PGL at Angry Bear Is Shrill

The PGL reads National Review, and reacts in the appropriate fashion:

Angry Bear: Tax Cut Nuts: Nick Schulz has a flair for titles. The latest defense of free lunch supply-side insanity starts by noting the William Niskanen regression - which suggests that the starve-the-beast rationale for tax cuts has not been operative as far as the U.S. economy over the past 25 years:

The question at hand regards whether tax cuts prompt more government spending or less. Some conservatives have argued for tax cuts with the belief that the resulting loss of revenue - and hence increased deficits - would yield spending cuts.... [R]esearch from economist William Niskanen of the Cato Institute suggests that tax cuts prompt more spending, undercutting the starve-the-beasters. For the sake of argument, let's say that Niskanen's analysis is correct. Chait says that, as a result, "the factual basis for [conservatives'] entire domestic strategy" has now been "exposed as a fraud." As Chait sees it, since conservatives continue to insist on tax cuts, even though they lead to more government spending, conservatives must be "crazy."

But "starve the beast" is [not] the only conservative argument for tax cuts.... Moral arguments about economic growth and undue burdens posed by excessive taxation animate conservative arguments in favor of tax cuts. The most articulate and successful advocates of tax cuts... all argued for cuts to prompt higher economic growth.

A moral argument? The issue is... economic... do the modest incentive benefits from lower tax rates outweigh the crowding-out effects from reduced national savings? Most economist would argue they do not, so the free lunch fiscal policies that folks like Jack Kemp advocate lower long-term growth.

Schulz next asks us to read the explanation provided by Jeffrey Miron. I would suggest that the folks at the National Review read the whole explanation, which begins with:

Most economists agree that large and persistent budget deficits are bad for the economy. Deficits mean government borrowing, which implies higher interest rates, lower investment, reduced capital accumulation, and slower growth.

Miron believes that incentives matter. I agree. But he also begins his discussion with noting that cutting taxes without cutting government spending leads to crowding-out. If Mr. Schulz wants to cite Jeffrey Miron as an authority on this economic issue - might I simply ask that Mr. Schulz bother to read what Miron has written.

Why oh why can't we have a better press corps?

Comments

[anne]

"Moral arguments about economic growth and undue burdens posed by excessive taxation animate conservative arguments in favor of tax cuts."

This may well be the funniest darkest comment of taxes ever. Imagine we have been in a lunatic war and occupation that has lasted almost as long as did our fighting in World War II, and charitable as conservatives are the need they find is to spare the wealthiest of any burden in favor of, well, our neediest children. School lunches or Iraq? School lunches or Iraq? There is conservative morality :)

[pgl]

Did you notice Schulz claimed you undermined what Niskanen's regression said as if you were a believer of the starve the beast hypothesis. Schulz should be careful about accusing Chait of cherry picking evidence etc.

[John M 307]

Supply-siders do the same thing that creationists do: They cite an effect, and don't bother to calculate or even make a rough estimation of how big or small that effect is. Or if they do, they keep the calculation secret.

Supply-siders say that tax cuts leave more money to spend, and that stimulates the economy, producing more tax revenue. (Doubtful proposition in the case of business or moneymaking activity.) They argue the second-order increase, while disregarding the first-order decrease. They might cite the Laffer curve showing that tax revenues decrease as rates increase beyond a certain point -- and then leave out any calculation of whether we are beyond that point.

Some creationists have argued (falsely) that the speed of light has decreased, so that light from objects ten billion light years away could have been emitted six thousand years ago and still reach us. They don't bother to consider how much the speed of light would have decreased, or the effects the rapidly changing speed of light would have on the laws of physics.

Their arguments are propaganda, not analysis.

[anne]

http://www.prospect.org/web/page.ww?section=root&name=ViewPrint&articleId=11646

July 5, 2006

The Price Is Wrong
By Matthew Yglesias

Depending on which administration official you, um, believed, the Iraq War was going to cost anywhere from $200 million to zero. But it's going to fly over $1 trillion....

[Careful, one might think there might not be enough growth to go round unless we cut taxes even further :)]

[knzn]

“do the modest incentive benefits from lower tax rates outweigh the crowding-out effects from reduced national savings?” In an open economy, the answer is almost certainly yes, at least if you’re talking about growth of domestic product. The argument should not be about economic growth. If that’s the only moral criterion, then the conservatives win. The real moral issue is who benefits from the growth. With a smaller deficit, the benefit goes to our children. With a larger deficit, the benefit goes (in theory) to foreign investors. (Although China and Saudi Arabia don’t seem to expect much of a return on their investment, so even this argument is kind of weak. Better than the moral argument is the practical one: what if the Chinese and Saudis change their mind?)

[dale]

I hear "moral" arguments in opposition to the estate tax all the time. Proponents of its abololition have found some weird strata of moral concern about the unfairnes of singling out the wealthiest 1% or so for taxation.

i assume it's related to some remnant of Calvinism. It just seems wrong to tax the best of us- the elect. We should reserve that for the most unworthy among us- the poor and working class.

[bakho]

Only spending cuts can cut spending. Revenues have nothing to do with spending if there is no balanced budget requirement.

As for increasing spending, failure to control health care costs with good policy is one reason for increased federal spending. The other reason is a new expectation of the military to solve more of our diplomatic problems rather than relying on soft power and international institutions. Well over half of all new Bu$h spending is either DOD/DHS or health related (Medicare/Medicaid).

