March 03, 2003

The Real Supply Siders

John Quiggen succumbs to High Relativism, and proclaims that whether Ronald Reagan was "convinced" that cutting tax rates would raise tax revenues is unknowable.

John Quiggin: Wanniski's claim to have convinced Reagan is rejected by (broad sense) supply-siders who were around at the time, like William Niskanen (quoted by Alex Robson), and it seems unlikely that the truth can be determined...

I think that this nihilistic-relativistic conclusion is much too pessimistic. What Reagan thought in his heart-of-hearts is not very important. Reagan wanted to lower taxes, balance the budget, and cut waste, fraud, and abuse in government. He (naively) relied on his advisers--his Grand Viziers--to share his priorities and to prepare and implement policies that would accomplish them. It went wrong: Reagan did not run for President so that he could become the biggest deficit-spender in American history. We know a lot about how it went wrong. But if we are to accurately set out what we know, we need to recognize that "supply side" and "economist" are contested terms of art. Different people use these terms to mean different things--deliberately use these terms to mean different things.

Let's review the bidding. There are four ideological police actions in progress. The first comes from William Niskanen. Alex Robson quotes a passage from William Niskanen's Reaganomics:

Supply side economics, however, was not a new economic theory. As of 1981 there was no distinctive supply-side texts, no courses, no distinguished scholar, and no school of supply-side economists. This body of analysis does not conclude that a general reduction in tax rates would increase tax revenues, nor did any government economist or budget projection by the Reagan administration ever make this claim. Arthur Laffer...once drew a curve on paper napkin to demonstrate that a reduction of some high tax rates could increase revenue; the existence of a "Laffer curve", however, was neither new (except by that name) nor controversial. Jude Wanniski of the Wall Street Journal and other journalists who promoted the Laffer curve as a symbol of supply-side economics unfortunately trivialized the substantive contribution of the micro effects of fiscal policy. Supply side economics does not address the effects of government borrowing; specifically, it does not provide a basis for concluding that deficits do not matter... In summary, there was no "supply-side revolution" in economic theory...

To properly understand this passage, you need to know that there is a book called The Supply Side Revolution: An Insider's Account of Policymaking in Washington written by Reagan-era Treasury Assistant Secretary Paul Craig Roberts. William Niskanen wants to rip the (to him honorable) label of "supply-sider" away from Roberts, Wanniski, Laffer, and company.

The second ideological police action comes from CEA Chair-Designate Greg Mankiw. Mankiw wrote, in the first edition of his Principles of Economics textbook:

An example of fad economics occurred in 1980, when a small group of economists advised Presidential candidate, Ronald Reagan, that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenues would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder and this extra effort would offset the direct effects of lower tax rates to some extent, but there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates....

Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 Presidential campaign and the economic policies of the 1980s....

People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise....

Mankiw is here trying to boost the standing of Ph.D. economists at the expense of those without Ph.D.'s who claim the mantle. He is trying to show his students that the mainstream of economics--in which Greg swims--has important pieces of knowledge that are worth heeding, and that others like presidents ignore at their peril. For Mankiw, supply-siders are people who let their ideology confuse them so they fail to distinguish between what is true and what they wish were true. The label is dishonorable: something to be avoided and thrown off, rather than something to be grasped.

The third ideological police action comes from Stephen Moore, who accuses Greg Mankiw of "indoctrinating young economists with wrongheaded thinking about supply-side economics..." He urges the replacement of Greg Mankiw as CEA Chair-Designate by David Malpass or Brian Wesbury or Richard Vedder. Moore's goals appear to be twofold: First, to enshrine the reputation of Ronald Reagan. Second, to assert that supply-side economists--among whom Moore counts himself--never held the views that Mankiw attributes to "cranks and charlatans."

Yet a fourth is being carried out by Bruce Bartlett, in a Town Hall column not yet up on the web: He writes that "Of course, no one ever said such a thing" as that tax rates could be cut with no loss of revenue. "I have thoroughly researched this matter and found no evidence that any economist working for the Reagan Administration ever said that..."

