In a post on The New York Times Economix blog, titled "The Varying Impact of Austerity and Stimulus" economics professor Casey Mulligan made the dubious argument that lowering taxes for the rich would help the employment situation while raising subsidies for working people would hurt it.
Mulligan previously made an argument that aid to people struggling in this economy might not have a simulative effect, and economist Dean Baker shot it down. The argument Mulligan makes this time fares little better.
In his most recent post, Mulligan argues: "[B]oth raising taxes on high earners and cutting subsidies for low earners would reduce the government deficit, but the former would reduce employment and the latter increase it." He also argues: "[R]aising subsidies and cutting taxes for low earners, as the 2009 American Recovery and Reinvestment Act did, would both add to deficit and reduce employment."
Mulligan concludes: "From this perspective it might appear that the best way for a government to put austerity into effect is by cutting subsidies and raising taxes for low earners, and the best way to carry out stimulus is by cutting taxes for high earners." Mulligan concedes that this might have the harmful effect of taking resources away from the poor, but even with this concession, his argument falls flat.
Regarding Mulligan's argument that tax cuts for high earners will increase employment, Nobel Prize winning economist Paul Krugman pointed out in an August 2010 column that "it's hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren't likely to spend a windfall":
According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion in revenue over the next 10 years.
And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But that's the least of it: the policy center's estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he's going to get the majority of that group's tax break. And the average tax break for those lucky few -- the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year -- would be $3 million over the course of the next decade.
So, for example, we're told that it's all about helping small business; but only a tiny fraction of small-business owners would receive any tax break at all. And how many small-business owners do you know making several million a year?
Or we're told that it's about helping the economy recover. But it's hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren't likely to spend a windfall.
Regarding the impact of help for lower-income earners, the Congressional Budget Office has found that such programs are some of the most cost-effective simulative options during economic downturns.
A chart from a CBO paper titled "Options for Responding to Short-Term Economic Weakness" details the "large" cost-effectiveness of government subsidies as economic stimulus.
Mulligan's claim that the Recovery Act reduced employment is erroneous as well. Analysts found in 2011 that the Recovery Act raised employment by 2.4 to 2.5 million.
In February, the CBO estimated that in 2012, the Recovery Act would increase the number of people employed by an additional 0.2 million to 1.1 million.