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December 17, 2004
What Bush Needs to Hear--But What No Republicans Dare Say
Jonathan Chait is unhappy at Martin Feldstein's performance at George W. Bush's economic conference. So am I, for somewhat different reasons. What George W. Bush needs to hear--and what no Republicans seem to be effective in telling him--is that current tax reductions unaccompanied by long-run spending cuts aren't tax cuts but tax shifts: they make future taxes higher; they make future taxes uncertain; and they thus exert on net a substantial; depressing effect on incentives for investment and enterprise. If you cannot get the spending cuts, you're much better off leaving the tax system alone than giving temporary reductions to be followed by permanent increases or a large financial crisis.
That's what Bush needed to hear. That's what nobody has been telling him in ways that manage to get through over the past four years. That's what Feldstein had a perfect platform to say. And that's what Bush--once again--did not hear.
Jonathan Chait writes:
...It was conservative economist Martin Feldstein giving his familiar spiel on taxes. Current tax rates, he said, "create bad incentives which slow down the rate of growth of the economy and hurt the standard of living." The point of Feldstein's lecture was that President Bush's tax cuts had made an enormous contribution to economic growth and, if we're not fully satisfied with the results, we ought to cut taxes yet again.
Feldstein's theory reflects the basic underpinning of Bush's economic agenda. The theory is that tax rates exert an enormous influence over people's (and especially rich people's) willingness to work hard and take risks. According to this view, countless potential entrepreneurs and innovators haven't bothered trying to get rich because of high taxes.
The corollary to this theory holds that tax cuts stimulate so much economic growth that they reduce tax revenue far less than conventional economists assume. Alas, the theory has failed every empirical test.
Feldstein's cohorts at the conference were polite enough not to bring up his influential prediction about the 2001 Bush tax cut. When Bush took office, if you recall, moderates prudently argued for using most of the $5.6-trillion-over-10-years budget surplus to pay down the national debt. Bush, however, insisted his tax cut was small enough that even afterward there would be enough left over to pay off the debt and keep a trillion-dollar "contingency fund."
To persuade skeptical tightwads, the administration trotted out Feldstein, who made essentially the same argument he made Wednesday. When tax rates go down, he explained, taxpayers "work harder and take more of their compensation in taxable form." Therefore, "the true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates."
As it turned out, the true cost ended up being substantially larger than the estimates. In fact, income tax revenues crashed through the floor, dropping to their lowest level as a percentage of the economy since 1942.
Frankly, it's amazing that anybody listened to Feldstein even then because he had made an equally bumbling prediction eight years before. In 1993, when Bill Clinton raised the top tax rate, Feldstein argued that because high-income workers are so sensitive to tax rates, they would dramatically change their behavior. Clinton's plan, he wrote, "reflects a fundamentally incorrect view of how taxes affect individual behavior." In another column, he thundered that "there is no possibility that the Clinton plan will produce the deficit reduction that it projects."
No possibility! Well, in case anybody has forgotten, the deficit actually dropped far more than anybody projected. Income tax revenue shot up through the ceiling. It's as if there was an actual invisible hand guiding the economy, and it grabbed Feldstein by the collar and screamed, "You're utterly, completely wrong, you fool!"
Feldstein's defenders would claim he just got unlucky twice in a row: Clinton's tax hike happened to precede a huge boom, and Bush's tax cut happened to coincide with a major slowdown. But revenue grew under Clinton and shrank under Bush, far more than could be accounted for by growth alone.
And, anyway, even if that excuse were right, it undermines Feldstein's point. Feldstein and his conservative allies argue that upper-bracket tax-rate levels are crucial to economic health. But history shows that, at the very least, many other factors have a greater effect on economic growth. So accepting large deficits for the sake of tax cuts makes no sense. This history also suggests that it's Feldstein who has a "fundamentally incorrect view of how taxes affect individual behavior."
And yet here is Feldstein today, dispensing his economic wisdom once again before the most powerful people in the country. Imagine if one man had designed the Titanic and the Hindenburg, and then was put in charge of the space program.
In a way, Feldstein's no worse than any of the other conservatives who made laughable claims on behalf of Bush's economic policies. That's exactly why the administration felt no shame in trotting him out once more. Anybody unprepared to make a fool of himself wouldn't appear at that conference in the first place.
Posted by DeLong at December 17, 2004 06:12 PM
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Comments
When does Marty get reassigned from conservative economist to crank?
There probably is a maximum tax level that when reached, encourages the wealthy to quit working or build libraries or colleges. But we are no where near that level of upper bracket taxation.
What seems to be missing from Feldstein's models and the Bush economic model (if there is one) is a demand function that is sensitive to income distribution. Just as there is a minimum price for making a profit on marketable items, there is a minimum disposable income that is necessary to create a demand for a product. Someone who has just enough to purchase room and board is not going to spend the rent check on an iPod. How is it that they manage to overlook this important relationship between demand and income distribution?