To pick your way through this tangled intellectual landscape, you need to hold on tight to a couple of things. First, "supply-side" and "economist" are both contested terms. They mean different things to different people Second, there were at least four different groups who have some claim to having been the real supply-siders in the early 1990s:

  1. The people--think of Jude Wanniski, Arthur Laffer, Jack Kemp, et cetera--who appear to have believed that the United States was on the far side of the Laffer Curve, and that tax rate cuts would genuinely increase tax revenues over what they would have been otherwise.
  2. The people--think of Bruce Bartlett, Larry Lindsey, et cetera--who believed that at the start of the 1980s America was paying a very heavy price at the margin for its progressive tax system. They thought that properly-designed tax cuts would boost real GDP through supply-side channels by between $1 and $2 for every $1 of notional static-estimate revenues loss from the tax cut (as opposed to people like me, who guess that the number is more like $0.50).
  3. The people--think of Public Interest editor Irving Kristol--who saw the ideas of the two groups above as convenient tools to use in trying to construct a Republican political coalition. As Kristol wrote in 1995: "The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority--so political effectiveness was the priority, not the accounting deficiencies of government." It was not that Kristol and the other neoconservatives interested in heating up the Cold War abroad and fighting Permissiveness at home believed in supply-side economics. Kristol writes of his faction's "...own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems." But they thought that pretending to believe in supply-side doctrines would allow them to claim that their candidates supported (a) big tax cuts and (b) balanced budgets--and thus win them political popularity.
  4. The people--think of Reagan-era Office of Management and Budget Director David Stockman--who were very skeptical about the ideas of the first two groups, but who saw their ideas as a convenient tool--a Trojan Horse--in (a) reducing the top income tax rate (something worth doing both on its own and as a convenient way to reward Republican political supporters) and (b) creating a large revenue shortfall that would leave the President and Congress with no alternative other than to deeply slash government spending and the social-insurance state.

Listening to all four of these groups was Ronald Reagan, who believed that Americans were overtaxed, and that there was a lot of waste, fraud, and abuse in government spending. Hence his three priorities: cut taxes; root out waste, fraud, and abuse; and balance the budget. And--given his naive belief that his advisors shared his priorities--his puzzlement at the options his various Grand Viziers kept bringing him after his first year in office. They had all assured him beforehand (each set for their own reasons) that his three priorities were consistent. So why did they keep bringing him budgets with huge deficits?

Whether supply-siders are good or bad, true believers or cynical media manipulators, charlatans or wise men, cranks or part of the economic mainstream, economists or fraudsters--that all depends on which of the four groups above grasps the brass ring and are the real supply siders. Everything Mankiw writes is correct--if the real supply siders are group one. Everything Niskanen writes is correct--if the real supply-siders are group two.

When people say that there is "no evidence that any economist working for the Reagan Administration ever said that taxes could be cut with no loss of revenue" the key words are economist (defined as someone with a Ph.D. in Economics) and working for the Reagan Administration. Irving Kristol never worked for the Reagan Administration. Jude Wanniski did not have a Ph.D. in Economics. Nevertheless the two of them--Kristol and his allies by providing Wanniski with a platform from which to shout and a cadre of neo-conservative non-economists who would push supply-side doctrines just because Kristol approved of them, and Wanniski and his fellows in arguing that the United States was on the far side of the Laffer Curve--did a great deal to shape the climate in which Reagan Administration fiscal policy was made. Thus we find many people today desperate to define "supply-side economist" in a way that excludes the first, the third, and the fourth groups--the first because their claims are incredible, and the third and fourth because today they make no bones about the fact that they regarded supply-side economics as something that was not true but that was nevertheless very useful.

So is there anything in the current dispute that does not turn on matters of definition--on who is and who is not a real supply-side economist? Yes. Stephen Moore is wrong: there is no reason to think that David Malpass or Richard Vedder or Brian Wesbury would make a better CEA Chair than Greg Mankiw.

Posted by DeLong at March 3, 2003 10:26 AM | TrackBack

Comments

Don't you mean "no reason to think that .. Malpass et al. would make a better CEA chair..."? Otherwise you know Moore and his cronies will be quoting you all over the net tomorrow.

