What’s at stake: There’s an economists’ duel underway in several countries through petitions. In Britain, 60 leading economists backed the decision of Alistair Darling, UK finance minister, to delay spending cuts until 2011. They were responding to a letter published by another group of prominent economists saying that budget cuts should start more or less […]
What’s at stake: There’s an economists’ duel underway in several countries through petitions. In Britain, 60 leading economists backed the decision of Alistair Darling, UK finance minister, to delay spending cuts until 2011. They were responding to a letter published by another group of prominent economists saying that budget cuts should start more or less immediately. In the US, economists have petitioned for a hiring tax credit.
Marginal Revolution wonders why institutions bother to generate petitions signed by economists. Is it to influence the world? To signal which economists are on their side? To cultivate better connections with economists and create an excuse to contact them and affiliate with them? He also reports that a team of researchers has just started a new project to try to understand why economists sign petitions.
The UK debate: Should the government slash spending now?
The sharp differences between economists emerged as official data showed the budget deficit surged in January as income tax receipts fell by a fifth, alarming the markets and pushing up yields on government debt.
20 economists (including Ken Rogoff, Anne Sibert and Charles Goodhart) supported the Conservative party’s argument that fiscal tightening should start this year. In order to minimise the risk that a loss of confidence in the UK’s economic policy framework contribute to higher long-term interest rates and/or currency instability, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report. The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.
The following weekend, more than 60 leading economists backed the decision of Alistair Darling to delay spending cuts until 2011. In two letters, they rejected the Tories’ claim that cuts are needed now to reassure the markets and head off the risk of Britain losing its triple A credit rating and instead pointed that a sharp shock now would be dangerous and that the first priority must be to restore robust growth. Paul Krugman supported the signatories and noted that the crucial thing to understand is that fiscal contraction of an additional one or two percent of GDP in the near future has essentially no significance for the sustainability of government finances, either in Britain or elsewhere.
FT Westminster writes that politically what will matter is a) the “prominence” of the economists and b) the transparency of any caveats (herding economists is harder than herding cats).
The US debate: Getting the biggest bang for job-creation bucks
The differences between economists emerged as official data showed that the unemployment rate was still at 9.7 percent after the first anniversary of the American Recovery and Reinvestment Act (ARRA) and after President Obama filled in the details of a proposed job creation tax credit. The NYT Economix notes that this policy tool hasn’t been used in about 30 years, and it was unceremoniously killed during the 2009 stimulus bill discussions.
A petition is being prepared by Brad DeLong to support wage subsidies. It argues that a well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment. At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done.
There hasn’t been a coordinated response against that call so far but several economists wrote against similar proposals. Bruce Bartlett argues that retirement, work-sharing and job creation tax credit policies won’t create jobs. Arnold Kling notes that cutting the employer portion of the payroll tax would do exactly what this petition wants but guesses that none of these economists would sign a petition calling for cutting the employer portion of the payroll tax. It really is the case of preferring the wage subsidy to take the form of a spending increase rather than a tax cut.
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