April 30, 2003

Notes: Mankiw: Charlatans and Cranks

Ah. Here it is. The exact reference and the exact context, which I have been looking for for a while:

N. Gregory Mankiw (1998), Principles of Economics (New York: Dryden: 0030982383).

Thinking Like an Economist: Why Economists Disagree: Charlatans and Cranks:

pp. 29-30: An example of fad economics occurred in 1980, when a small group fo 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 raise by so much, they claimed, that tax revenue would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as 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 caues tax revenues to rise in the face of lower tax rates. George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea "voodoo economics." Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s.... Congress passes the cut in tax rates... but the tax cut did not cause tax revenue to rise... tax revenue fell... government began a long period of deficit spending... largest peacetime increase in the government debt in U.S. history. Fads can make experts seem less united than the actually are... when the economics profession appears in disarry, you should ask whether the disagreement is real or manufactured... [by] some snake-oil salesman who is trying to sell a miracle cure...

Posted by DeLong at April 30, 2003 03:40 PM | TrackBack

Comments

I was once convinced by Thomas Willett to call the voodoo economics crowd "Radical Supply-siders". Polite I guess but not as precise as "free lunch supply-siders" as in those who try to deny crowding-out, which is nothing more than the law of scarcity. Mankiw was not so silly to be overly polite back in 1998. But now that he has joined the ReaganII team - many are watching to see if he holds to his integrity. Let's hope so. But Lawrence Kudlow writes today that Mankiw et al. have put forth a dynamic scoring analysis more to Kudlow's liking. Does anyone know the real details for this new analysis that Kudlow alludes to?

Posted by: Hal McClure on April 30, 2003 04:22 PM

Does anyone know the story of how exactly Mankiw transformed from a Democrat to a Republican or from a moderate liberal to conservative?

Posted by: Bobby on April 30, 2003 05:13 PM

The Reagan administration used to say that if it appears in the press five times, people will believe it is true. Economists can call Reaganomics voodoo economics all they want or state emphatically that the dividend tax cut is not a good short term stimulus. However, if the president with the bully pulpit repeatedly insists that economists think the dividend tax cut is the best thing since apple pie and the TV carries this message over and over, then it must be true. If Reagan sychophants insist over and over that Reaganomics and supply side were a success (don't look at that national debt behind the curtain) then it must be true. It becomes the easy argument and very difficult to refute to the unscholared.

Thanks for the quote from Mankiw, Brad. The administration can buy the best economists and get them to toe the administration line, but they can't cover up their past. It is a good thing that Hubbard and Mankiw wrote books.

Posted by: bakho on April 30, 2003 07:48 PM

Bobby, what makes you think Mankiw was ever liberal?

Posted by: Stephen J Fromm on April 30, 2003 09:07 PM

Bobby

I know several Republican Keynesians: Robert Hall and John Taylor come to mind. Being a good economist is a bipartisan thing. I have always been impressed by Mankiw. And the Dems who want to give tax breaks to the poor as a temporary stimulus device should read his AER paper on consumption theory - the Savings-Spending model.

Posted by: Hal McClure on April 30, 2003 09:37 PM

"One of the ironies of the Reagan administration in those years was its staff of senior economists that included democrat ‘whiz-kids’ such as Paul Krugman, Gregory Mankiw and Lawrence Summers."

http://www.wiwiss.fu-berlin.de/w3/w3collie/krugman/laudatio.html

So this document said he was a democrat (I notice the small d). More evidence is that he removed the aforementioned "charlatans and cranks" from his Macro book.

Stephen. I never said he was liberal. I said moderate liberal.

I guess I'm really saying that Mankiw didn't seem earlier in his life like the kind of guy who would be chief economic spokesman for an administration as extreme and dishonest in its selling of policy as this one. I just thought it seemed kind of strange.

Posted by: Bobby on April 30, 2003 09:53 PM

When all is said and done, though, in the long run the Reagan tax cuts didn't really do all that much damage. Yes, they were partly reversed, but the tax structure is still a great deal less "progressive" (clever use of positive spin there) than it was under Jimmy Carter, while the debt-to-GDP ratio is lower than in any other major economy other than (perhaps) Great Britain.

