President Trump has just announced exactly the right policy to deal with coronavirus interruptions to the economy — well, announced he’s thinking about it. Cutting payroll taxes is the best way to handle it, as even John Maynard Keynes himself pointed out.
Think back to what the central contention of Keynesian macroeconomics is. Something goes wrong in the economy (something being any one of a long, long list of possibilities), and there’s not enough demand out there. The economy can get stuck at this less-than-maximum-potential level of output simply because no one’s spending the cash. So, government can and should expand demand by increasing the budget deficit. That means it should spend more than it collects in taxes, filling the gap with borrowing. This stimulates consumption, perks up production, and we leap back to being as well off as we can be.
The normal way this gets expressed, and has been for some decades now, is that government should spend more. This is essentially because the people who are in government like spending money and any excuse will do. However, the economic insight doesn’t depend upon spending more, rather, it’s about the gap between what is being taken out in taxes and being poured in through spending. Cutting taxes works just fine too. The benefit is that what the money gets spent upon is what the people want, rather than what bureaucrats think they should have — thus, again, the opposition from bureaucrats and the politicians who love them.
We have a further difference between the two approaches these days. We’re now so in love with permissions, permits, and planning that it’s not possible to spend more money quickly. President Barack Obama wandered the country for two years looking for shovel-ready projects, consoled only by carrying $800 billion to spend upon them. After 24 months he found nary a one. This is not a good way to quickly stimulate the economy.
However, the government takes money out of every paycheck once every two weeks. If it didn’t, then that money would be there, immediately, ready for spending. James Meade made this point to Keynes himself back in 1942. Keynes agreed. It’s a big enough amount of money to make a difference. It’s absolutely the fastest way to get the cash out there. Let’s do it this way.
There are a couple of technical points. Paying less payroll taxes should not reduce the benefits that come from paying payroll taxes. Social Security payments due in those golden years should continue to pile up and so on. Further, it should be both sides of the tax which are cut, both the amount nominally paid by the employee and that nominally handed over by the employer. We’re in a crisis, right, let’s get it done and done properly.
Now, of course, anything from Keynes is merely the product of some pointy-head British intellectual. But we actually tried this out some 12 years ago. In the last period of the Bush administration, there were two attempts at handing out free cash to boost the economy. There were those stimulus checks for a few hundred dollars each, but most people just saved them or paid down debt. That’s not what we’re trying to do at all, because we want to boost spending.
There was also a payroll tax reduction. Since that was a smaller sum (larger in aggregate but each part smaller) arriving regularly, people did indeed go and spend it. Stimulus was achieved.
Thus we have both theory and empirical evidence telling us the same thing. We have an economic crunch, so cut the payroll tax. Don’t spend months and years trying to spend more government money, just tax everyone less.
The really great joy of the process is that we could tell the IRS to change the withholding rules today, and the money would start to be in paychecks in only 14 days. There simply isn’t anything at all else that will work that fast. We can even do it without Congress, for Trump could say that we’ll take it all back in a few months, thus it doesn’t change the budget at all.
If we really want to make it more favorable to low-income workers, as we probably should, just exempt the first $1,000 per biweekly paycheck from payroll taxes altogether. That makes it the same amount for everyone but a much larger portion, percentage-wise, of those lower incomes.
It’s even entirely in accordance with that Keynesian theory that every Democrat says they agree with already. Therefore, it must be an excellent plan. The only people who could possibly be against it are those who would have to forgo the pleasures of determining the extra spending that government isn’t going to be doing — that joy of splashing out remains with us, the citizenry.
That is, of course, where it should be anyway.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