Posted by: achilles on March 3, 2003 06:43 PM

Ah. Thanks...

Posted by: Brad DeLong on March 3, 2003 07:07 PM

Brad,
Do you have an opinion on how the JFK tax cuts affected the budget?

Posted by: Dan on March 3, 2003 08:59 PM

It's nice to see someone who is not a Bush administration supporter with kind words for Greg Mankiw. As a long-standing 'groupie' for Paul Krugman, even I can't stand the contempt for Greg that he expressed in the NYT. The thing is to watch what they do, not what they say. I think it is not at all clear where this administartion is headed economically speaking. Do they, for example, want a strong or a weak dollar? To suggest they are going to let the US economy go to the dogs for the sake of some highly prized tax cuts is absurd. To say that Greg is going to allow himself to be party to this is even more so. Even on the most opportunistic reading of the 'Bushometer', there are still such things as elections to worry about.

http://news.bbc.co.uk/1/hi/health/2814253.stm
http://bonoboathome.blogspot.com/2003_03_02_bonoboathome_archive.html#90400027

Posted by: Edward Hugh on March 3, 2003 10:57 PM

"Gregory Mankiw, his successor, is a very good economist, but never mind: When the political apparatchiks who make all decisions in this administration want Mr. Mankiw's opinion, they'll tell Mr. Mankiw what it is."

Contempt?

Posted by: Jason McCullough on March 4, 2003 01:15 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:24 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:24 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:24 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:25 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:25 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:25 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:26 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:27 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:27 AM

Prof. Delong,

Has there been any research to ascertain how accurate the Laffer Curve is? Intuitively, the only two points that I concur with the supply-siders' mantra curve is when the tax rates are 0% and 100% respectively.

Posted by: Albert Cheng on March 4, 2003 01:27 AM

Sorry for repeatedly submitting my comments.

Posted by: Albert Cheng on March 4, 2003 01:36 AM

Prof De Long, why don't you put a line next to the post button that reads "click only once, upload takes some time"

Posted by: Hans Suter on March 4, 2003 02:33 AM

Yes Jason,contempt. Of course he mentions in passing that Mankiw's a good economist, but really, how else would you describe the part about telling him what to say. Do you really think Mankiw is so stupid as to take a job knowing he would only be the mouthpiece for someone else. Of course if this were a football match, then maybe you could be foregiven for being so partisan as to think that only your side got to get any good players. Trouble is, it isn't.

Krugman's closing paragraph is if anything worse. Mankiw is apparently well-intentioned innocent, who just possibly, depending on your interpretation values career over all that unemployment.

"I almost feel sorry for Mr. Mankiw, who I suspect has no idea what he's getting into; I'm sure he will soon feel frustrated over his inability to have any real influence on this disastrous policy. But on second thought I'll save my sympathy for the two million people who have lost their jobs over the past two years, and are not likely to find new ones any time soon."


Thanks for the thought Paul, but I think maybe Greg could use your moral support more than he could use your sympathy. That could turn out to be a really practical way to get some help to all those unemployed Americans.

Posted by: Edward Hugh on March 4, 2003 02:53 AM

Edward, taken to be about Professor Mankiw alone I tend to agree with you but surely the target is the administration and they play very rough. Many of the same things could have been said of Prof. Hubbard and yet he seems to have succumbed to the blandishments of the press weasels. Moving from the polite society of professional economics to front line politics is surely not easy and the current administration does not make it any easier. That's a fair point reasonably made with scare stories and to suggest that Prof. Mankiw will not be at risk is a slur on Prof. Hubbard.

Posted by: Jack on March 4, 2003 03:49 AM

Does anyone know when Mankiw's Senate confirmation hearings will be held? It would be very interesting to watch. . . .

Posted by: Bobby on March 4, 2003 04:05 AM

This piece was excellent! In the other posts about factions competing for Sultan Bush's ear, DeLong doesn't name names, so I was exactly sure what he meant. But this piece was very clear partly because you know who is in each faction and you know specifically their view of administration policy and policy adviertising. Maybe the facts aren't available for George W. Bush's advisors yet, but what do we know so far about who is in what faction and what they believe, and how they're influencing policy and its advertising. . . .

