To: Financial Writers
From: Jude Wanniski
Re: Assessing Tax Cuts
The New York Times premiere writer on public finance, Richard W. Stevenson, on Saturday produced a front-page assessment of George W. Bush’s proposed $1.3 trillion tax cut (over ten years). He did not do the analysis himself, but surveyed the views of several economists who turned thumbs up or down. I only skimmed the piece after seeing it was a quick-and-dirty round-up of the usual suspects. Ira Stoll, who publishes Smartertimes.com, the online watchdog of the NYT, decided to quibble with the piece and I decided it was a pretty good quibble. You really don’t have to bother reading the piece, but the quibble is worthwhile, followed by a comment of mine that points out the problem a journalist like Stevenson has in getting his arms around a story like this.
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By Ira Stoll, Smartertimes.com
The use of the phrase 'most economists' in an article by The New York Times about a tax cut is an alarm bell that should tell readers to go into skeptical mode. Here's a classic use of the phrase, taken from a front-page article in this morning's paper about George W. Bush's tax plan. "For the last several years, the economy has been running at or above what most economists consider to be its capacity for noninflationary growth, and by putting more money into the hands of consumers, a tax cut could be expected to further stimulate growth."
This is an interesting sentence for two reasons. The first is that the story seems to buy into this notion of "most economists" that there is a limit on noninflationary growth. In most disciplines, the existence for several years of a reality that contradicts the theory might lead to a reassessment of the theory. If, for instance, the laws of gravity stopped working, you wouldn't expect the Times to blithely report that "For the last several years, objects have not obeyed what most physicists consider to be the laws of gravity." You would expect the physicists to reassess the theory. Yet the reaction of the Times and its "most economists" to several years of strong noninflationary growth is not to reassess the theory that says it is impossible, but to tremble at the possibility that Bush's tax cuts might -- perish the thought! -- actually unleash more growth, thereby causing inflation.
The second reason this sentence is interesting is that it concedes that tax cuts stimulate growth. We'll keep that in mind for the next time the Times editorials and Times columnists such as Paul Krugman use static analysis to claim that a tax cut will increase the deficit. It will be satisfying to be able to cite the Times' own news coverage in asserting that a tax cut "could be expected to further stimulate growth." Unfortunately, if the Times' coverage is to be believed, the Bush camp is undermining its own case for a tax cut. The article about the Bush tax cut reports: "Mr. Bush's team said the fiscal stimulus would be very modest, and in any case would be far less than the stimulus created by the government spending increases backed by Mr. Gore and President Clinton."
Hello? The Republicans are now claiming that government spending creates more growth than tax cuts? First of all, that claim is probably not true, because private capital is spent more efficiently than government capital. Secondly, if the claim were true, it would undermine the entire rationale for Mr. Bush's economic policies. If Bush's economic advisers really think this, the Gore campaign should try to get one of them to say it in public and then immediately turn it into a television commercial for Mr. Gore.
Apparently, the Bush camp agrees with "most economists" who worry that too much growth could cause inflation. This leads to the comical phenomenon of a Republican presidential campaign actually arguing, with a straight face, that its economic plan is better because it would cause less economic growth that the Democratic plan would, and therefore would put the country in less danger of inflation. Part of the problem here is that Mr. Bush hasn't come out publicly for a gold standard. With hard money, all of this guesswork about the effects of taxes and spending on inflation would cease to exist.
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Here is my note to Ira Stoll:
The problem for Dick Stevenson of the NYT is that there is a total confusion among academic Keynesians and he has not tried to sort it out. It was the Hoover crowd in the 1930s that argued a decrease in the deficit would cause economic expansion, because it would leave more capital in the capital pool available for private investment. That is, there would be less "crowding out" of available capital by government borrowing. Note Paul Krugman has now become a "Hooverian," in that he explicitly makes the "crowding out” argument. The Bush economists are just as bad, as you point out, but that is because they also are neo-Keynesians, not supply-siders. Larry Lindsey and Larry Summers are squabbling over narrow aggregate demand issues. Lindsey is not a Lafferian.
These "neo-Keynesians" are not "Keynesians" at all, except that they do totally focus on aggregate demand. Keynes argued that in a weak economy, the government could cause an expansion either by increasing spending or by cutting taxes. In other words, increasing the national debt. The Keynesians of the 1940s pointed to the economic boom of WWII, which "ended the Great Depression" by massive borrowing and spending. As the war ended, the Keynesians insisted there would be a return to the Great Depression unless government spending continued at a high level. When spending dropped like a stone and the economy expanded anyhow, the Keynesians said there was "pent-up demand" which they had not counted upon.
So we now have the "neo" Keynesians turning Keynes on his head. Even worse: A cut in taxes will cause an economic expansion, which results in inflation! And an increase in taxes causes a decline in the national debt, which lowers interest rates, which causes an economic expansion, which causes inflation!
Stevenson never really gets into the supply model or he would find there is unhappiness with the Bush tax plan because its supply-side effects are not nearly what they should be -- because Larry Lindsay nixed a cut in the capgains tax. The best estimate is that the Bush plan will, though, yield $1.63 of revenues for every $1 of tax cut. Some parts will yield very little and others more than $1.63 per dollar. Lindsey's failure to cut the capgains tax is the worst mistake in that there is more than $12 yield for every dollar of capgains cut on a dynamic basis.