The bottom line is that if Reagan's tax cuts failed to bring in the extra income promised, they also failed to do as much (if any) damage to the American economy as feared (or hoped), not withstanding the prophecies of doom by "progressive" forces - and this in spite of a defence buildup amounting to 6% of GDP at its' peak.

Posted by: Abiola Lapite on May 1, 2003 06:29 AM

Sean Hannity and Rush Linbaud are working hard to make it into common sense.

Posted by: LowLife on May 1, 2003 06:42 AM

Abiola-

In the 14 years (1989-2002) since Reagan left office, the interest payment on the debt has averaged $319 Billion and totalled $4.475 Trillion Dollars. During the Clinton administration (1993-2000) the interest payment on the debt was $2700 Billion. Were it not for Reagan's legacy, Clinton could have run a surplus or we could have addressed the looming health care problems, the disinvestment in infrastructure or even had a large tax cut. The interest payments on the national debt this year almost equal the deficits that Bush is running.

Every year we are paying tax dollars for about 2 months to cover our debt expenses. That money could be going for other things, including tax relief had Reagan not been so foolish. I disagree that the Reagan tax cuts did not do that much damage. Reagan's legacy (the national debt) continues to do damage to our fiscal policy even today.

Posted by: bakho on May 1, 2003 07:24 AM

This is a "sine ira et studio" question. Mankiw says federal tax revenue didn't rise over the Reagan years. Yet the data seems to show that it did. So who is right? Is there a confusion between tax revenues and tax revenues' sufficiency to cover expenditures? Is there also a timing issue? Tax revenues fell at the beginning of Reagan's presidency, but picked-up later.

Posted by: maciej on May 1, 2003 07:33 AM

Maciej:

The oft noted doubling of Federal tax revenues during the 1980's is misleading for two reasons. One is that real increases will be less than nominal increases if inflation is above zero. More importantly, this statistic counts the large increase in payroll revenues designed to provide a reserve for Social Security. Income tax revenues grew only by 17% in real terms over the decade. In most decades, real income tax revenues grow by amount closer to 40%.

On how much the Reagan fiscal stimulus cost us, the debt increase is only part of the story. The real cost was the reduction in capital accumulation which has not been reversed. This led to lower real growth, lower real wages, and contributed to rising poverty.

Posted by: Hal McClure on May 1, 2003 07:41 AM

Maciej:

The oft noted doubling of Federal tax revenues during the 1980's is misleading for two reasons. One is that real increases will be less than nominal increases if inflation is above zero. More importantly, this statistic counts the large increase in payroll revenues designed to provide a reserve for Social Security. Income tax revenues grew only by 17% in real terms over the decade. In most decades, real income tax revenues grow by amount closer to 40%.

On how much the Reagan fiscal stimulus cost us, the debt increase is only part of the story. The real cost was the reduction in capital accumulation which has not been reversed. This led to lower real growth, lower real wages, and contributed to rising poverty.

Posted by: Hal McClure on May 1, 2003 07:46 AM

maciej,

The implication of the free-lunch version of supply side is that economic activity would respond so strongly to tax incentives that revenues would rise despite lower rates. In particular, the response was supposed to be that people would work harder, so the clearest indication would be a big rise in income tax revenue, the result of a growth based hiring boom. An unremarkable revenue rise due to unremarkable output growth is not sufficient to make the free-lunch case. You would have expected revenue to growth with the economy anywhere in the middle of Professor Laffer's curve. Trend-like growth in output and revenue is all the free-lunch crowd has to point at, unless they want to claim credit for the later Clinton years (some do). Even claiming credit for the later Clinton years is a weak case, since much of the revenue rise came from capital gains taxes, which doesn't make a strong case for a supply-side-driven labor market response.

A clear "yes" to the timing issue question. One notorious way to make a case for extraordinary growth in output and revenues (a way sometimes used by the free-lunch crowd) is to be very selective in choosing the period to make the case. If the starting point is the recessionary trough and the end point is the expansionary peak, an illusion of extraordinary growth can be given. Responsible economists try to measure from peak to peak or trough to trough, to avoid the illusion.

