McArdle's blindness to supply-siders

New Atlantic blogger Megan McArdle claims that the Bush adminstration did not cut taxes out of "crackpot supply-sidism" but instead was "making extravagantly exaggerated claims about the benefits of its policies":

4) Highly respected economists Greg Mankiw and Glenn Hubbard shilled for the crackpot supply side theories of the Bush administration. This accusation is, to put the most charitable light on it, horribly overblown by people who don't really understand the debate very well. The Bush administration was not cutting taxes out of crackpot supply-sidism; it was cutting taxes because it wanted to cut taxes, and making extravagantly exaggerated claims about the benefits of its policies. This is not exactly surprising or novel behavior for a presidential administration; in his book, Bob Rubin claims that real interest rates fell by an utterly implausibly large amount due to deficit cuttery.

She also belittles the idea that supply-siders dominate the conservative movement and the Republican party:

I'm diving into Jonathan Chait's piece in The New Republic on how a whole huge conspiracy of crazy supply-siders has taken over the Republican party. This is, to put it kindly, wildly overblown. I mean, I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue.

Let me join Ezra Klein, Kevin Drum, Mark Thoma, and Matthew Yglesias in pointing out that McArdle's claims are absurd. Prominent Republicans and movement conservatives constantly suggest that tax cuts increase revenue, including the Bush administration and at least two of the current presidential candidates. The Wall Street Journal even doctors graphs to do it.

In case McArdle missed it, here's my compilation of administration statements suggesting tax cuts increase revenue:

President Bush, 11/13/02: "Well, we have a deficit because tax revenues are down. Make no mistake about it, the tax relief package that we passed -- that should be permanent, by the way -- has helped the economy, and that the deficit would have been bigger without the tax relief package."

President Bush, 1/7/03: "This growth and jobs package is essential in the short run; it's an immediate boost to the economy. And these proposals will help stimulate investment and put more people back to work, is what we want to have happen. They are essential for the long run, as well -- to lay the groundwork for future growth and future prosperity. That growth will bring the added benefit of higher revenues for the government -- revenues that will keep tax rates low, while fulfilling key obligations and protecting programs such as Medicare and Social Security."

Press Secretary Ari Fleischer, 1/8/03: "The entire [tax cut] package the President does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government and pay for itself."

Vice President Cheney, 1/30/03: "The President's proposals will reduce the tax burden on the American people by $670 billion over the next 10 years. By leaving more money in the hands of the people who earn it, people who will spend and invest and save and add momentum to our recovery, we'll help create more jobs and ultimately increase tax revenues for the government."

President Bush, 5/7/03: "[T]he other way to deal with the deficit is to put policies in place that increase the revenues coming into the Treasury. And the best way to encourage revenues coming into the Treasury is to promote policy which encourages economic growth and vitality. A growing economy is going to produce more revenues for the federal Treasury. The way to deal with the deficit is not to be timid on the growth package; the way to deal with the deficit is to have a robust enough growth package so we get more revenues coming into the federal Treasury."

President Bush, 8/6/05: "The tax relief stimulated economic vitality and growth and it has helped increase revenues to the Treasury. The increased revenues and our spending restraint have led to good progress in reducing the federal deficit. Last month we learned that the deficit is now projected to be $94 billion less than previously expected. I set a goal of cutting the deficit in half by 2009, and we are ahead of pace to meet that goal."

President Bush, 2/8/06: "One of the interesting things that I hope you realize when it comes to cutting taxes is this tax relief not only has helped our economy, but it's helped the federal budget. In 2004, tax revenues to the Treasury grew about 5.5 percent. That's kind of counter-intuitive, isn't it? At least it is for some in Washington. You cut taxes and the tax revenues increase. See, some people are going to say, well, you cut taxes, you're going to have less revenue. No, that's not what happened. What happened was we cut taxes and in 2004, revenues increased 5.5 percent. And last year those revenues increased 14.5 percent, or $274 billion. And the reason why is cutting taxes caused the economy to grow, and as the economy grows there is more revenue generated in the private sector, which yields more tax revenues."

