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Must Government Shrink During Every Downturn?

AEI's Allan Meltzer has an extremely familiar screed against President Obama's economic program in today's Wall Street Journal op-ed page. The one portion of it I hadn't heard for a while was this:

One piece financed temporary tax cuts. This was a mistake, and ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Experience with past temporary tax reductions, as in the Carter and first Bush presidencies, confirms this outcome.

Republicans were making this point in early 2009, and in support of the Bush tax cuts in 2001: Tax cuts must be permanent in order to have any stimulative power. If the tax cuts are temporary, people will just save them. Aside from the truth of this proposition, which is questionable but not totally wrong, just consider the logic on its own terms. The argument is that you have to enact permanent tax reductions in response to temporary economic dislocations. Every time the economy stalls -- 2008, 2001, 1990, 1982, etc. -- conservatives think the government should cut taxes. And you can't raise taxes in between, because that's the same thing as making the tax cuts temporary. At some point, revenues are going to hit zero. maybe conservatives would approve of such a solution. But what do you do when the next recession comes, if there are no more taxes to cut?

Moreover, if you actually implemented the permanent tax reduction stimulus plan, at some point you'll have to cut spending to match the reduction in revenues. Won't consumers save their money in anticipation of the spending cuts? I mean, if they're rational enough to anticipate a future change in federal tax policy, they should also be rational enough to anticipate that the government is going to cut their Social Security benefits or whatnot.