Brookings fellow Peter Orszag and economist Joseph Stiglitz have a well-argued piece in Sunday’s globe maintaining that taxes should be raised to solve the state’s budget crisis. Curiously, the debate has so far taken place between the state’s conservatives, who see government waste everywhere they look (even before looking) and the liberals, who see vital human services being callously cut - at no time do macroeconomic considerations enter the picture. Orszag and Stiglitz not only put Taxachusetts into proper perspective in comparison to other states, they make the useful point that while tax increases and spending cuts both do macroeconomic damage, that latter do far more damage because unemployment directly cuts into aggregate demand, whereas some of the tax cuts at least will result in lower saving, not lower consumption.
The question remains of why the Republicans, here and nationally, are so unconcerned with the multiplier effect of state budget crises. Some certainly are just so enamored with cheap and small government that they’re willing to come up with shoddy economic theories to justify their desires. With other, more responsible conservatives, I imagine the problem has something to do with the return of a business cycle that many had thought irrelevant. Certainly we’ve had business cycles before, but the conventional wisdom til now was that a) monetary policy could handle any downturn and b) fiscal policy was relatively ineffective anyhow. (Robert Shapiro has a good overview of the oddness of this downturn in Slate, though it strikes me as unfair in downplaying Keynesian explanations, as wages certainly are still “sticky” - it’s easy to find folks laid off, but hard to find any salaried professional with a pay cut.) Now we face the problem of having to resort to fiscal policy and debate what a proper policy would be. And since conservative economics has placed emphasis on tax efficiency, incentives for investment and microeconomic foundations of the business cycle, conservatives (maybe not conservative economists, but their followers in the policy and commentary worlds) resist looking at something so basic as an aggregate supply/demand curve graph.
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