Posted by: bakho at December 17, 2004 07:29 PM
"How is it that they manage to overlook this important relationship between demand and income distribution?"
Simple-- they don't think civilian consumption matters in this economy. Their model is the late 19th century, when naval development built strong steel industries.
Which leads to another element of the bush world view that Brad and any other economist will be unwilling to accept: They do not believe that debts ever have to be paid. That is simply not part of their world.
Look at it this way. On the one hand we have people like bush himself; they have accountants and family retainers who pay any debts that can't simply be ignored. These people are like French aristocrats before that revolution, in that they see no connection between payments and the ability of others to live their lives.
On the other hand we have people like Cheney, who famously said, "Reagan proved that deficits don't matter." What did he mean? Cheney after all started out poor. But he became part of the corporate plutocracy for whom debt is simply an accounting transaction. It has no reality for him either.
Both types live in a world that is so profoundly un-reality-based that it's hard for normal people to comprehend, let alone trained economists. For this reason they have absolutely no regard for promises made to retirees and future retirees, which are a form of debt. This is why they're so blithe about destroying Social Security.
But what they say usually *sounds* pretty impressive to people who don't have time to think about it, in the same way that Kerik *seemed* like just the kind of tough guy you'd want in charge of "homeland security" (Heimatsicherheit?). And/or to the considerable portion of the American public that believes in magic.
Posted by: Altoid at December 17, 2004 09:05 PM
A few thoughts.
1. Isn't there some research that says as long as tax rates are below 50%, it doesn't matter much one way or another how much people are taxed? And if so, isn't it particularly true for people at the top?
2. Isn't there also some research that the more people are taxed, up to a point, the harder they will work because they feel they need to not be pinched too tightly? In other words, wouldn't too low a rate make them sort of lazy?
3. It doesn't seem as if the author is giving Feldstein the respect he deserves. If I remember correctly, didn't he argue in favor of tax increases, along with spending cuts, in the 1980s because he felt the deficit was getting too large? If so, perhaps he's not the shrill, Luskin/Kudlow-like crank the author wants him to be.
Posted by: Brian at December 17, 2004 10:33 PM
Apparently Marty has never heard of the backward bending supply curve for labor. All his finely tuned analytical prognostication about those poor rich folks' willingness to throw dice in response to itty-bitty changes to marginal rates is just so much shilling for pure unadulterated avaricious greed.
Posted by: bobbyp at December 17, 2004 10:48 PM
Altoid's right. The Bush people don't care about paying back debts. Paying debts is for other people. They will refinance the national mortgage for as long as the Germans will lend us money to buy Arab oil and Chinese TVs.
Posted by: wkwillis at December 18, 2004 12:04 AM
That comparison was thoroughly unfair to the designers of both the Titanic and the Hindenburg. Each was a thoroughly sound design that was pushed beyond its limits. Don't forget that each came from a stable of sister craft that didn't meet the same fate, indeed worked well for years.
Does this suggest a better comparison, perhaps Napoleon's aphorism about wanting his Marshals to be lucky? (In which case only Bernadotte made it, measured over the long term.)
Posted by: P.M.Lawrence at December 18, 2004 12:24 AM
>But what they say usually *sounds* pretty impressive to people who don't have time to think about it, in the same way that Kerik *seemed* like just the kind of tough guy you'd want in charge of "homeland security" (Heimatsicherheit?).
Vee know how to make you spell "Reichssicherheitshauptamt", Mister Altoid.
Posted by: Felix Deutsch at December 18, 2004 12:53 AM
Brad, I love the Titanic/Hinderburg metaphor. Fantastic. I once slagged you off about media training and message delivery. This is crisp and succint and funny. You definitely should use this the next time you are anywhere near the electronic eye.
Tax shift is another vital concept we have to get across. Your post on paying down our national debt, reminds me that Bush went around the "country saying" the surplus is "your money" and he was just giving it back. Yet we still had this massive debt. Idiots like James Glassman warned about the US government being debt free.
I thought Kerry should have talked about Bush spending like a kid with first credit card. Kerry should have proposed he would run a "checkbook financial policy" in contrast to Bush's "credit card financial policy." I think it would have resonated.
Posted by: KevinNYC at December 18, 2004 01:10 AM
Dean did talk about that and was destroyed.
America wants to live beyond our means and we mean to pursue this to the bitter end. Look at all the individuals around you! Debt up to the eyeballs, wall to wall red ink flowing everywhere, all over our once fair nation.
The economists are paid to tout this just like whorehouses paid touts to call out the virtues of the prostitutes inside. It is nothing more than that.
