Tax Cuts Caused the Recession

Economics Economics Questions
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1

I apologize ahead of time for provoking anyone with the Subject line. I’ve posted this as an Economic Question, and you should take this as an honest question.

I believe a few years ago, Hillary Clinton said something like “Tax cuts caused the recession.” If I heard correctly, President Obama has made the same claim. If he did not, I know for a fact that several commentators and bloggers are now making that claim for this recession.

Understand, they are not saying tax-cuts won’t help. They are saying they CAUSED the recession.

What is their logic, facts, or delusions, and what is the Austrian answer to their claim? Any additional insights would be welcome.

Thanks,

2

Power. Vilify anything private sector.

3

Followed directly by the thought “People are morons, and ignorant, and will believe any BS I say as long as my buddies at NYT or Time print it. Hahaha, it is so easy to steal from these idiots.”

4

I was going to jokingly say that if you’d asked Hitler was caused Germany’s economic problems he would have said the jews, then I remembered that he actually did blame it on the jews (at least, as far as I recall).

5

I’m pretty new to Austrian economics and economics in general, so correct me if I’m wrong, aren’t they relying on the “underconsumption” theory? Had Bush taxed the rich at a higher amount the money could have been distributed to people with lower incomes who had more to spend, then talking heads wouldn’t be making a big deal about that circular flow chart and blaming consumers for saving and not spending.

…or they decided that class warfare was the best way for millionaires to become populist heroes

6

How the hell would tax cuts cause a recession?

7

I don’t see how an economic-bad, which taxation is by definition, when reduced or cut can entail a recession.

8

krazy kaju, fezwhatley:

Your questions parallel my own mystification at the claim being made increasingly by Democrats that tax-cuts caused the recession. I don’t get it. I figured that Krugman or someone had figured out how to blame the recession on tax-cuts, but not being an economist, I’ve never heard of such a thing. What I do know is that people who point to Krugman as an authority worth listening to, have also made the claim that tax-cuts caused the recession.

I suppose that since most recent so-called tax-cuts have really been a form of hand-outs paid for with deficit spending in conjunction with NO cuts in spending at all, then maybe an Austrian school economist could make the claim that these particular misnamed ‘tax-cuts’ have actually contributed to the current recession. But I seriously doubt that Hilary in 2001 or Obama in 2009 have been listening to any such economists.

So I’m wondering what Keynesian came up with the ‘tax-cuts caused the recession’ theory, and what may have been said of this theory by the Austrian school.

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if i put on my keynsian madhat, i might spout some nonsense like ‘before tax cuts, the governments tax and spends, dictates much consumption and spending in the economy, this is good control, after tax cuts and reduced spending, it is private interests in the driving seat, and their animal spirits cause booms and busts’. so animal spirits be tamed by taxation, as beaurocracts are more rational than the calculating market.

10

It is possible that they espouse some of the views of one of FDR’s economic advisors who blamed the Great Depression on rising income inequality.

11

I think the argument is is that because the tax cuts were massive and unaccompanied by spending cuts they created a large public government debt which harmed the economy in many ways including overcrowding private investment, and inflation (printing more money to pay down the debt).

Cutting taxes does indeed help the economy by moving more capital into the private sector for investment and job creation. But if spending increases while taxes is cut then government finances its expenditures through borrowing and inflation which are bad for the economy. The problem with the U.S. form of republican government, especially in the institution of the Congress, is that voters usually demand both - cutting taxes and more spending - which absolutely ruins the economy. Even libertarian/conservative congressmen have to try to cut taxes, which often works, but cutting spending almost never works out. Its inherent in the structure of the system. Monarchial regimes and parliamentary systems have much more ease in keeping the budget balanced even if taxes are cut than presidential systems.

12

So far, I think Roy Munson’s reply has given me the best answer so far, though it doesn’t explicitly answer my original post:

The statements have to be based on the underconsumption theory, and the income inequality ideas of Krugman/Keynesians.

The statements are STILL stupid, even from their point of view, since the tax-cuts in question were NOT accompanied by cuts in spending. So by the above theories, IF spending on welfare, earned-income tax credits, etc. were not cut, and general spending only increased across the board, then the harping on tax-cuts adding to the income inequality and exacerbating the whole ‘income-inequality’ effect on consumption just can’t be true in the first place.

So anyway, for Hillary and others to make these kinds of statements, there had to have been a study or article somewhere. Hillary made these comments in Dec. 2001.

"Acknowledging that the economy began to slow while her husband was still president, Hillary Clinton nonetheless said Bush’s 10-year, $1.3 trillion tax cut was to blame."

However, I still haven’t found much more from Krugman than his mantra represented by the following idiotic, moronic, typical quote:

“There is no coherent argument that tax cuts should be effective. An additional dollar in public spending is going to do more for the economy than an additional dollar of tax cuts,” Krugman said during a discussion on the impact of President Barack Obama’s economic recovery plan."

Here is my favorite Krugman quote, so far (I’ve only read a handful of his articles!):

“I think I screwed up the letters on the chart, but it really doesn’t matter.” (I know, I know… in context, his screw-up really didn’t matter, I suppose.)

BTW, why is it with Krugman that tax-cuts, regardless of what a chart shows, never help, but regardless of what a chart shows during a depression, government spending ALWAYS made the numbers better than they would have been if the spending had not happened? Then why does he ever bother showing anyone a chart if the chart never really means what it appears to show?

All I’ve been able to find from an economist is:

July 21, 2008

How the War, Tax Cuts, and the Swaps Market Debased the U.S. Financial System (http://www.hussmanfunds.com/wmc/wmc080721.htm)

John P. Hussman, Ph.D.

BUT that was written after Hillary made her comment. What I still can’t find is the origin, and I’m also curious why we’re hearing this mantra recently when it was Democrats who put all the so-called tax-cuts in the current 2009 Stimulus package.