Posted by: Bobby on March 4, 2003 04:55 AM

"As Kristol wrote in 1995: 'The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority--so political effectiveness was the priority, not the accounting deficiencies of government.' It was not that Kristol and the other neoconservatives interested in heating up the Cold War abroad and fighting Permissiveness at home believed in supply-side economics. Kristol writes of his faction's '...own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems.'"

Does anyone have a complete citation for this?

Posted by: J. Goodwin on March 4, 2003 06:16 AM

Ah ha, got the article, thank you google:

http://www.thepublicinterest.com/notable/article2.html

No indication of when it saw print.

Posted by: J. Goodwin on March 4, 2003 06:20 AM

1995, I think...

Posted by: Brad DeLong on March 4, 2003 06:36 AM

What amazes me is supply-siders had what looks to me like a low opinion of US workers. I know I'm gonna get all sorts of flack for this, and yes, I know people respond to incentives, but I just don't believe we were all laying back, slacking and waiting for a tax cut. I worked just as hard prior to the Reagan tax cuts as after. My deal was with my employer, not the tax man, and every employer I have ever had expected my best. Where was all this additional work to come from? I also think the supply-side expectation of $1-$2 increase in GDP from a $1 tax reduction ignores an awful lot about the structure of our labor system. I've never had a choice to cut my hours. My work day has always nominally been 8 hours, in reality 8 hours plus any additional time needed to meet deadlines. Choosing a job requiring less than 8 hours often means a job without benefits, something many of us cannot face. I've never faced a tax rate high enough to make a promotion financially unrewarding. How is my $1 tax cut going to end up producing $2 in GDP?

Posted by: K Harris on March 4, 2003 06:55 AM

"Contempt?"

As has been previously pointed out on this website, Mr. Mankiw has already caved in to the politicians and gone against his own historical record by signing Bush's Republican "Economists" Letter. Someone suggested even then that Mankiw probably had to sign the letter if he wanted to be considered for the CEA job if it ever became available. It's beginning to appear that if you want into the Bush Administration, they will make you check any Integrity at the door.

Posted by: Dan on March 4, 2003 07:02 AM

I've never understood the high regard as an intellectual in which Irving Kristol is held in some circles.

His cheerful willingness to condone blatant deceit on fiscal matters for the sake of some nobler cause did nothing to change my view.

Posted by: Bernard Yomtov on March 4, 2003 07:39 AM

Google turns up this 1995 paper on the possibility of the "self-financing tax cut" and Laffer Curve Dynamics. The authors conclude that one or two Scandinavian countries MIGHT be able to consider a successful supply-side tax cut, but that it requires some rather rosy-eyed assumptions. In countries where the total tax burden is much less than 55%, such a cut is impossible.

http://www.nek.uu.se/pdf/00wp5.pdf

Posted by: Ethan on March 4, 2003 08:00 AM

It would be interesting to learn how Greg Mankiw evolved into a conservative. There's nothing wrong with it, but maybe it's an interesting story. Paul Krugman's German page (at http://www.wiwiss.fu-berlin.de/w3/w3collie/krugman/laudatio.html ) it says that Mankiw was a Democrat when he worked with Krugman for the Reagan CEA. I was under the impression that he was moderate-to-liberal, and the leader of the neo-Keynesian school (he had an adorable dog, whom he named Keynes, who unfortunately died recently. A picture of him is at http://post.economics.harvard.edu/faculty/mankiw/keynes.html ). You can find NPR radio debates between Paul Krugman and Mankiw at http://www.pkarchive.org/video1.html
where Mankiw supports the Bush tax cuts. Then there's an archive of Mankiw's fortune columns at http://post.economics.harvard.edu/faculty/mankiw/columns.html

Posted by: Bobby on March 4, 2003 08:01 AM

Agreed. It appears to be a typo. It should read "... would make a better CEA Chair."

