Greg Mankiw headed up the CEA in the Bush administration and he is currently an economic adviser to Mitt Romney's campaign. He and his colleague at Harvard, Robert Barro must talk about these things a lot. Mankiw offers a plan for recovery that has some resemblance to the plan that I posted by Barro. They both argue that Keynes placed a big role on business investment in his analysis of the economy, and that business confidence about the future is critical for business investment. They both downplay the role that consumer spending has on business investment decisions, and neither of them talk about the relationship between household balance sheets and household income to their spending decisions. Moreover, they ignore the problems in the banking system and the difficulty that small business has in getting loans that are not backed by collateral. Apparently, business confidence is dependent upon cuts in the corporate tax structure. Mankiw uses data from OECD which show the the US corporate tax rate is at the high end of the continuum. He ignores the effective tax rate, after deductions, which compares favorably with other OECD countries. The contribution of corporate taxes to federal tax revenues has fallen over the last 30 years. Its hard to believe that high corporate tax rates are responsible for low rates of business investment. The investment spending boom in 1990's would be hard to explain if corporate tax rates were the limiting factor in business investment.
Mankiw and Barro both teach the undergraduate courses at Harvard that are taken by most of the Harvard students. They are doing a great job of preparing them for the leadership roles that they will play in society. Tax cuts and deregulation are the medicine that they will remember. Keynes argued that "in the long run we will all be dead", Mankiw and Barro want us to ignore short term solutions to restore growth, and to focus on structural changes that will encourage supply side solutions to our growth problems.
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