Monday, July 4, 2011

An Economist Changes Her Mind

Christina Romer, UC-Berkeley economics professor and former head of Obama's Council of Economic Advisers, has penned an op-ed for the NYT recommending tax increases as the least painful method of dealing with the federal budget deficit. She hasn't always felt that way. The Wall Street Journal in announcing her appointment, pointed out that "That the Romers are so well-regarded by their peers of both parties has many economists cheered that the Obama administration is going for the top minds in the field rather than those who adhere most closely to party lines. The Romers’ work has even been cited by Republicans as supporting the idea that tax increases negatively impact economic output."

But that was in 2008. This is 2011. The science of economics has evidently changed in the last three years. Romer has a different take on taxes now. The Keynesian theory that government spending drives the economy has come to the fore. Romer now maintains that increased taxes on "the rich" will be paid for out of their savings, putting less strain on the finances of "the poor". That would extinguish the fact that only savings, deferred consumption, can be used to create the capital necessary for economic expansion and a subsequent increase in employment. The less saving there is, the less investment there can be.

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