This would be an interesting subject to know more about. Why did Stockman feel lower taxes were good in themselves? Because he was anti-big government, or he loved the rich? What was it about the climate of the times that the phrase "tax cuts" came to mean tax cuts for the rich, rather than tax cuts for the working class? Last month I told a young friend of mine, only 20 years old that you could have progressive tax cuts - it was the first time in her life she'd heard the idea and she was skeptical about whether it was true. How in the world could the neo-cons be so cavalier about the deficit. Why didn't they worry about American economic decline?

For all that, isn't it possible that the Laffer curve theory turned out to be right? Americans work much more now than they did in 1980. The average American works something like an extra 200 hours a year, now - almost an extra 5 weeks of "full time" work. Would Americans work that hard if the upper tax bracket was still 70%?

Posted by: Lawrence on March 4, 2003 08:05 AM

If you read Stockman's book "The Triumph of Politics", Stockman, like many other conservatives was an opponent of the "welfare state" and much of FDR's New Deal and LBJ's War on Poverty. It is a philosophy that individuals are better off if they do not rely on the government for support and that government money given to poor people encourages laziness and other social problems. Stockman believed that the tax cuts would lead politicians to make cuts in these social programs. However, Stockman underestimated the political pressures that could be brought to bear in defense of Social Security and other safety net programs. Thus, ideology was defeated by politics and thus the title of Stockman's book.

In 1982 SS was a huge political battle that threatened to undermine Reagan. In this climate, we ended up with a tax increase that raised payroll taxes from about 5% to 7.5%. While the rich were getting their supply side trickle down tax cuts, the workers were getting a hefty increase in payroll tax. Interestingly, that payroll tax is generating a several trillion dollar "SS trust fund" that is currently being squandered on more tax cuts for the wealthy.

Posted by: bakho on March 4, 2003 08:34 AM

>>For all that, isn't it possible that the Laffer curve theory turned out to be right? Americans work much more now than they did in 1980. The average American works something like an extra 200 hours a year, now - almost an extra 5 weeks of "full time" work. Would Americans work that hard if the upper tax bracket was still 70%?<<

While the 1983 tax law did reduce tax rates in all brackets, the average American was never in the 70% bracket, which got the biggest cut. In 1980, the 70% rate kicked in at $108,300; adjusting for inflation, that's $238,812 in 2003 dollars.

Posted by: alkali on March 4, 2003 10:21 AM

alkali, his point was tongue-in-cheek. He was saying that the tax cuts benefitted only a few while causing everyone else to have to work more.

Posted by: Stan on March 4, 2003 11:07 AM

Lawrence wrote: >>For all that, isn't it possible that the Laffer curve theory turned out to be right? <<

Actually this has something to do with the response of the supply of labor to wages and income and it moves in two directions- To the extent that the more labor you sell buys more goods then more labor will be supplied, but, liesure foregone also becomes more expensive and if liesure is a normal good then people will consume more of it. The result is indeterminate theopretically but emprically the results suggests people supply less labor.
I think one problem with the "Laffer Curve" is that no one, especially Laffer, could come up with a convincing way of actually estimating it. Then too what would have happened had the results indicated that in fact higher rates would raise taxes? You have to be in a very unusual position-beyond the hump for it to work as a reason to cut taxes.

Point two: I believe some of these claims were documented. As I recall in Economic Reports of the President it was argued that the budget would be balanced because growth rates would be so high that tax revenues would more than offset the tax decrease. Thus by their own standards, deficits are the clear empirical proof that supply side tax cuts did not work.

These ERP's under the Reagan administration also contained among other points reasons why fire warnings should not be required on children's pajamas. The reason being that after a few children died then people would know anyway. I kid you not. And it was Marty Feldstien that wrote it.

Posted by: Lawrence (another) on March 4, 2003 11:35 AM

- flame retardant suit - * ON * -

Try to think in terms of a rational, wealthy investor in 1979. Inflation is 13% and long-term government bonds are yielding 8%. The federal tax rate on "unearned income" is 70%. So the real after-tax return on that investment income is . . . . . -10.6% per year. Under those circumstances, would a rational, wealthy person want to save and invest for the future, or would they want to spend dollars quickly in the present before prices go up?