These costs have everything to do with policy and little to do with taxes.

[anne]

Dale is clever.

There we are spending $10 billion a month on the tragic lunacy of occupying Iraq, with never a possibility that we might focus on just what this means as we find ways to be ever more wasteful of what must be middle class well being. War however needless however tragic however costly is acceptable, while we must never think of the cost and especially of who will bear the cost. So, the wealthiest must keep what they have gained at the expense of others who will then pay more to insure that the wealthiest keep what they have :) Hmmm....

[Fred Hapgood]

> Supply-siders do the same thing that creationists do: They cite an effect, and don't bother to calculate or even make a rough estimation of how big or small that effect is. Or if they do, they keep the calculation secret.

A good point, but one that hits everyone, not just supply-siders. Nobody arguing for an increase in taxes ever bothers to calculate which side of the laffer curve we are on either. Yet there are just as many y-units going up -- on the left -- as there are going down, so in theory the random argument on either side is as likely to be wrong as right. Yet demand-siders, or whatever you want to call them (taxers?) are as blind to the presence of the right side of the curve as supply siders are to the left hand phase. Politics renders everyone equally stupid. Nobody escapes.

[pgl]

knzn - your argument is that under perfect capital mobility, a fiscal stimulus from a small nation will not raise world interest rates. That nation still faces net export crowding-out - which means real GNP growth will suffer even if real GDP growth does not. In other words, under extreme assumptions (BTW - the US is not a small nation) there is a counter-argument (sort of) that has no practical implications for the nation's income - whose growth is still reduced by a reduction in national savings.

[Captain Video]

"But "starve the beast" is [not] the only conservative argument for tax cuts.... "

The primary purpose of the tax cuts for the rich is to redistribute income and wealth upward from working people and the poor to the haves and have mores.

There is a class war going on and the rich are winning!

[knzn]

pgl, If the US is not a small nation, how has it been possible for the US to borrow so much over the past 5 years without causing world interest rates to rise above historically low levels? I would say, all nations are small, but some are smaller than others.

[andres]

"But "starve the beast" is [not] the only conservative argument for tax cuts.... Moral arguments about economic growth and undue burdens posed by excessive taxation animate conservative arguments in favor of tax cuts. The most articulate and successful advocates of tax cuts... all argued for cuts to prompt higher economic growth."

This is nothing more than a return to the simplistic and discredited Laffer-curve supply side argument: cut taxes enough, and the long-run economic growth triggered by the tax cuts will result in higher tax revenues. No discussion of _who_ the tax cuts actually target, no discussion of how after-tax corporate profit rates compare with risk-free interest rates before and after the tax cuts, no discussion of whether the change in such profit rates stimulates investment and by how much, as opposed to more financial speculation. And, as mentioned by PGL, no discussion of the crowding out of investment financing caused by the increased volume of Treasury bonds.

I have yet to hear of any important economy where more economic growth can be irrefutably linked to tax cuts. Even in the most obvious example: Thatcher's Britain, faster economic growth in the 80's and 90's was probably due more to the effects of deregulation (and union-busting) than to tax cuts. As for the US, well, compare the growth rates of 1993-2000 with the growth rates of 2001-2005, keeping in mind that the Bush tax cuts provided very little stimulus to ease the 2001-2002 recession.

There may well be a point where tax rates are so high that they discourage economic growth, but I'm not sure even the scandinavian welfare states have reached that level.

[ob]

Fred -

I've read numerous places (including this blog, angry bear, NBER, etc.) about gross tax revenue changes following 2001 and 2003 tax cuts. Such writings suggested <= 20% dollar revenue growth per dollar revenue lost.

I don't think it's fair to make that argument about the Laffer curve- we HAVE looked at the results and the results show we are not above the equilibrium point. I've read similar analysis by quintile against the Reagan tax cuts.

So in this instance, I think the supply siders are alone in their lack of strong econometric evidence.

[Fred Hapgood]

> So in this instance, I think the supply siders are alone in their lack of strong econometric evidence.

It may well be true that the burden of the best evidence in hand to date is that we are not over the Laffer peak. My point was more sociological than scientific, which perhaps makes it less interesting. What we all really want to know is where the Laffer peak is. (Of course there might well be reasons not to want to extract the maximum possible from an economy, but it would be nice to know where the outer limits are anyway.) Has anyone worked on this? Make a heck of a Phd thesis.

[anne]

"There may well be a point where tax rates are so high that they discourage economic growth, but I'm not sure even the Scandinavian welfare states have reached that level."

Growth has been fine through the Nordic countries this last decade, so too the competitiveness of the economies appears fine, enough for us to look to what is being done right. Where the Nordic stock index is up 14.2% in domestic currencies and 13.6% in dollars through the last decade, our large cap stock index is up 8.0% through last evening.

[dubblblind]

"School lunches or Iraq? School lunches or Iraq? There is conservative morality."--Anne--

Thanks for bringing this up, Anne, for the Bush administration and the Rethug led congress manage to create the best of no worlds where they cut essentials for the neediest while still spending recklessly overall and providing bonus dollars for the wealthiest Americans.

[pgl]

knzn - good question. Two possible answers. The rest of the world may have run a savings glut (that's Bernanke's answer). My answer is that we started a global investment deficiency in 2001. Guess what? It's over and now the world is seeing interest rates rise.