October 24, 2007

Today In Bad Economic News, Pt. II

Well, bad for the Republican presidential front-runners, anyway.

The New Yorker's James Surowiecki writes a damning indictment of supply-side economics theory in this week's issue. "The supply-side argument that, in the United States, tax-rate cuts pay for themselves -- that, after cutting taxes, the government actually ends up with more revenue -- has little or no support within the mainstream economic profession, and no hard empirical data to back it up," he contends.

President Bush, of course, is the supply-sider in chief. Bush has been able to point to the growth of the economy during his term, and the post-9/11 rebound in particular, as proof that his controversial tax cuts are sound -- ignoring the "simple fact," as Surowiecki puts it, that "the American economy grows over time."

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 not between government revenue in 2001 and government revenue in 2007. It's 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. And studies that make these types of comparisons -- including one by Bush’s own Treasury Department that looked at the tax cuts' impact on economic growth -- find that government revenues would be greater had taxes not been cut.

Economics blogger Megan McArdle, of our sister publication The Atlantic, gets a mention as a heretic in the Church of Supply-Side Economics in Surowiecki's column. On Oct. 16, she disclosed to her readers that a conservative publication spiked a book review because it "violated their editorial line on taxation." McArdle, a self-described libertarian, hasn't disclosed the name of the publication.

The top GOP front-runners, including John McCain, have vowed to make Bush's tax cuts permanent. McCain, as many might remember, is one of Bush's more prominent GOP critics on fiscal policy and voted against the tax cuts. Though talk of raising taxes remains verboten, more or less, in the GOP, Republican fiscal conservatives have grown more visibly uncomfortable with the ballooning deficit under Bush's watch.

Many conservative economists dispute the idea that tax cuts pay for themselves, as the Christian Science Monitor's David Francis noted earlier this month. Making waves among pop economic theorists is a new book by Jonathan Chait, "The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics." Chait, a senior editor for liberal political pub The New Republic, equates supply-side economics with creationism.

Chait's book is being lambasted by some for being hyperpartisan and getting his rationale wrong in places.* Chait paints supply-side dogmatists as "quite possibly insane." McArdle disagrees: "One of the worst features of modern political discourse is the inability of critics to distinguish between being crazy, and being wrong. The supply siders of the 1980s were not crazy... they were simply incorrect."

The GOP candidates paid their respects to the Church of Supply-Side Economics at the CNBC debate in Michigan two weeks ago; read our coverage here.

*(This post originally stated that Chait's book has been criticized for "getting some facts wrong." The counterarguments referenced largely attack his analysis for ignoring "large swathes of economic history," which is what we intended to write. We regret the error.)

Posted at 5:05 PM
Posted to: Bush Administration, Campaigns, Economy, John McCain, President Bush, Republicans, WH 2008
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