Vice President Cheney, 2/9/06: The President's tax policies have strengthened the economy, as we knew they would. And despite forecasts to the contrary, the tax cuts have translated into higher federal revenues... Nobody's perfect, but when revenue projections are off by 180 degrees, it's time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy. Recognizing this, the President's recently submitted budget would create a new Dynamic Analysis Division within the Treasury Department to analyze major tax proposals. The evidence is in, it's time for everyone to admit that sensible tax cuts increase economic growth, and add to the federal treasury.

President Bush, 7/11/06: "Some in Washington say we had to choose between cutting taxes and cutting the deficit. You might remember those debates. You endured that rhetoric hour after hour on the floor of the Senate and the House. Today's numbers show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring. That's what's happened."

Now, as Klein points out, the rest of us apparently lack McArdle's talents for mind-reading. We can't know whether all these people actually believe the claims they make. In the real world, however, we must judge public figures on the statements they make, not on unprovable claims about what their private views.

Update 9/6 5:04 PM: McArdle responds:

Brendan Nyhan, of whom I am generally very fond, is attacking me on supply side economics. In his post, he does a brilliant job of proving that politicians make ludicrous claims for their policies. Stand by for the blistering expose of the shameless way that men pursue young, attractive women, and the follow-up report titled "Sometimes, when the people you have slept with say they are going to call, they don't mean it".

Once again, before I go any further, I think people should spend all the time they want refuting those claims. What I don't think is that supply-side economics is dominating Republican policy, which is what Chait, and now Matt, and for all I know everyone to the left of Lincoln Chafee, are now claiming. To release a book subtitled "How Washington Got Hoodwinked and Hijacked by Crackpot Economics" you need a little more than "sometimes, in the course of selling their policies, politicians make ludicrous claims based on discredited economic notions", because that is not exactly a unipartisan vice. To subtitle your book that way, you need the most extreme form of supply-sidism to be the driving force behind Republican tax policy. And it just isn't.

Supply-side claims are made in the course of selling tax cuts, but they are not the dominant reason that politicians pursue tax cuts. Nor are they the dominant means by which those tax cuts are sold to the public; Brendan or anyone else can find plenty of other arguments for tax cuts from all the politicians they cite as rabid supply-siders.

We can all agree that Republicans offer multiple rationales for tax cuts -- indeed, President Bush changed the rationale for his first tax cut from returning the surplus to the people (campaign 2000) to stimulating the economy (early 2001). But there are two problems with McArdle's reasoning. First, it's not clear how she knows what the "dominant reason" politicians pursue tax cuts is -- this is more mind-reading. I do know that, as commenters point out below, McCain and Giuliani made supply-side themes central to their tax cut pitches last night:

MCCAIN: I think it’s very clear that the increase in revenue that we’ve experienced is directly related to the tax cuts that were enacted, and they need to be made permanent rather than the family budgets and businesses being uncertain about their future.

... GIULIANI: It is my intention to lower taxes. I have without any doubt of all the people running for president the strongest record of lowering taxes. I did it 23 times in a city that had never lowered a tax before well over $9 billion. I lowered the personal income tax 25 percent, and I was collecting 40 percent more in revenues from the lower tax than the higher tax. I made supply-side economics work in a city that didn’t understand it, and I ended up having a very positive impact on the economy of the city as a result of that. I lowered 23 different taxes in a city that had a city council with 45 Democrats and six Republicans.

In addition, even if supply-side claims aren't the "dominant reason" Republicans want tax cuts, they are the focus of one of the two principal critiques of tax cuts from Democrats, who typically oppose GOP tax cut proposals by saying (1) they'll increase the deficit and (2) they're skewed toward the rich. Thus, it matters a lot that prominent Republicans and conservatives keep saying tax cuts generate revenue, a claim that implies a lack of difficult tradeoffs (as Matthew Yglesias points out). In the language of economics, a revenue-generating tax cut would be Pareto optimal even if the distributional effects are skewed -- everyone would be at least as well off as they were before, and some people would be better off. This claim is a hoax that's been perpetrated on the American people for more than two decades, and Chait is right to focus his book on exposing it.

Update 9/6 9:43 PM: Bizarrely, Tyler Cowen argues that supply-side thinking isn't influential, citing Conservapedia entries as evidence:

Do read Matt Yglesias's interesting post (and here), but supply-side thinking simply isn't that influential anymore. To show this, the entry on supply-side economics from Conservapedia is neither fleshed out nor current. Conservapedia is not a reliable source but it is a information aggregator of sorts for what is an influential idea on the right.

