Tax Analysts Blog

Simple Minded Economics in WSJ Op-Ed

Posted on Sep 19, 2012

In today's Wall Street Journal former hedge-fund manager Andy Kessler makes the age-old argument that redistribution from rich (job creators) to poor hurts the poor. Indeed, there is an element of truth to his line of reasoning. If the wealthy do more and better investing, the economy can grow and this would provide some benefit to low income families. But there are at least two enormous shortcomings of letting this view be the only guiding principle for economic policy.

First, Kessler is only talking about the speculative indirect effect (more capital formation grows the economy and economic growth benefits all income categories) and he is ignoring the certain direct effect of government moving money from poor to rich. There is more hope than hard evidence that his approach will help low-income families. Given that the distribution of income has already significantly shifted away low-income households, adopting this approach now is especially questionable.

Second, there is a demand side to the economy and the swings in aggregate demand are what make most recessions. The economics profession almost started believing that major recessions were a thing of the past until we had that little meltdown at the end of 2008. "Stimulus" has gotten very bad press because people are scared about rising deficits and because they think the Obama stimulus did not work because we still have 8 percent unemployment. But the cure for a demand-side job losses is demand side stimulus. There is a legitimate debate about the magnitude of the benefit from stimulus, but forsaking stimulus--as the United Kingdom is finding out--could have made matters a whole lot worse. Ignoring, as Mr. Kessler does, that demand side effects even exist is intellectually dishonest.

So yes, Mr. Kessler, giving teachers extra cash to buy lunch at Denny's is not the path to long-term industrial competitiveness but it is an appropriate approach to getting us out of our current predicament. It might be best to put aside your devotion to what you call "i-Side Economics" for sunnier times when the recession is over and the lower middle class is not struggling.

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