Cut Taxes for the Right Reasons

In their zeal to oppose the lunacy of the so-called “stimulus” plan, many radio talk show hosts and other pundits have fallen into the Keynesian trap. Rather than the politicians spending nearly a trillion dollars, they argue, it would provide much more stimulus if the government gave massive tax cuts. This would “put money back in the pockets of average Americans” and they would go to the mall and “get that money into circulation and boost the economy.”

Although the instincts behind such arguments are sound, they often betray an underlying Keynesian mindset. By justifying tax cuts on the grounds that the taxpayers will go out and spend the money, these critics actually concede the entire case. After all, why take a chance on those fickle taxpayers, who might selfishly decide to pay down some debt or to stick the extra cash under the mattress? If buying stuff is the way to promote recovery, then nobody can top the DC politicians.

The biggest mistake in the “let taxpayers spend the money” argument is that it buys into the Keynesian notion that recessions are due to a sudden bout of squeamishness on the part of consumers. This mindset pervades our financial press. Analysts wonder whether the holiday shopping season will “pull the economy out of its doldrums,” and even Nobel laureates lament that the American consumer has finally thrown in the towel.

Now it is certainly true that ultimately, a consumer needs to buy the finished good or service in order to make a given production process worthwhile. It would be pointless for workers to toil day in and day out on a project, if there weren’t a consumer at the end of the pipeline eager to buy the finished item.

But this just proves how silly it is to “fix” the economy through manipulation of consumption spending. If Americans are worried about the future and want to restrict their purchases of iPods, DVDs, and expensive nights out on the town, we shouldn’t throw our hands up and worry that this will wreck “the economy.” The purpose of an economic system isn’t to provide jobs; it’s rather to provide goods that consumers desire. If people want to cut back on their purchases of certain items, the economic system should respond to those changed preferences.

Scarcity is a regrettable feature of the world. This means that there are always tradeoffs involved in any decision. There are not enough resources available to satisfy all human desires. In particular, human labor is needed to transform nature’s gifts into items that are more pleasing to people.

The hard part of economic affairs, then, is to produce things. After the product is available, consuming it is a piece of cake. To hear some crude versions of Keynesian thinking, you would get the impression that businesses are in trouble because Americans all of a sudden just decided that they didn’t like steak and they didn’t enjoy plasma screen TVs.