Fiscal Stimulus and Tax Cuts

At The Atlantic Derek Thompson reviews the latest lightning bolts from Paul Krugman which seem intended for anyone who suggests that we need to think about backing off on fiscal stimulus. Thompson seems to be in the Krugman camp which is fine and then republishes this graph from Krugman’s blog.

The point being that Reagan’s tax cuts took time to work and critics of the Obama stimulus plan, particularly those insidious conservatives who argue for tax cuts instead of spending, are ignoring history. Fortunately, James Pethokoukis earlier today put this particular graph in context with the following comment:

But as pointed out in the wonderful book “The End of Prosperity” (authored by my pals Art Laffer and Stephen Moore), the way the Reagan tax cuts were structured meant that familes only got a meager 1.25 percent tax cut in 1981 and 10 percent in 1982. When the Reagan cuts really kicked in 1983, so did the economy.

If anything, we might just be proving again that stimulus whether in the form of tax cuts or government spending don’t do much good until the money actually gets into the hands of consumers and businesses. Reagan’s tax cuts appear to have had an effect once they truly kicked in and one can hope that Obama’s spending will have the same effect once the government actually gets around to spending the money.

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