Posted by: K Harris on May 1, 2003 07:56 AM

I did an Excel file a while back regarding that shows the amount of federal revenues in some year divided by that 10 years before. It shows revenues both adjusted and not adjusted for inflation. The results for the Reagan years aren't impressive.

The file is:

http://www.pkarchive.org/Double.xls

I made it from Conference board data. The unadjusted for inflation figures are correct, but I computed the adjusted figures by myself and likely incorrectly, so beware.

The data that shows how I made the chart is in this much bigger file:
http://www.pkarchive.org/bci-ed2.xls

Posted by: Bobby on May 1, 2003 08:57 AM

By the way that post was about the claim that Reagan doubled revenues. I got so sick of hearing it, I looked at how past administrations had done both adjusted and (since my adjustments were likely faulty) unadjusted for inflation. Anyway, if you have excel or one of the many imitations you can get off download.com, check it out.

Posted by: Bobby on May 1, 2003 09:02 AM

I offer no defense for false claims made by the Reaganites, but if somebody wants to try to get elected by advocating a return to a top rate of 70%, they're free to try.

Posted by: Will Allen on May 1, 2003 09:50 AM

Thanks for the responses. From what I see, there seems to be no serious dispute about the fact that tax revenues did increase during the Reagan years, both in real and nominal terms; there is plenty of argument about its size, impact, or relevance. So I'm still puzzled by Mankiw's remarks as quoted by Brad: "...but the tax cut did not cause tax revenue to rise... tax revenue fell". I don't think one can defend the first of these statements by interpreting it as "tax cuts didn't cause it, something else did", because it doesn't agree with the second point, which is rather unambiguous. I don't have the text itself; does the quotation omit some relevant caveats?

maciej

Posted by: maciek on May 1, 2003 10:31 AM

maciek

If normal real income growth over a decade is 35% to 40%, then the Laffer claim would hold that real revenues increases should be greater than 40%. So a 17% increase over the decade undermines this Laffer claim. The fact is that average real income growth during Reagan-Bush was only 2.9% per year as opposed to 3.5% per year from 1947-1980. Incidentally, Federal revenues rose by 170% during the 1970's. You say that's misleading because it's in nominal terms? yes but real revenues rose by 35% during this decade.

KH

One might argue Laffer's position relies on huge incentive effects. But it's more than that. Feldstein et al. would argue that tax cuts lead to modest income increases based on modest estimates of size of the incentive effects. But both Laffer and Feldstein are assuming fiscal neutrality. If a tax cut leads to more consumption as Bush keeps saying, then that means less savings and investment. And the reduction in capital accumulation tends to overwhelm the incentive effects. How Laffer and Feldstein can simply ignore this is beyond me - unless they assume that the tax cut is matched by spending cuts. But then they should consult what is really happening to spending.

Posted by: Hal McClure on May 1, 2003 10:42 AM

Hal,

If that's what he means, i.e. tax revenues didn't grow as fast as income--which is what was expected by some--that's fine by me; he's right, even though I would prefer a clearer wording, and they were wrong.

maciej

Posted by: maciej on May 1, 2003 11:20 AM

Bobby

Mankiw was never ever a liberal. The point was trying to learn just what it would take to be conservative enough to get where he has got. Same for Hubbard.

Like getting on Fox. Woman.... Dye your hair blond, admit to having been raised by fanatical Democrats and suddenly have seen the light to become righter than right.

Posted by: lise on May 1, 2003 01:10 PM

Macie j. I think Mankiw was comparing the actual revenues after the tax cut to the baseline revenues (ie revenues that would occur if Reagan's tax cuts never happened). Supply-side economics would predict revenues greater than this baseline or at least pretty close. This probably did not happen (we just have to learn the baseline revenues). The Reagan years in the (likely mistaken) inflation adjusted stats seem to have been met by declining revenues relative to ten years before. This is not an impressive record, and it does not justify the fairytale promises of supply-side economics.

Posted by: Bobby on May 1, 2003 01:22 PM

I have to admit I am somewhat dismayed at the number of ways one can interpret the word "fall" when used by an economist. So far, I see:

1) falling short of income growth
2) (presumably, if different from 1) ) falling short of GDP growth
3) falling short of historical growth rates that prevailed under previous administrations
4) falling short of baseline projections

But it's been very interesting.

