Ok, this one's really just for the archives, but if you'd like to read a clear piece of analysis, a breakdown of economic players and teams during the Reagon era, and why people can say conflicting things about Reagonomics and all be right in one way or another then feel free to read on.
The Real Supply Siders: From Brad DeLong's WebjournalJohn Quiggen succumbs to High Relativism, and proclaims that whether Ronald Reagan was "convinced" that cutting tax rates would raise tax revenues is unknowable.
John Quiggin: Wanniski's claim to have convinced Reagan is rejected by (broad sense) supply-siders who were around at the time, like William Niskanen (quoted by Alex Robson), and it seems unlikely that the truth can be determined...I think that this nihilistic-relativistic conclusion is much too pessimistic. What Reagan thought in his heart-of-hearts is not very important. Reagan wanted to lower taxes, balance the budget, and cut waste, fraud, and abuse in government. He (naively) relied on his advisers--his Grand Viziers--to share his priorities and to prepare and implement policies that would accomplish them. It went wrong: Reagan did not run for President so that he could become the biggest deficit-spender in American history. We know a lot about how it went wrong. But if we are to accurately set out what we know, we need to recognize that "supply side" and "economist" are contested terms of art. Different people use these terms to mean different things--deliberately use these terms to mean different things.
Let's review the bidding. There are four ideological police actions in progress. The first comes from William Niskanen. Alex Robson quotes a passage from William Niskanen's Reaganomics:
Supply side economics, however, was not a new economic theory. As of 1981 there was no distinctive supply-side texts, no courses, no distinguished scholar, and no school of supply-side economists. This body of analysis does not conclude that a general reduction in tax rates would increase tax revenues, nor did any government economist or budget projection by the Reagan administration ever make this claim. Arthur Laffer...once drew a curve on paper napkin to demonstrate that a reduction of some high tax rates could increase revenue; the existence of a "Laffer curve", however, was neither new (except by that name) nor controversial. Jude Wanniski of the Wall Street Journal and other journalists who promoted the Laffer curve as a symbol of supply-side economics unfortunately trivialized the substantive contribution of the micro effects of fiscal policy. Supply side economics does not address the effects of government borrowing; specifically, it does not provide a basis for concluding that deficits do not matter... In summary, there was no "supply-side revolution" in economic theory...
To properly understand this passage, you need to know that there is a book called The Supply Side Revolution: An Insider's Account of Policymaking in Washington written by Reagan-era Treasury Assistant Secretary Paul Craig Roberts. William Niskanen wants to rip the (to him honorable) label of "supply-sider" away from Roberts, Wanniski, Laffer, and company.
The second ideological police action comes from CEA Chair-Designate Greg Mankiw. Mankiw wrote, in the first edition of his Principles of Economics textbook:
An example of fad economics occurred in 1980, when a small group of economists advised Presidential candidate, Ronald Reagan, that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenues would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder and this extra effort would offset the direct effects of lower tax rates to some extent, but there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates....
Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 Presidential campaign and the economic policies of the 1980s....
People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise....
Mankiw is here trying to boost the standing of Ph.D. economists at the expense of those without Ph.D.'s who claim the mantle. He is trying to show his students that the mainstream of economics--in which Greg swims--has important pieces of knowledge that are worth heeding, and that others like presidents ignore at their peril. For Mankiw, supply-siders are people who let their ideology confuse them so they fail to distinguish between what is true and what they wish were true. The label is dishonorable: something to be avoided and thrown off, rather than something to be grasped.
The third ideological police action comes from Stephen Moore, who accuses Greg Mankiw of "indoctrinating young economists with wrongheaded thinking about supply-side economics..." He urges the replacement of Greg Mankiw as CEA Chair-Designate by David Malpass or Brian Wesbury or Richard Vedder. Moore's goals appear to be twofold: First, to enshrine the reputation of Ronald Reagan. Second, to assert that supply-side economists--among whom Moore counts himself--never held the views that Mankiw attributes to "cranks and charlatans."
Yet a fourth is being carried out by Bruce Bartlett, in a Town Hall column not yet up on the web: He writes that "Of course, no one ever said such a thing" as that tax rates could be cut with no loss of revenue. "I have thoroughly researched this matter and found no evidence that any economist working for the Reagan Administration ever said that..."
