Matt Yglesias carps:
Not only is this barrel full of tax cuts proposed by the Republican Study Committee pretty bad stimulus, but to even call a package of permanent tax cuts a “alternative stimulus” is a serious abuse of the term. The idea of a stimulus measure is that you increase the budget deficit over the short-term to try to get the economy back to something like a full employment of available resources. But a permanent increase in the deficit extends, by definition, into non-recessionary periods in which such deficits operate as a drag on growth.
I haven’t studied the RSC proposal closely enough to comment on the details, but Yglesias’s theoretical argument is way off base. For one thing, as Peter Ferarra noted on our main site last week:
Tax cuts stimulate the economy when they involve reductions in tax rates. The reduction in rates improves incentives for savings, investment, business creation and expansion, job creation, entrepreneurship, and work, by allowing people to keep a greater percentage of the reward produced by these activities. This improves the economy not just by the dollar amount of the tax cut. The improved incentives affect every economic decision and every dollar in the entire economy. The astoundingly successful Reagan tax cuts in the 1980s, as well as the astoundingly successful Kennedy tax cuts of the 1960s, were both based on reducing tax rates, and were successful for these reasons.
By making tax cuts permanent, it allows individuals and businesses to make longer-term decisions.
But overall, the problem with Yglesias’s argument is that it defines “stimulus” only in narrow Keynesian deficit spending terms — i.e. providing a short term boost — rather than taking a broader view of what type of policies are compatible with longer term economic growth.