Does anyone here consider such a set of economic circumstances to be destructive to prosperity?

There are lots of things to criticize the Reagan budget and tax cuts for, but it's worth remembering that the system was much more screwed up under Carter.

Posted by: Anarchus on March 4, 2003 11:43 AM

- Has no fire warning on clothes. Am I safe?

Anarchus is right. The supply side was squeezed in 1980 for reasons that went beyond the tax rate. So the combined policies of cutting inflation and tax rates was likely good for long term budgets (though complicated by defense and other spending).

However, as we re-debate the tax policy issues of the early 1980's would anyone like to step up and defend supply-side economics here in 2003?

Posted by: Dan on March 4, 2003 12:00 PM

As far as I could work out, Laffer both worked for the Administration (or at least for Reagan) and was an economist (PhD qualified, professorial positions held etc)>

Posted by: John on March 4, 2003 12:30 PM

I think the argument for lower taxes wasn't that the average person would have more incentive to work harder, but that the wealthy would have more incentive to risk their capital on investment opportunities. With the increase in investment would come an increase in the demand for labor, outpacing the supply of labor, which therefore would cause incomes to rise. Also, along with the increase in investment would be increases in efficiencies in industry, therby creating more wealth.

Wanniski now argues that the decline in tax revenues after the Reagan tax cuts was caused by the Federal Reserve having to deflate the dollar, which caused the recession early in Reagan's first term.

After the capital gains tax cut in 1997, revenues from capital gains taxes did increase the following year, though this could have been influenced by other factors (NAFTA, dereg of telecom, explosion in Internet companies, more investment in America because of reduced opportunities in Europe and Japan, more efficient corporations from the early 90's downsizing, etc.). I think it's difficult, if not impossible, to prove whether marginal rate reductions do, in fact, increase revenues because of the complexity of our economy.

Posted by: Greg E. on March 4, 2003 04:48 PM

Jack - 'surely the target is the administration and they play very rough.'

OK but do we really have to sink to their level.

Dan 'caved in to the politicians and gone against his own historical record by signing Bush's Republican "Economists" Letter. Someone suggested...'

I don't see it as my job to defend Greg Mankiw's ideas, I (as opposed to Paul Krugman) imagine he's a big enough boy to do that for himself. My point was not to agree with him, but to defend his right to change his mind. It's all about respect. I prefer to live in a society that is governed by the other side, the one I don't agree with, for half of the time, than to be governed by people I agree with for all of the time. And while the others are governing me, I prefer they select the best people for the job. (Also I'm afraid I can't stand this someone suggested innuendo stuff......).

You could also consider Tony Blair's 'inside the tent argument', namely that if you really care about all those unemployed, and think your point of view might help do something about it, maybe you can have more influence by accepting the job, than by bellowing from an op-ed column.(Of course the people who agree with you are convinced, but then they already were). Time will tell.

Bottom line: I think the world's a better place if the Republicans have people like Gregg Mankiw (and Marty Feldstein?) on board than if they don't. Call it American pragmatism if you like.

Posted by: Edward Hugh on March 4, 2003 11:00 PM

OK, following Anarchus's example I'm also donning some flame retardant underware for this 'heretical thought out of season'.

What is the White House up to? I just caught John Snow's 'not particularly concerned about the dollar' piece. Faux pas, or strategic manipulation. My feeling is this administration is turning the image of maladroit, crazy, self-interested charlatans into an art form to distract attention from the real strategic agenda. Deflation is a priority, so getting the dollar down is important, at the same time the US is savings light so this means keeping the Japanese on board. Ergo a lot of rhetoric about Japan's problems, but little real pressure. Even tolerance that the Japanese have a yen/dollar pain threshold. Now Ol Europe on the other hand.........

Now to the really heretical bit. A broad spectrum ranging from Wynne Godley to Stephen Roach is convinced that the twin cocktail of weak savings and current account deficit is dangerous and liable to end in tears. Something has to be done to provoke US savings. The rich save more than the poor for obvious reasons, so unfortunately you end up giving the money to the rich. Unjust, of course. Effective, I don't know. But Paul Krugman seems to miss this point entirely. He seems to think the only rationale is to let the economy go to hell as a cover for inexplicable tax cuts.