To pick your way through this tangled intellectual landscape, you need to hold on tight to a couple of things. First, "supply-side" and "economist" are both contested terms. They mean different things to different people Second, there were at least four different groups who have some claim to having been the real supply-siders in the early 1990s:
The people--think of Jude Wanniski, Arthur Laffer, Jack Kemp, et cetera--who appear to have believed that the United States was on the far side of the Laffer Curve, and that tax rate cuts would genuinely increase tax revenues over what they would have been otherwise.
The people--think of Bruce Bartlett, Larry Lindsey, et cetera--who believed that at the start of the 1980s America was paying a very heavy price at the margin for its progressive tax system. They thought that properly-designed tax cuts would boost real GDP through supply-side channels by between $1 and $2 for every $1 of notional static-estimate revenues loss from the tax cut (as opposed to people like me, who guess that the number is more like $0.50).
The people--think of Public Interest editor Irving Kristol--who saw the ideas of the two groups above as convenient tools to use in trying to construct a Republican political coalition. As Kristol wrote in 1995: "The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority--so political effectiveness was the priority, not the accounting deficiencies of government." It was not that Kristol and the other neoconservatives interested in heating up the Cold War abroad and fighting Permissiveness at home believed in supply-side economics. Kristol writes of his faction's "...own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems." But they thought that pretending to believe in supply-side doctrines would allow them to claim that their candidates supported (a) big tax cuts and (b) balanced budgets--and thus win them political popularity.
The people--think of Reagan-era Office of Management and Budget Director David Stockman--who were very skeptical about the ideas of the first two groups, but who saw their ideas as a convenient tool--a Trojan Horse--in (a) reducing the top income tax rate (something worth doing both on its own and as a convenient way to reward Republican political supporters) and (b) creating a large revenue shortfall that would leave the President and Congress with no alternative other than to deeply slash government spending and the social-insurance state.
Listening to all four of these groups was Ronald Reagan, who believed that Americans were overtaxed, and that there was a lot of waste, fraud, and abuse in government spending. Hence his three priorities: cut taxes; root out waste, fraud, and abuse; and balance the budget. And--given his naive belief that his advisors shared his priorities--his puzzlement at the options his various Grand Viziers kept bringing him after his first year in office. They had all assured him beforehand (each set for their own reasons) that his three priorities were consistent. So why did they keep bringing him budgets with huge deficits?Whether supply-siders are good or bad, true believers or cynical media manipulators, charlatans or wise men, cranks or part of the economic mainstream, economists or fraudsters--that all depends on which of the four groups above grasps the brass ring and are the real supply siders. Everything Mankiw writes is correct--if the real supply siders are group one. Everything Niskanen writes is correct--if the real supply-siders are group two.
When people say that there is "no evidence that any economist working for the Reagan Administration ever said that taxes could be cut with no loss of revenue" the key words are economist (defined as someone with a Ph.D. in Economics) and working for the Reagan Administration. Irving Kristol never worked for the Reagan Administration. Jude Wanniski did not have a Ph.D. in Economics. Nevertheless the two of them--Kristol and his allies by providing Wanniski with a platform from which to shout and a cadre of neo-conservative non-economists who would push supply-side doctrines just because Kristol approved of them, and Wanniski and his fellows in arguing that the United States was on the far side of the Laffer Curve--did a great deal to shape the climate in which Reagan Administration fiscal policy was made. Thus we find many people today desperate to define "supply-side economist" in a way that excludes the first, the third, and the fourth groups--the first because their claims are incredible, and the third and fourth because today they make no bones about the fact that they regarded supply-side economics as something that was not true but that was nevertheless very useful.
So is there anything in the current dispute that does not turn on matters of definition--on who is and who is not a real supply-side economist? Yes. Stephen Moore is wrong: there is no reason to think that David Malpass or Richard Vedder or Brian Wesbury would make a better CEA Chair than Greg Mankiw.
Comments (3)
Conservatives point out that in US history there have been six years in which tax rate reductions have gone into effect, and that in five of those years, tax revenues - in inflation-adjusted dollars - have gone UP. The one year in which real revenue fell was the deepest year of the recession, which was caused by fed policy - and arguably might have been worse, thus producing even lower revenues, without the tax cut. They also point out that Bush 41's tax rate increases produced a 2.2% DECLINE in federal revenues - also in the year of a recession, but not characterized by GDP reduction of anything near 2.2%. Thus, Laffer was correct about the existence of a curve AND our place on it. The problem in the 1980s, say conservatives, was that there was no check on spending, which simply rose by more than revenues rose. To conservatives, if your income goes up by $6,000 and you spend an extra $12,000, the problem isn't on the inflow side - it's on the outflow side, the result of fiscal irresponsibility.
