Sunday, December 09, 2012

Are Republicans Hypocritical About Cliff?

Paul Krugman asserts that the Heritage foundation and Chicago school economists and other Republicans who want to avoid the "fiscal cliff" are hypocritical because they argued that the Obama stimulus wouldn't have any effect because the increased government borrowing would crowd out private investment. If that was the case, Krugman reasons, then shouldn't decreased borrowing crowd in investment?

If Heritage and the others had used Keynesian arguments against the cliff, then Krugman would have a point, but they usually don't (except when it comes to military spending where many Republicans indeed use Keynesian arguments in a hypocritical way ). Instead, their main problem with the cliff consists in that it would mean an increase in marginal tax rates that is particularly dramatic when it comes to dividends, but also capital gains and compensation of workers. By contrast, Obama's so-called stimulus didn't lower marginal tax rates.

Krugman can argue that the concern about the incentive effects of higher marginal tax rates is exaggerated, but it is obvious that it is not hypocritical.