or business receiving the tax break actually spends the money. So, if you give Warren Buffet a tax break, his increased wealth just piles up and therefore, such a tax break has no stimulative effect. And the reverse of this is true as well - namely, if you raise taxes on millionaires and billionaires, they don't spend less (it just cuts into their pile of cash). Thus, there is no drag on the economy.

So, whether they know it or not, the Republicans are invoking Keynes - tax hikes being a drain on the economy is a Keynesian principle. But they're invoking Keynes incorrectly - tax hikes are only a drag if it results in decreased spending.

Cross-posted at Daily Kos.