Liberals point out that there were big "revenue shortfalls" and growing deficits in the early 1980s.
Both sides are correct. IF by "revenue shortfalls" you mean that in 1982, 1983 and 1984, the dollars collected were fewer in number than the dollars budgeted, then the liberals are correct - there was a "shortfall" of tens of billions of dollars. But the liberals are incorrect in blaming tax policy - adjusted for inflation, there was no such great shortfall. The conservatives correctly point out that the government collected the real spending power it had planned to, but spent more.
The problem, though, was not "fiscal irresponsibility," of Congress or the President, but was and remains a budget process that is not designed for rapid year-over-year changes in inflation.
Over a year advance, the OMB and CBO lay out assumptions about the economy. Those assumptions are applied to the President and Congress' budget priorities to come up with a budget: a COMMITMENT to allow federal agencies to spend X dollars, and to revenue predictions: a PROJECTION of how many dollars of revenue will be generated.
You see the disconnect: funds are COMMITTED to the agencies that spend them as a function of ASSUMPTIONS. Revenue, which comes from taxes and fees collected the following year, are PROJECTED using the same ASSUMPTIONS, but are GENERATED as a function of REALITY. If REALITY turns out to be different from the ASSUMPTIONS, revenues will be affected accordingly, but the authority to spend has already been committed.
The most important economic assumption to be made in the early 1980s was INFLATION, which declined precipitously (at a rate of about 50% per year) throughout Reagan's first term. An OMB planner in February 1981 was sitting on double digit inflation - so the assumption of 12% inflation was applied to the budget priorities.
If you want the army depot clerk to be able to order in 1982 the same amount of ammunition he could order in 1981, and in 1981 he ordered $100,000 worth, then you'd adjust upward for inflation - which at the time was assumed to be 12% - and you'd authorize him to order $112,000 worth. To keep funding constant on a $1 trillion budget (is was a bit less than that but $1 trillion but this makes the math easier to follow), you'd write up a budget of $1.12 trillion and assume the same 12% increase in revenue dollars collected simply as a function of inflation.
But 1982 inflation turned out to be about 6%. Thus revenue increase as a result of inflation was only 6%, not the budgeted 12%. THERE'S YOUR $60 BILLION SHORTFALL. Right off the bat, you're $60 Billion in the hole.
Federal monies flow like a river going backward - from one source down through all the little tributaries. The army depot clerk has been authorized to spend $112,000. That's $6,000 more purchasing power than you intended to give him, but it's what you gave him. The policy at the depot level is to spend what you get while you have it - because if you spend less, you might get less funding next year. Because the money can only be committed for a year at a time, you can't save put the extra purchasing power aside for a year - the clerk buys and the training program uses an extra $6,000 of ammunition. At the time, the purchasing clerk probably doesn't even know that the extra ammunition resulted from the decline in inflation rather than his abilities as a purchasing clerk. There are thousands of such clerks operating in dozens of agencies - there is just no practical way to go to each of them and get your $6,000 back. It's even more of a challenge when it's $6,000 in a "cost-of-living" adjustment to two unionized federal employees' wages.
Posted by Patrick Trombly | May 1, 2003 7:35 AM
Posted on May 1, 2003 07:35
Conservatives point out that in US history there
have been six years in which tax rate reductions
have gone into effect, and that in five of those
years, tax revenues - in inflation-adjusted
dollars - have gone UP. The one year in which
real revenue fell was the deepest year of the
recession, which was caused by fed policy - and
arguably might have been worse, thus producing
even lower revenues, without the tax cut. They
also point out that Bush 41's tax rate increases
produced a 2.2% DECLINE in federal revenues -
also in the year of a recession, but not
characterized by GDP reduction of anything near
2.2%. Thus, Laffer was correct about the
existence of a curve AND our place on it. The
problem in the 1980s, say conservatives, was that
there was no check on spending, which simply rose
by more than revenues rose. To conservatives, if
your income goes up by $6,000 and you spend an
extra $12,000, the problem isn't on the inflow
side - it's on the outflow side, the result of
fiscal irresponsibility.
Liberals point out that there were big "revenue
shortfalls" and growing deficits in the early
1980s.
