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December 23, 2005

Paul Krugman: The Tax-Cut Zombies

Paul Krugman is a little disingenuous in today’s column (surprise!).

To describe supply-side economics as silly is a little over the top. Clearly, dropping a tax rate from 100% (at which it will raise no revenue whatsoever) to 50% will increase the revenue collected. So the basic assertion (forgotten by many) that sometimes tax cuts will raise revenues is anything but silly. It’s simply a statement of obvious fact.

Oh, and by the way, supply-side actually means a great deal more than tax cuts. It actually means, umm, you know, reform of the supply-side. Might mean bashing unions, might mean crushing a business monopoly, might mean privatization of a currently Government run activity....all of those are things that might (note might!)  be included in a supply-side program. Could mean nationalization of a currently privately run activity too. Certainly there are parts of the world where an assertion of the State’s monopoly rights on legal violence would benefit.

Because, you know, it says what it means on the tin. We want to reform the supply-side and all of those things are elements of such.

The starve the beast argument, although I agree incompetently applied by the current bunch of big government conservatives, also still has merit. As Jim Glass is fond of pointing out, it’s not as if when there was a surplus spending was that much more restrained. And it’s certainly arguable that reporting the nett deficit (ie, the SS trust fund lock box included) has increased current outlays.

Perhaps this bunch haven’t made starving the beast work but then that doesn’t mean that no one could. As a personal opinion I think a line item veto would be the best way to do it but then that is, I believe, unconstitutional.

Anyway, thus ends the analysis of a Krugman column. Republicans can’t find a way to reduce current spending so we’d better elect Democrats who want to spend even more anyway.

Good one Paul.

Tag

Update: You’ll want to read this Don Boudreaux piece. Where do people get this strange idea that lower tax rates might (note might!) increase revenues collected?  Adam Smith:

The high duties which have been imposed upon the importation of many different sorts of foreign goods, in order to discourage their consumption in Great Britain, have in many cases served only to encourage smuggling, and in all cases have reduced the revenue of the customs below what more moderate duties would have afforded. The saying of Dr. Swift, that in the arithmetic of the customs two and two, instead of making four, make sometimes only one, holds perfectly true with regard to such heavy duties which never could have been imposed had not the mercantile system taught us, in many cases, to employ taxation as an instrument, not of revenue, but of monopoly.

If you want someone to play Scrooge just before Christmas, Dick Cheney is your man. On Wednesday Mr. Cheney, acting as president of the Senate, cast the tie-breaking vote in favor of legislation that increases the fees charged to Medicaid recipients, lets states cut Medicaid benefits, reduces enforcement funds for child support, and more.

For all its cruelty, however, the legislation will make only a tiny dent in the budget deficit: the cuts total about $8 billion a year, or one-third of 1 percent of total federal spending.

So ended 2005, the year that killed any remaining rationale for continuing tax cuts. But the hunger for tax cuts refuses to die.

Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels. Conservative insiders adopted the supply-siders as mascots because they were useful to the cause, but never took them seriously.

The insiders' theory -- what we might call the true tax-cut theory -- was memorably described by David Stockman, Ronald Reagan's budget director, as ''starving the beast.'' Proponents of this theory argue that conservatives should seek tax cuts not because they won't create budget deficits, but because they will. Starve-the-beasters believe that budget deficits will lead to spending cuts that will eventually achieve their true aim: shrinking the government's role back to what it was under Calvin Coolidge.

True to form, the insiders aren't buying the supply-siders' claim that a partial recovery in federal tax receipts from their plunge between 2000 and 2003 shows that all's well on the fiscal front. (Revenue remains lower, and the federal budget deeper in deficit, than anyone expected a few years ago.) Instead, conservative heavyweights are using the budget deficit to call for cuts in key government programs.

For example, in 2001 Alan Greenspan urged Congress to cut taxes to avoid running an excessively large budget surplus. Now he issues dire warnings about ''fiscal instability.'' But rather than urging Congress to reverse the tax cuts he helped sell, he talks of the need to cut future Social Security and Medicare benefits.

Yet at this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years -- and presided over record deficits -- public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending.

In fact, two years ago the Bush administration actually pushed through a major expansion in Medicare. True, the prescription drug bill clearly wasn't written by liberals. To a significant extent it's a giveaway to drug companies rather than a benefit for retirees. But all that corporate welfare makes the program more expensive, not less.

Conservative intellectuals had high hopes that this year President Bush would make up for this betrayal of their doctrine by dealing a death blow to Social Security as we know it. Indeed, he tried. His proposed ''reform'' would, over time, have essentially phased out the program. And he seemed to have everything going for him: momentum from an election victory, control of Congress and a highly sympathetic punditocracy. Yet the drive for privatization quickly degenerated from a juggernaut into a farce.

Medicaid, whose recipients are less likely to vote than the average person getting Social Security or Medicare, is the softest target among major federal social-insurance programs. But even members of Congress, it seems, have consciences. (Well, some of them.) It took intense arm-twisting from the Republican leadership, and that tie-breaking vote by Mr. Cheney, to ram through even modest cuts in aid to the neediest.

In other words, the starve-the-beast theory -- like missile defense -- has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts.

Yet the cuts go on. In fact, even as Congressional leaders struggled to pass a tiny package of mean-spirited spending cuts, they pushed forward with a much larger package of tax cuts. The benefits of those cuts, as always, will go disproportionately to the wealthy.

Here's how I see it: Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more.

December 23, 2005 in Economics | Permalink

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Comments

"Paul Krugman is a little disingenuous in today’s column (surprise!). To describe supply-side economics as silly is a little over the top..."

Hey, you beat me to it again.

You know, if all you read is Krugman you'll never get the idea that there are any people out there who are reasonably literate in economics -- like, say Nobel winners -- who disagree with him 'bout such things.

It's also a tad disingenuous of PK to say the starve-the-beasters' goal is "to shrink the government's role back to what it was under Calvin Coolidge", and then give as an example of this Alan Greenspan talking "of the need to cut future Social Security and Medicare benefits" -- which rather is a plea to restrain the scheduled growth of the size of US government to that of the staggering European welfare states.

Krugman wouldn't want to describe it that way because it might seem ... reasonable?

(And as for all those "zombies" whom PK deduces mustn't be able to remember why they've endorsed what they have regarding all this, shaking the hand of the King of Sweden must pass infectious zombie-ism, because the list includes the likes of Lucas, Friedman, Becker, Buchanan, Coase, Smith, Prescott ...)

Posted by: Jim Glass | Dec 24, 2005 7:06:50 AM