Monday, January 09, 2012

One Of The Most Misleading Articles Ever

Matthew Yglesias' article about Austrian economics is so full of inaccuracies that it would require an essay to refute all of them. I won't bother doing that especially since I have already refuted many of the inaccuracies, here is for example a post on Bryan Caplan's rational expectations argument, here is a post on the argument that residential construction started to contract in 2006 (and so supposedly couldn't have caused the recession and here is a post on the myth that Sweden's relative success is due to inflationary policies.

The perhaps most surprising claim is Yglesias' assertion that Austrians don't believe that tax cuts will help during a recession. I don't think any Austrian have made that assertion. This is for example what Murray Rothbard wrote in America's great depression (page 22):

There is one thing the government can do positively, however:
it can drastically lower its relative role in the economy, slashing its
own expenditures and taxes, particularly taxes that interfere with saving
and investment. Reducing its tax-spending level will automatically
shift the societal saving-investment–consumption ratio in favor
of saving and investment, thus greatly lowering the time required for
returning to a prosperous economy.18 Reducing taxes that bear most
heavily on savings and investment will further lower social time preferences.
19 Furthermore, depression is a time of economic strain.
Any reduction of taxes, or of any regulations interfering with the
free market, will stimulate healthy economic activity; any increase
in taxes or other intervention will depress the economy further.


Blogger Ralph Musgrave said...

I suggest there is distinction to be made between cutting taxes while leaving government spending and borrowing untouched which is a form of Keynsian stimulus, and on the other hand cutting taxes and cutting government spending by the same amount, which is what Austrians tend to favour.

Your quote from Murray Rothbard is quite clearly an example of the latter: indeed he specifically refers near the start of the quote to cutting government’s “relative role in the economy”.

Put another way, the question as to what proportion of GDP government should take has nothing to do with whether Keynsian type stimulus works or not.

The question as to what proportion of GDP government should take is largely political and not economic. Murray Rothbard, like far too many so called professional economists, particularly in the U.S. can’t distinguish between politics and economics.

7:04 AM  
Blogger stefankarlsson said...

Ralph, yes there is a difference between reducing taxes and leaving government spending unchanged and reducing taxation and government spending by the same amount.

But Yglesias specifically wrote in his article that "Austrians also believe that cutting taxes to boost economic activity doesn’t work either", a statement that is simply wrong regardless of what happens to spending.

8:26 AM  

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