Both sides are correct. IF by "revenue
shortfalls" you mean that in 1982, 1983 and 1984,
the dollars collected were fewer in number than
the dollars budgeted, then the liberals are
correct - there was a "shortfall" of tens of
billions of dollars. But the liberals are
incorrect in blaming tax policy - adjusted for
inflation, there was no such great shortfall.
The conservatives correctly point out that the
government collected the real spending power it
had planned to, but spent more.
The problem, though, was not "fiscal
irresponsibility," of Congress or the President,
but was and remains a budget process that is not
designed for rapid year-over-year changes in
inflation.
Over a year advance, the OMB and CBO lay out
assumptions about the economy. Those assumptions
are applied to the President and Congress' budget
priorities to come up with a budget: a COMMITMENT
to allow federal agencies to spend X dollars, and
to revenue predictions: a PROJECTION of how many
dollars of revenue will be generated.
You see the disconnect: funds are COMMITTED to
the agencies that spend them as a function of
ASSUMPTIONS. Revenue, which comes from taxes and
fees collected the following year, are PROJECTED
using the same ASSUMPTIONS, but are GENERATED as
a function of REALITY. If REALITY turns out to
be different from the ASSUMPTIONS, revenues will
be affected accordingly, but the authority to
spend has already been committed.
The most important economic assumption to be made
in the early 1980s was INFLATION, which declined
precipitously (at a rate of about 50% per year)
throughout Reagan's first term. An OMB planner
in February 1981 was sitting on double digit
inflation - so the assumption of 12% inflation
was applied to the budget priorities.
If you want the army depot clerk to be able to
order in 1982 the same amount of ammunition he
could order in 1981, and in 1981 he ordered
$100,000 worth, then you'd adjust upward for
inflation - which at the time was assumed to be
12% - and you'd authorize him to order $112,000
worth. To keep funding constant on a $1 trillion
budget (is was a bit less than that but $1
trillion but this makes the math easier to
follow), you'd write up a budget of $1.12
trillion and assume the same 12% increase in
revenue dollars collected simply as a function of
inflation.
But 1982 inflation turned out to be about 6%.
Thus revenue increase as a result of inflation
was only 6%, not the budgeted 12%. THERE'S YOUR
$60 BILLION SHORTFALL. Right off the bat, you're
$60 Billion in the hole.
Federal monies flow like a river going backward -
from one source down through all the little
tributaries. The army depot clerk has been
authorized to spend $112,000. That's $6,000 more
purchasing power than you intended to give him,
but it's what you gave him. The policy at the
depot level is to spend what you get while you
have it - because if you spend less, you might
get less funding next year. Because the money
can only be committed for a year at a time, you
can't save put the extra purchasing power aside
for a year - the clerk buys and the training
program uses an extra $6,000 of ammunition. At
the time, the purchasing clerk probably doesn't
even know that the extra ammunition resulted from
the decline in inflation rather than his
abilities as a purchasing clerk. There are
thousands of such clerks operating in dozens of
agencies - there is just no practical way to go
to each of them and get your $6,000 back. It's
even more of a challenge when it's $6,000 in
a "cost-of-living" adjustment to two unionized
federal employees' wages.
Thus, the true culprit in the budget deficits of
the 1980s was a flaw in the budget PROCESS, that
funds were committed based upon inflation
assumptions during a period that turned out to be
a rapidly declining inflation environment.
Understanding this, we can hopefully stop
referring to "how much a tax cut is going to cost"
in terms of revenues "lost," basing the assertion
mistakenly upon the budget deficits of the 1980s.
Adjusted for inflation, the results show that
at present levels, federal tax rate cuts pay for
themselves in the first year. You can reduce
tax rates and generate the same or more revenues
- adjusted for inflation. The budget deficits
of the early 1980s occurred because there is no
mechanism for spending commitments to be
adjusted for inflation.
Posted by Patrick Trombly | May 1, 2003 7:46 AM
Posted on May 1, 2003 07:46
Conservatives point out that in US history there
have been six years in which tax rate reductions
have gone into effect, and that in five of those
years, tax revenues - in inflation-adjusted
dollars - have gone UP. The one year in which
real revenue fell was the deepest year of the
recession, which was caused by fed policy - and
arguably might have been worse, thus producing
even lower revenues, without the tax cut. They
also point out that Bush 41's tax rate increases
produced a 2.2% DECLINE in federal revenues -
also in the year of a recession, but not
characterized by GDP reduction of anything near
2.2%. Thus, Laffer was correct about the
existence of a curve AND our place on it. The
problem in the 1980s, say conservatives, was that
there was no check on spending, which simply rose
by more than revenues rose. To conservatives, if
your income goes up by $6,000 and you spend an
extra $12,000, the problem isn't on the inflow
side - it's on the outflow side, the result of
fiscal irresponsibility.
