I agree with you that a more effective short-term stimulus would have focused on low-income tax cuts and state fiscal relief. Too bad we weren’t in charge.
I don’t agree, though, that the tax cuts will have a “benign long-term effect on growth by creating more incentives for savings and investment.” The long-term effect of the Bush tax changes will be to reduce national saving and investment, not increase it.
The reason is simple: National saving is the sum of private saving and public saving. Public saving falls when the budget deficit increases. Although the tax cuts may boost private saving modestly, that effect will be dominated by the increase in the budget deficit. As a result, national saving as a whole will decline. Unless you believe that private saving will increase by enough to offset the net increase in the deficit–an entirely implausible assumption in my opinion–the effect on national saving must be negative.
The decline in national saving is problematic in the long term because saving finances investment–so less saving means less investment. (Technically, a reduction in national saving must reduce either domestic investment or net investment abroad or some combination thereof. Regardless of the mix, we as Americans will not accumulate as much capital over time.) Less investment then means lower future national income, relative to what it would otherwise have been.
But don’t just take my word for it. The Congressional Budget Office recently concluded that “the tax legislation will probably have a net negative effect on saving, investment, and capital accumulation over the next 10 years.” The Joint Committee on Taxation similarly concluded that “eventually the effects of the increasing deficit will outweigh the positive effects of the tax policy.” And in case you’re worried about bias at CBO and JCT, note that the directors of both agencies were appointed by the current House and Senate leadership.
View the entire debate at The New Republic online