View From a Height
Commentary from the Mile High City
Monday, March 15, 2004

Worthy of Paul Krugman 

By focusing on selected time periods, and by completely ignoring the effects of the business cycle, he's able to deny such a connection. Republicans, unlike some Democrats, have never claimed to be able to repeal the business cycle. He ignores the fact that tax policy is usually implemented in response to existing or developing conditions, not in a vacuum. So the Reagan tax cuts didn't cause the 1981-82 recession - they were implemented in response to stagflation. Bush's tax cuts aren't irrelevant to unemployment; he was able to implement them just as the economy was slipping into recession - political timing that almost never happens. And so on.

In effect, the scope of his report is both too narrow and too broad: it expects the entire US economy to turn like a PT boat on the basis of one macroeconomic input. Tax policy a blunt, but effective, instrument, but it's only one of a number at the government's disposal: spending, interest rates. tariffs, regulation. The effects of tax cuts on a smaller scale are well-documented: states with lower tax rates do attract more business. (This is also true at a national level; thus the efforts of the EU to use the WTO to dictate our tax policy to us. Thus the EU's efforts at "tax harmonization" within its borders.) Excise taxes on items do reduce consumption. Those effects can take root quickly.

The problem with his report isn't so much that it's false, as that it's meaningless, but leaves a false impression.

Weisman states that:

Senior Treasury Department officials said the correlation is "standard macroeconomics" dating to the Kennedy administration. Last year's surge in economic growth can be timed to the week that tax refunds arrived in American mailboxes, they said.

In fact, the evidence for it dates back much further than that, all the way to the Great Depression. The Fed and the Federal Government didn't cause the initial recession and bank difficulties. They did respond in a way that our worst enemies couldn't have better designed. They raised tariffs (a tax on trade), interest rates (a tax on borrowing, when done artificially), and both cut spending and raised other taxes to close a budget deficit. The results are well-known.

Still, Burtless noted, some prominent conservative economists, including Harvard University's Martin S. Feldstein, predicted wrongly that the Clinton tax cuts would choke off the 1990s recovery and kill jobs, while the millions of new jobs that Bush said his $1.7 trillion in tax cuts would generate have not materialized.

According the the household survey, many of those jobs have materialized. I know from personally scanning Internet job boards and mailling lists that the activity in the tech sector has picked up considerably, here in a market that got hit hard by the dot bomb.

Weinstein gives Gary Burtless of the Brookings Institute both the first and last words, and never identifies the Institute as "liberal," although he's careful to label those on the other side both "Republican" and "conservative." This is standard enough fare that it's probably taught at journalism schools at this point, but it's always worth pointing out.

Cross-Posted at Oh, That Liberal Media!

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