Posted by: maciej on May 1, 2003 02:03 PM

Don't blame economists. Blame supply-siders for pie-in-the-sky promises. That revenues would exceed or come close to that baseline was the supply-siders' promise, not the economists.

Saying that Reagan did a great job just because revenues increased in nominal and real terms means nothing since GDP increases in nominal and real terms (If I started drinking lots of coffee when I was a kid and 4ft tall and then was 4 ft 5 in. when 18, wouldn't you say it stunted my growth?). We have an expanding population and an expanding economy, which both imply greater need for govt services (not just things that social workers only want, but things like criminal justice and air traffic control) and hence greater revenues to cover those expenses. Reagan created a huge deficit and debt burden. Interest on the debt is today 12.466458% (I'd like to do historical comparisons, but don't have any). As Paul Krugman said, "The real failure of conservatism in America, then, was not so much economic as social. Conservatives in power made America a harsher, meaner place in the name of growth - and then failed even to deliver the growth. It was time for them to go."

Posted by: Bobby on May 1, 2003 07:24 PM

It should say:
Interest on the debt is 12.466458% of federal outlays for fiscal 2000 according to the Statistical Abstract of the United States.

Posted by: Bobby on May 1, 2003 07:27 PM

Hal,

Yup. Also interesting is estimates of what happens if the savings rate goes up - remember those Reagan era estimates of how much of any tax cut would go to savings and investment?. Investment rises, but in time, gets eaten up by depreciation. A one-time rise in investment leads to a forever rise in capital replacement that at some point takes trend growth right back where it was. Even Larry Lindsey, if I recall correctly, comes to this conclusion. I get all the arguments about taxes changing behavior by leading to consumption switching and income effects and the like. I am pretty skeptical of any argument about taxes having much impact on the growth trend, which seems to be behind a lot of supply side thinking. Give me technology shocks anytime. Best I can do is hope that a higher level of investment leads to a more rapid pace of technical advance and diffusion.

Posted by: K Harris on May 2, 2003 12:09 PM

Even conservatives didn't Laffer's Supply-Side Economics.

Alfred L. Malabre, Jr. _Lost Prophets An Insider's History of the Modern Economist_, Harvard Business School Press, 1994n pp. 183

Alfred L. Malabre, Jr. was the economics editor of the Wall Street Journal.

Like many academic economist, Feldstein was deeply skeptical of Laffer's economic ideas from the start. "There's absolutely no indication that Laffer's ideas will work in the way he suggests," Feldstein told me 1978, well before the Reagan White House and an accommodating Congress gave Laffer a chance to test his ideas. With evident distrain, the Harvard economist added that he had "never seen Laffer in attendance at any meeting of professional economists where serious economic issues were under discussion."


Martin Feldstein, "Supply-Side Economics: Old Truths and New claims," _American Economic Review_, May 1986, pp. 29-30

Feldstein refers to the supply-siders as the new supply-siders.

The experience since 1981 has not been kind to the claims of the new supply-side extremists that an across-the-board reductions in tax rates would spur unprecedented growth, reduce inflation painlessly, increase tax revenue, and stimulate a spectacular rise in personal savings. Each of those predictions has proven to be wrong... The miraculous effects anticipated by some of the new supply-side enthusiasts were, alas, without substance.

Posted by: George Stebbins on May 3, 2003 06:15 PM

My apologies for contributing to the birth of the urban legend of a democrat Mankiw during the Reagan years. When I wrote the Laudatio for Paul Krugman's honorary doctorate at the Free University Berlin, I was paraphrasing Paul Krugman from memory. When I stumbled across this discussion here and saw my words cited as an authority, I decided to hunt down what Krugman actually wrote. He referred to Summers and Mankiw as "politically incorrect", i.e. with respect to supply side extremists. Thus I have no evidence to offer that Gregory Mankiw ever has been big D democratic and certainly no evidence to suggest undemocratic tendencies either. Mea culpa.

Posted by: Irwin Collier on June 24, 2003 09:23 PM
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