When reality bites, people will be bitter and upset and still listen to the touts who will tell them it was the fault of the Jews or whoever our next Hitler chooses to target. Jews tend to be the target more often because they have money to steal....and are a very small minority.
Posted by: Elaine Supkis at December 18, 2004 04:19 AM
I read this and had one question:
Did you actually think that this conference was anything more than an excuse to give Bush another ego trip?
Since when did Bush give a damn what "liberals" think - that is, those smart people that did good in school and stuff.
This was a conference to dupe the masses - nothing new, and nothing else.
Posted by: Mark-NC at December 18, 2004 06:33 AM
Didn't we learn this in the 80's?
Didn't they thoroughly disprove it and prove the opposite in the 90's?
Where the hell were THESE guys anyway?
What good does it do them to destroy everything?
I just don't get it.
Posted by: Jim A. Sherman at December 18, 2004 07:36 AM
If we really want to understand this administration's fiscal patterns and prospects, the first thing we have to do is understand their basic premise about government and taxes. It goes like this:
1) Only suckers pay taxes. People who have pull aren't suckers; they don't pay taxes.
2) Government exists to transfer money from the suckers to the people who have pull.
They really do believe this.
It's probably the ethos of oil and natural resources, and I think it partly goes back to the New South's leadership, which was happy as clams to take government money but would do anything to avoid paying taxes themselves. And come to think of it, *that* probably goes back to the plantation owners pre-Emancipation, because they wrote the laws and made sure to tax their own slaves and plantation lands at a much lower rate than anyone else's property.
Whatever the historical roots, they really do think like that. We have to be willing to understand that and talk about where it leads.
Posted by: Altoid at December 18, 2004 08:09 AM
Bakho wrote:
"How is it that they manage to overlook this important relationship between demand and income distribution?"
They don't overlook it. If you follow the system through (as in Japan) this is the first time in history that wealth has been so concentrated with no outlook for redistribution through war or otherwise. I call it "maximally concentrated wealth", a form of socialism where just enough scraps are fed to the masses, through deficit spending, to keep them happy.
http://www.mosler.org/wwwboard/messages/1796.shtml
Altoid wrote:
"Which leads to another element of the bush world view that Brad and any other economist will be unwilling to accept: They do not believe that debts ever have to be paid. That is simply not part of their world. "
Exactly, and since a government, corporation "never" dies, partly true.
"1) Only suckers pay taxes. People who have pull aren't suckers; they don't pay taxes.
2) Government exists to transfer money from the suckers to the people who have pull.
They really do believe this."
I agree, this is the reason that so many American citizens have offshore island accounts that have investments in American assets but pay no taxes. Why is this never an election issue? The economics profession keeps America stupid about the important stuff.
Posted by: Winslow R. at December 18, 2004 08:52 AM
Do not forget that part of the reason for the the Bush tax cuts was to please social conservatives by increasing standard deductions and creating child taz credits to make it easier for the woman folk to stay home where they belong. In economic terms it created an income effect (where leisure is a superior good), without an offsetting substitution effect (only modest decreases in marginal tax rates). Voila - no supply-side boost.
Posted by: S. Weil at December 18, 2004 02:03 PM
If I might be allowed a moment of cynicism, isn't Marty on the shortlist for replacing Greenspan? Ambition will out...
Posted by: JohnDL at December 18, 2004 04:10 PM
KevinNYC, it was crisp, succinct, funny - and wrong. The people at fault with the Titanic and the Hindenburg were those that pushed them too hard, not the designers. The metaphor does not fit the case here, and anyone who followed it up would take it as grounds for shifting the blame away from Feldstein. But Feldstein is at fault in this case.
Posted by: P.M.Lawrence at December 18, 2004 10:31 PM
About Feldstein: he's president and CEO of NBER.
What does that tell us about economics' status as a "science"?
Posted by: liberal at December 19, 2004 06:33 AM
Dr. DeLong,
PLEASE respond to this: what is the source for this column by Chait? Thanks.
Posted by: James S. W. at December 19, 2004 09:13 PM
Doctor Doom has been ranting this upside down Keynesian nonsense for over 20 years.
His theories might look good on the back of a napkin, and make wonderful martini talk at some hoodie toodie cocktail party, but the fact is he's NEVER been right. Not even PARTIALLY right.
He is the kind of wonk that Republicans love. The kind that espouse "theories" that suit their agenda but have no basis in any kind of fact or logical economic theory....and whose impact isn't felt until long after the public memory has faded of who made the idiotic suggestions in the first place.
Posted by: Liberal AND Proud at December 20, 2004 11:58 AM
Liberal,
I don't know. What does it tell us about the status of economics as a science?
Posted by: kharris at December 20, 2004 12:16 PM