"Why is the administration so uninterested in helping the economy? Here's my theory: The depressed state of the economy provides a convenient if bogus rationale for the huge, extremely irresponsible long-run tax cuts that, after Iraq, constitute this administration's principal obsession. To do anything else to help the economy would suggest that it's possible to create jobs now without putting the country's future solvency at risk — and that's not a message this administration wants to convey."

In fact in the paragraph before this he kinda gets the point, and then loses it.

"Yes, I know, the Bush team is proposing about $1.5 trillion in tax cuts. But when pressed, administration officials admit that their plan will do little for the economy right now. Why? Because those are long-term cuts; only a tiny fraction of the total will flow into people's pockets this year. Furthermore, most of the tax cuts will — of course — go to affluent families, who will probably save most of the money."

My own theory: Paul has been listening to Dylan's 'desolation row' too much of late, all that 'Ezra Pound and TS Eliot fighting in the captain's tower' stuff. You know.


Posted by: Edward Hugh on March 4, 2003 11:26 PM

>>Now to the really heretical bit. A broad spectrum ranging from Wynne Godley to Stephen Roach is convinced that the twin cocktail of weak savings and current account deficit is dangerous and liable to end in tears. Something has to be done to provoke US savings. The rich save more than the poor for obvious reasons, so unfortunately you end up giving the money to the rich. Unjust, of course. Effective, I don't know. But Paul Krugman seems to miss this point entirely. He seems to think the only rationale is to let the economy go to hell as a cover for inexplicable tax cuts.

It maybe obvious to you but he believes in the Life Cycle-Permanent Income Hypothesis, i.e. cuting taxs on the rich will not increase savings.

Posted by: George Stebbins on March 5, 2003 01:43 AM

>- flame retardant suit - * ON * -
>Try to think in terms of a rational, wealthy investor in 1979. Inflation is 13% and long-term >government bonds are yielding 8%. The federal tax rate on "unearned income" is 70%. So the >real after-tax return on that investment income is . . . . . -10.6% per year. Under those >circumstances, would a rational, wealthy person want to save and invest for the future, or >would they want to spend dollars quickly in the present before prices go up?
>Does anyone here consider such a set of economic circumstances to be destructive to >prosperity?
>There are lots of things to criticize the Reagan budget and tax cuts for, but it's worth >remembering that the system was much more screwed up under Carter.
Anarchus don't want to hit you with a bucket of cold water ;-)
1979 had the highest level investment by American's in the last 25 years. Probably the reason that it was so high, was that wealthy investor spent his dollars on capital before the prices went up. Investment by American's dropped in the 80's. The low rates of investment and low productivity of that time were probably not unrelated. The worse thing to happen to the supply-side of the economy in the last fifty years was type 1 supply-side economics.

Posted by: George Stebbins on March 5, 2003 02:37 AM

Edward,
If that was the Administration's rationale, why wouldn't they say so? Have you heard a single Administration figure say "well, okay, no, the cuts won't provide short-term stimulus or reduce the deficit, but they will encourage a higher savings rate, which is the most important goal right now and is what we're really trying to accomplish here"?
I grow weary with people defending Dubya's stupid policies with arguments that the Administration doesn't make itself, the invasion of Iraq being the most obvious example. If this is an exception, I'd be glad to hear about it. (I'd also be interested to hear whether anyone responsible economist thinks that record-deficit-inducing cuts for the rich are really the best way to increase national savings.)

Posted by: Brendan Lynch on March 5, 2003 07:11 AM

"Interestingly, that payroll tax is generating a several trillion dollar "SS trust fund" that is currently being squandered on more tax cuts for the wealthy."

Oy, vey! Some people have a remarkable method of accounting!

How can money the government receives for one purpose (i.e., payouts of Social Security) be *squandered* by ***NOT TAKING*** money (i.e., income taxes from the wealthy)?

