‘Military Keynesians’ and Other Economic Hypocrites

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Feb. 20 (Bloomberg) -- It’s no surprise that economic philosophies tend to divide along party lines. In the U.S., Democrats advocate government intervention in the economy and align with the theories of John Maynard Keynes. Republicans extol the free market and Friedrich Hayek, and think an economy should be allowed to self-correct with as little government intrusion as possible.

None of this is new. What’s changed is the level of hypocrisy manifested by both sides. Consider some examples:

-- For over a decade, Democrats have disparaged the reduction in marginal and capital gains tax rates enacted under President George W. Bush as “tax cuts for the rich” -- at least until they were about to expire. Then President Barack Obama discovered that, lo and behold, the middle class had gotten tax cuts, too.

-- Republicans want to reduce the deficit by cutting spending. They disavow the Keynesian notion that cuts in government spending have a contractionary effect on the labor market -- except when it’s defense industries that are facing cuts. Libertarians call them “Military Keynesians,” to highlight the inconsistency in their positions.

-- The payroll tax cut in 2011 and 2012 posed a problem for both parties. Republicans oppose temporary tax cuts because empirical evidence suggests that they don’t have the desired effect. That’s because individuals make spending decisions based on their expectations of income over a lifetime. On the other hand, the GOP doesn’t like to stand in the way of any tax cut.

Democrats supported the reduction in the payroll tax, which is regressive, on the grounds that it would help the ailing economy. That put them in a bind when they had to explain why tax cuts for everyone wasn’t a good idea for the same reason.

The increase in the worker’s portion of the payroll tax at the start of the year was almost a non-event. Many Republicans have signed Grover Norquist’s pledge never to raise taxes, so even if they opposed the cut they don’t want to be seen supporting an increase. Democrats argued for raising taxes on the rich to increase revenue, which made it hard to oppose the tax increase. No wonder the payroll tax holiday went quietly into the night without much fuss from either side.

Using economics to advance a political point of view has become so commonplace that you almost don’t notice anymore. That’s why it’s so enjoyable when you can catch the economic hypocrites at their own game.

(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)