Beastly Economics

The President seems to be wanting to talk about the conservative economic record at the moment. So this might be a fun time to remember what yesterday told us about two recurring, contradictory and economically rather silly tax nostrums trotted out by Republicans. These are the laffer curve and the starve-the-beast hypothesis, supported by Art Laffer and Milton Friedman respectively. The first turns up from time-to-time in the President's speeches as a justification for tax cuts. It argues that, up to a certain point, tax cuts cause higher tax takes because of changed incentives. The second, confusingly, means almost completely the opposite. It argues that tax cuts lower government revenue (and hence spending), starving the beast in question.) Which is right? Turns out - drumroll - it's neither.

A splendid post at the scarcely Keynsian Wall St Journal picks up new figures put out yesterday by the Administration explaining why the tax cuts don't pay for themselves:

"The congressional Joint Committee on Taxation, using conventional analyses, says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate."

(There is more on this at Brad De Long's ever excellent blog too, where he also agrees with Rob's post below on previously high deficit estimates.) And what of the beast? Yesterday's events shed less light on that, beyond the President's admission that little had been done on his watch to curb entitlement spending. Its common knowledge that spending has increased mightily under what the Economist calls his "Big Government Conservatism." But beasts aside, sensible economic theory isn't much surprised by this. Americans are at present getting roughly the same ammount of Government for less money. It makes perfect sense for them to then want more of it, because they don't have to pay as much for it in taxes. The rub, of course, is that future generations do, through the now 4th largest ever deficit. I'm afraid I can't find a WSJ article to back me up on this, so the CATO Institute will have to do instead. So there you have it. Taxes go down, so do revenues. Taxes go down, government spending does not fall, but deficits get bigger. Come in Mr Laffer, and Mr Friedman. Your time is up.