Only in a "liberal's" mind is *not taking* money "squandering" it! :-/

We don't have a Social Security Trust Fund...and we never have. But that isn't because the federal government is *failing* to tax people. It's because the federal government is squandering that money...for agricultural subsidies, for losing money on land (they shouldn't own in the first place), for education (i.e. money that could be more effectively used if received and disbursed at the state and local level), for energy research, for the completely insane, completely unconstitutional, and completely fascist federal War on Some Drugs, and about 1000 other items.

Posted by: Mark Bahner on March 5, 2003 09:48 AM

"Anarchus don't want to hit you with a bucket of cold water ;-)
1979 had the highest level investment by American's in the last 25 years."

George do you have a reference for that assertion?

Mark, you finally said something I agree with. The War on Drugs is a big government disaster.

Posted by: Dan on March 5, 2003 11:50 AM

"The War on Drugs is a big government disaster."

Yes, well, wake me up when the leadership of the Democratic Party ever realizes that. (And acts on it. Bill Clinton's cheap remorse, after leaving the presidency, doesn't impress me...it disgusts me.)

Certainly Bill Clinton and Al Gore never did, when they led the Democratic Party. Clinton set a record for federal imprisonments of drug offenders. I imagine Dubyah will break it, if he gets two terms.

In the 2000 campaign, at least Bush *said* he'd let the states decide on medical marijuana. (A promise/statement he's since reneged on.) Al Gore was firmly for continued federal violation of the Constitution, and persecution of sick people. Until Gore saw studies that convinced *him* (Him?) of the efficacy of medical marijuana, Gore was against it.

Forget that people who actually had medical degrees and experience in cancer/AIDS management were willing to prescribe it. Forget that Gore was about to swear an oath to preserve, protect, and defend the Constitution. What an arrogant, ignorant, and immoral twit! I can't think of anything much more repellent than deliberately and illegally harming sick people.

Posted by: Mark Bahner on March 5, 2003 03:55 PM

"Anarchus don't want to hit you with a bucket of cold water ;-)

1979 had the highest level investment by American's in the last 25 years."

“George do you have a reference for that assertion? “

Absolutely, Capital investment by Americans is what we spend new structures, equipment and software. That is the National Savings Rate. In 1979 it was 21% of the GDP.

Table 5.1
http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp?Selected=N#S5

Posted by: George Stebbins on March 5, 2003 09:49 PM

George,
The 21% you referred to was actually 21% of GNP - not GDP. GNP has grown at a higher rate than GDP between 1979 and 2002.

Taking Gross Private Direct Investment as a % of GDP reveals:
1979 - 15%
2000 - 19%
2002 - 16.8%

Posted by: Dan on March 5, 2003 10:55 PM

The more I think about it the more I concede GNP is probably more relevant. But then I wonder, do the numbers account for FDI in other countries?

Posted by: Dan on March 5, 2003 11:05 PM

"George,
The 21% you referred to was actually 21% of GNP - not GDP. GNP has grown at a higher rate than GDP between 1979 and 2002. "
Dan,
Yes but only by 0.07% or a cumulative 1.5%. It changes GNP 21% to GDP 21.2%

"Taking Gross Private Direct Investment as a % of GDP reveals:
1979 - 15%
2000 - 19%
2002 - 16.8%"

I'm not sure were you got your number. Usually when you use the word direct you are talking about all investment in assets, and not just newly created capital. If you by a share in a company the money the person you bought the share from can only do two things with it, buy a new consumer good or a new capital good. We would only count that money as saved if it was spent on capital. In the 80's we saw a large increase in financial investment while capital investment fell. In seems that we took more capital gains then we earned.

George

Posted by: George Stebbins on March 8, 2003 11:47 AM

"The more I think about it the more I concede GNP is probably more relevant. But then I wonder, do the numbers account for FDI in other countries?"

Dan,
Indirectly, GDP looks Net Foreign Investment in the USA by definition equals the trade deficit which equals the Net FDI in the USA.

You can get the numbers here.
http://www.bea.gov/bea/di1.htm

Posted by: George Stebbins on March 8, 2003 12:01 PM
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