January 06, 2003

THAT VOODOO THAT NEOLIBS DO

THAT VOODOO THAT NEOLIBS DO: Mickey Kaus is right to say, in his New Year's Day post, that Virginia Postrel's column on tax policy is quite useful. But his reaction to it-- namely to the permanent income hypothesis-- is a bit bizarre. This hypothesis holds that people and businesses act according to what they believe their long-term revenues will be; thus short-term Keynesian demand-side initiatives aren't very effective. This has empirical support; for example, the $300 tax rebates from 2001 appear to have gone mostly toward personal debt, and consumers spent far less than the neo-Keynesians predicted. (Bush's then-economic advisor Larry Lindsey, by the way, is most assuredly a neo-Keynesian in temperment, despite occassional dabbling in supply-side ideas; his professed synthesis is questionable at best.)

Since the permanent income hypothesis implies that the government's long-term ability to steer economic growth is severely limited, Kaus asks, "shouldn't we resist the 'permanent income hypothesis'?" Huh? That seems a bit like saying "the sky would be prettier if it were green-- let's pretend it is!"

Perhaps this mode of thought-- call it a willful blind spot-- explains why The New Republic, bastion of a center-left ideology fairly close to Kaus's, studiously ignores the permanent income hypothesis; they believe that a payroll tax holiday will provide "bang for our buck" by spurring low-income workers to spend, spend, spend, giving little thought to their more-highly-taxed future.

Is this the neoliberal approach to economic theory-- to ignore any doubts of the government's magical potency? Why isn't that what's generally meant by "voodoo economics?"

Posted by John Tabin at January 6, 2003 03:32 AM
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