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Preaching to the Converted October 22, 2007 The Great Lie of Supply-Side Economics I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned.
The tax cuts that went through were sold on false premises - what it costs us is far greater than advocates said, advocates who claimed it would actually increase revenue and cost us nothing. It does cost us, hundreds of billions of dollars so far, and that cost has not been presented honestly to the public by either the advocates of the tax cuts or the press reporting on the issue. Without an adequate understanding of the true costs, the public discussion on the issue is distorted and the result is bad public policy. The big lie matters, and the sooner the press starts to call politicians on it, the better for us all. There are encouraging signs, Jon Chait's recent book being one example and this being another, but it's still possible to tell the lie with little consequence from the mainstream media.
The Tax Evasion: The Great Lie of Supply-Side Economics, by James Surowiecki, The New Yorker: In American politics, supply-side economics is the monster that will not die. The supply-side argument that, in the United States, tax-rate cuts pay for themselves ... has little or no support within the mainstream economic profession, and no hard empirical data to back it up.
demonstrated that both the Reagan tax cuts of the nineteen-eighties and the tax cuts put through under the current Administration shrank government revenues and led to bigger budget deficits. Yet the absence of proof for supply-side theory has not dimmed Republicans' devotion to it.
published a list of what "the Republican Party stands for." This supply-side orthodoxy is striking in a couple of ways. First, it requires Republican politicians to commit themselves publicly to a position that is wrong--and wrong not as a matter of ideology or faith but as a matter of fact.
Megan McArdle wrote that she had a book review for an unnamed right-wing publication spiked because in it she dared suggest that, in the US, tax cuts decreased government revenues. The cynical explanation for the persistence of the supply-side dogma is that it's simply cover for cutting taxes for the rich. But the supply-side orthodoxy has flourished for other reasons, too. To begin with, the absurd idea that tax cuts pay for themselves is based on an idea that is not at all absurd, which is that tax rates can have an impact on people's behavior.
They're aided in that extrapolation by the simple fact that the American economy grows over time. As a result, even if you cut taxes the federal government will eventually take in more tax revenue than it once did. And that allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001, government revenues are higher in 2007 than they were in 2001, therefore the tax cuts increased revenue. The comparison that really matters in analyzing the impact of the tax cuts, of course, is ... the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001.
find that government revenues would be greater had taxes not been cut. But that hasn't stopped President Bush from claiming victory. In one sense, of course, it's odd that a Republican President should treat higher government revenues as a point of pride. Historically, after all, Republicans have been the party of small government...
attacked the Republican candidates for failing, in their most recent debate, to explain what spending cuts they would advocate to accompany the tax cuts they propose. But Kudlow should hardly have been surprised, because supply-side rhetoric suggests that spending cuts aren't really necessary. This tax-cut-and-spend approach is the promise of a free lunch, something that voters like to hear. The appeal of that promise may make it easier for politicians to run a campaign. But the fraudulence of the promise makes it awfully hard to run a government.
The Case of the Missing Surowiecki Column, by Felix Salmon: Memo to Jeff Bercovici: What's with Jim Surowiecki's column in this week's New Yorker? It's right there on the website - complete with no fewer than nineteen hyperlinks. The most charitable explanation I can think of is that the New Yorker decided the column was simply too reliant on its hyperlinks to work in print. But if that's the case, why didn't they just ask Surowiecki to write a different column, or to rewrite this one so that it worked in print form? I can't remember Surowiecki ever being banished from the print edition like this before, which is why it's so bittersweet to read this, from Mark Thoma: I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned. He's writing, of course, about Surowiecki's column, which is about supply-side economics. And it turns out that the one time he singles out "the press" for praise in exposing the lie is also the one time that the article remains unprinted by any physical press.
The Great Lie of Supply-Side Economics: Comments Brooks says... Given the enormous unfunded entitlement liabilities we face, we must address our long-term fiscal imbalance ASAP and base such policy on realistic assumptions, including assumptions regarding the relationship between tax rates and revenues.
Link to comment | October 22, 2007 at 05:32 PM Bruce Wilder says... For truth-telling and fact-checking to resume in journalism, it must become a characteristic that increases the career "fitness" of the journalist, who does it. Just like being right about Iraq does not seem to have done anything for the career prospects of those, who were, and are, right, I remain skeptical that truth-telling will be all that rewarding.
Link to comment | October 22, 2007 at 05:37 PM gordon says... Of course the tax aspects of supply-side get a lot of attention because taxes are a high-profile policy issue, but when Surowiecki can write: "an idea that is not at all absurd, which is that tax rates can have an impact on people's behavior.
investment isn't actually doing much as a result of the US tax cuts. Lafayette made an insightful comment on this fact under the linked post - he noted that low investment might well arise from low capacity utilisation (and quoted some numbers). Obviously, sluggish investment bodes ill for future US growth. So let's not only focus on the failure of the revenue aspect of supply-side, but also on the failure of the investment implications. By the way, I still see supply-side as essentially an attempt to revitalise the corpse of Say's Law, with the Laffer curve as being essentially a bit player.
Link to comment | October 22, 2007 at 05:55 PM anne says... "Given the enormous unfunded entitlement liabilities we face, we must address our long-term fiscal imbalance ASAP and base such policy on realistic assumptions, including assumptions regarding the relationship between tax rates and revenues." Say Social Security, which is a social insruance program and rolling in surplus and fine for decades to come? This is simply a way of advertising a Republican, blame the Democrats for what Repuiblicans have done, website. Imagine a Republican who can manage to spell "Iraq," when it comes to thinking of say unfunding?
Link to comment | October 22, 2007 at 06:15 PM mark says... Growin...
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