Here is their painful (but also obsolete and undernourished) entry on the Laffer Curve. This claim boggles the mind: "In the Reagan era, the Laffer Curve demonstrated that tax cuts lead to a near doubling of federal tax reciepts ($500 billion to $900 billion)." Might Reagan's huge tax increase have had something to do with that?

I know one can find cites to supply-side economics by Giuliani, McCain and others, but the "starve the beast" theory -- rightly or wrongly -- is far more popular with the Right these days. Many people will use Laffer Curve claims to hide their real agendas but that is distinct from the Laffer Curve having much influence.

I have the same question for Cowen as I do for McArdle -- how do you know what politicians' "real agendas" are? Either they are being invited to top-secret meetings where prominent conservatives explain the "real" motivations for their actions or they are pretending to read people's minds.

Comments

[DrexelDem]

Giuliani claimed that he raised city revenues in NY during his mayorship by cutting taxes in the debate last night.

I don't remember any of the other candidates rebuking him either.

McArdle is clearly a liberal ploy designed to make conservatives appear foolsih.

[Rob]

What Giuliani said was this: "It is my intention to lower taxes. I have without any doubt of all the people running for president the strongest record of lowering taxes. I did it 23 times in a city that never lowered a tax before. Well over $9 billion. I lowered the personal income tax 25 percent, and I was collecting 40 percent more in revenues from the lower tax than the higher tax. I made supply-side economics work in a city that didn't understand it. And I ended up having a very positive impact on the economy of the city as the result of that."

It's worth noting that supply-side economics might very well work in a city or state but not work on a national level. Cities and states compete with one another for high-income residents and for businesses.

Before Giuliani, New York City was notoriously a high-tax environment, and many high-income individuals had abandoned New York City in favor of New Jersey, Connecticut, Westchester County and Long Island, all of which offered lower taxes. That tax cuts in New York City might have resulted in a greater mix of higher-income residents with consequent increase in revenues is not at all improbable. Of course, it's impossible to say with certainty whether the reason people returned to the City was lower taxes, lower crime, or other factors.

The difficulty of transposing the lessons of local finance onto a national scale is evident, since a far smaller percentage of Americans is in a position to choose to reside outside the U.S. than is the case for city residents. Giuliani may be worthy of criticism for being overly simplistic on that point. But the factual claims that Giuliani made probably are unassailable.

[DrexelDem]

Fair point about the differences in scale Rob, but I thought Giuliani's clear implication was that he supported federal tax cuts to boost revenue. I wasn't saying that he didn't both cut taxes in NYC and raise revenues, my point was that he was apparently endorsing the wisdom of supply-side as a presidential candidate.

It's also worth noting the larger economic environment in which NYC's revenues rose, which is to say the roaring nineties. Wall Street was making lots of money for reasons unrelated to Rudy.

[Sean]

Here's one from last night's Republican debate.

McCain:
I think it’s very clear that the increase in revenue that we’ve experienced is directly related to the tax cuts that were enacted, and they need to be made permanent rather than the family budgets and businesses being uncertain about their future.

From the NYT transcript.

[Kandis]

Ah Brendan, another good bit of detective work! Thanks for your research on this.

[Bloix]

Shorter Megan: "When Bush and Cheney tell us why they're doing something, THEY'RE FUCKING US. And then they don't even call. Why did we ever agree to a 3-some with those guys?"

[putnam]

The rising local tax revenues during the Giuliani administration were a minor local ripple, due to the rising stock market, of the Clinton economy, which was NOT a supply side economy.

[William]

Supply side or not, I strongly object to ANY tax increase on this notion alone: Congress and the Executive branch are doing a very poor job of spending MY tax money. Until they can exercise some actual fiscal constraint, the economic contretemps over supply-side validity is silly and pointless.

[Econ Reader]

Megan McArdle is a shame to the Atlantic. All those intellectual backflips to defend... what exactly? I'm already growing tired of having to read blog posts from around the world decimating her talking points.

Why couldn't the Atlantic hire a real economist, instead of essentially a heavily biased, innumerate essayist?