Liberals point out that there were big "revenue
shortfalls" and growing deficits in the early
1980s.
Both sides are correct. IF by "revenue
shortfalls" you mean that in 1982, 1983 and 1984,
the dollars collected were fewer in number than
the dollars budgeted, then the liberals are
correct - there was a "shortfall" of tens of
billions of dollars. But the liberals are
incorrect in blaming tax policy - adjusted for
inflation, there was no such great shortfall.
The conservatives correctly point out that the
government collected the real spending power it
had planned to, but spent more.
The problem, though, was not "fiscal
irresponsibility," of Congress or the President,
but was and remains a budget process that is not
designed for rapid year-over-year changes in
inflation.
Over a year in advance, the OMB and CBO lay out
assumptions about the economy. Those assumptions
are applied to the President and Congress' budget
priorities to come up with a budget: a COMMITMENT
to allow federal agencies to spend X dollars, and
to revenue predictions: a PROJECTION of how many
dollars of revenue will be generated.
You see the disconnect: funds are COMMITTED to
the agencies that spend them as a function of
ASSUMPTIONS. Revenue, which comes from taxes and
fees collected the following year, are PROJECTED
using the same ASSUMPTIONS, but are GENERATED as
a function of REALITY. If REALITY turns out to
be different from the ASSUMPTIONS, revenues will
be affected accordingly, but the authority to
spend has already been committed.
The most important economic assumption to be made
in the early 1980s was INFLATION, which declined
precipitously (at a rate of about 50% per year)
throughout Reagan's first term. An OMB planner
in February 1981 was sitting on double digit
inflation - so the assumption of 12% inflation
was applied to the budget priorities.
If you want the army depot clerk to be able to
order in 1982 the same amount of ammunition he
could order in 1981, and in 1981 he ordered
$100,000 worth, then you'd adjust upward for
inflation - which at the time was assumed to be
12% - and you'd authorize him to order $112,000
worth. To keep funding constant on a $1 trillion
budget (is was a bit less than that but $1
trillion but this makes the math easier to
follow), you'd write up a budget of $1.12
trillion and assume the same 12% increase in
revenue dollars collected simply as a function of
inflation.
But 1982 inflation turned out to be about 6%.
Thus revenue increase as a result of inflation
was only 6%, not the budgeted 12%. THERE'S YOUR
$60 BILLION SHORTFALL. Right off the bat, you're
$60 Billion in the hole.
Federal monies flow like a river going backward -
from one source down through all the little
tributaries. The army depot clerk has been
authorized to spend $112,000. That's $6,000 more
purchasing power than you intended to give him,
but it's what you gave him. The policy at the
depot level is to spend what you get while you
have it - because if you spend less, you might
get less funding next year. Because the money
can only be committed for a year at a time, you
can't save put the extra purchasing power aside
for a year - the clerk buys and the training
program uses an extra $6,000 of ammunition. At
the time, the purchasing clerk probably doesn't
even know that the extra ammunition resulted from
the decline in inflation rather than his
abilities as a purchasing clerk. There are
thousands of such clerks operating in dozens of
agencies - there is just no practical way to go
to each of them and get your $6,000 back. It's
even more of a challenge when it's $6,000 in
a "cost-of-living" adjustment to two unionized
federal employees' wages.
Thus, the true culprit in the budget deficits of
the 1980s was a flaw in the budget PROCESS, that
funds were committed based upon inflation
assumptions during a period that turned out to be
a rapidly declining inflation environment.
Understanding this, we can hopefully stop
referring to "how much a tax cut is going to cost"
in terms of revenues "lost," basing the assertion
mistakenly upon the budget deficits of the 1980s.
Adjusted for inflation, the results show that
at present levels, federal tax rate cuts pay for
themselves in the first year. You can reduce
tax rates and generate the same or more revenues
- adjusted for inflation. The budget deficits
of the early 1980s occurred because there is no
mechanism for spending commitments to be
adjusted for inflation.
Posted by Patrick Trombly | May 1, 2003 7:49 AM
Posted on May 1, 2003 07:49