ECONOMICS: Chait's Crackpottery
Wesbury, Brian S.
ILTON FRIEDMAN BELIEVED that the real test of any economic theory was its predictive power. Who canarguewiththat?Let'ssayyouthinkmarinatingsteakinsoysaucemighttastegood.Soyoutry it. If you...
...To stop peoplefromusingthem,ofcourse.Itseemsthatevery-onebutChaitknowsthatwhenyoutaxsomething,you getlessofit...
...The easy money of the 1970s also helped cover up agreatdealofthedamagefromhightaxrates.Printing money can make people feel rich for a time...
...Despite many references to deficits and spending, he rarely talks about tax revenue...
...The reason he doesn't is that figures on tax revB R I A NS .W E S B U R Y Supply-sidershavebeenblamedforlots ofthings,butCheeseWhizhasnever beenoneofthembeforeChait addedhistwocents...
...Theywere"amateursandcranks," "fanatics," "propagandists," "cultlike" people, who "tricked the masses...
...He blames tax cuts for the rise of all-powerful lobbyists whohamstringgovernment...
...The government provided people with transportation, health care, food,electricity,water,andothergoodsandservicesin return for their work...
...Chait claims that tax cuts have caused rising income inequality--to"levelsassociatedwithThirdWorldoligarchies, not healthy Western democracies...
...In his day job, ChaitissenioreditorattheNewRepublic...
...This year, U.S...
...Chait suggests that this just isn't true because the Soviet Union had a 100 percent tax rate and still "managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik,andsoon...
...They reflect a detachment from reality "that would have been the envy of the Manson gang...
...In the end, Jonathan Chait's new book breaks no newground.Allhisargumentshavebeenmadebefore...
...But it's also true thatwithataxrateof100percentnobodywillhavereason to earn any taxable income...
...One thing is for sure...
...The mostrecent can be found in Jonathan Chait's clever, but acerbic,newbook,TheBigCon:TheTrueStoryofHow Washington Got Hoodwinked and Hijacked by Crackpot Economics (Houghton Mifflin...
...Nonetheless,oneofthemainthemesinTheBigConis thatbecauseconservativeshavemadesomanypeople drink from the cup of the holy tax cut, voters, journalists, and politicians all bend to their wishes like zombieswhocan'thelpthemselves...
...in the1970s--the1973Arab-IsraeliWarandtheoilshock are responsible, of course--never mind that a large numberofeconomistsblameanaccommodativemonetary policy for both the rise in oil prices and overall higherinflationinthe1970s...
...If you love it, you do it again...
...After all, between 1969 and 1982, when the country was in the grip of demand-siders of the Keynesian and Galbraith persuasion, the U.S...
...Supply-siders have been blamed for lots of things, but Cheese Whiz has never been one of them beforeChaitaddedhistwocents...
...Chait longingly describes Franklin Roosevelt as the epitome of a great president, and believes Herbert Hoover and Gerald Ford were good Republicans because they were willing to raise taxes...
...Chait conveniently ignores this, and never explains why the USSR collapsed...
...Or is it a continuing effort to set the stage for a New-New Deal under a potential Democraticpresidency...
...Thereisasmallsamplingofprotein(callittofu)in the midst of all this liberal red meat, but not much...
...Tax receipts have averaged 18.1 percent of GDP for the past 50 years and rarely stray far from that average (seechartbelow).Theonlyexceptionwasthelate1990s, during the bubble years, when the federal government andeverystategovernment(nomatterwhatitstaxrate) rakedinthedoughonthebackofthedot.comboom.The recessionof2001causedtaxrevenuestocollapse,evenin California,whichdidnotcuttaxrates...
...But even Martin Feldstein and Arthur Laffer, who are trained economists,arechastisedbyChait,whoisnotaneconomisthimself...
...American politics has been hijacked by "right-wing extremists," "ideological zealots," the "greedy,"andthe"possiblyinsane...
...Thesesupply-siders E C O N O M I C S Chait'sCrackpottery 3 8 T H E A M E R I C A N S P E C T A T O R N O V E M B E R 2 0 0 7 by Brian S. Wesbury M N O V E M B E R 2 0 0 7 T H E A M E R I C A N S P E C T A T O R 3 9 usedtobeonthe"fringe,"withideasthatwere"laughed atagenerationago...
...The reason is simple-high tax rates discourage productive activity, work effort, saving, and investment...
...He quotes Bob Dole and George Bush Sr., but only when they spoke out against supply-side tax cuts...
...The Irish can spend their new found wealthonmuchmoreproductivethings...
...Supply-siders said that by tightening the money supplyandcuttingtaxrates,stagflationwouldend.Andit did.SincetheReaganRevolutiontookholdin1983,the U.S.hasbeeninrecessionjust5percentofthetime...
...Putting that aside, Chait is on to something here...
...But it's not becauseoftheMarxistideasofexploitation.Tax cuts are associated with a widening income gap because tax cuts encourage entrepreneurship and the development of new technology...
...Just drive to the Illinois-Missouri border...
...Theonlydifferenceisthathedeliverstheminthenew angrytoneoftoday'spolitics...
...This helped solidify the belief that John Kerrywasanelitist...
...It's bereft of stores, restaurants, and gas stations on the Illinoisside,butburstingattheseamsontheMissouri side.Why?HighertaxratesinIllinois.Andwhydowe have "sin taxes" on cigarettes and alcohol...
...BrianS.Wesbury,TheAmericanSpectator'seconomics editor,ischiefeconomistatFirstTrustPortfoliosL.P...
...Tax cuts do seem to be associated with rising income inequality...
...federal tax receipts are 18.8 percent of GDP, which is wellabovethe1970to1979averageof17.9percent.It's also above the 1947-1973 period (Chait's good old days),whenfederalreceiptsaveragedjust17.4percent oftotaloutput...
...It asserts that supply-side economics doesn't work, but never even comes close to proving it...
...The stock market went nowhere, inflation rose sharply, and, by the end ofthatperiod,oneintenAmericanswereoutofwork...
...HeclaimsGeorgeBushorderedthewrongcheese too but alleges that this report somehow dodged the popular press...
...Afterdescribinghimselfasamoderate,Chaitstarts the name calling...
...A high capital gains tax rate locks in investors and puts up a wallbetweenoldandnewinvestments...
...This seems to drive liberals crazy...
...Federal Tax Take as % of GDP 100 75 50 25 0Percent Average = 18.1% 19551960196519701975 1980198519901995200020052010 Source: OMB /Haver Analytics / First Trust Advisorswww.FTAdvisors.com...
...Tax cuts, including the Clinton capital gainstaxcutin1997thatledtothereal boomofthe1990s,increaseproductivity growth by encouraging risk-taking...
...They want so badly to introduce new programs and spend more money, but proposing a tax hike to pay for them has almostbecomecertainpoliticalsuicide...
...But he does have an explanation for why things were so bad for the U.S...
...Everytime,andeveryplace,thatpeoplehavelived through a boom in technology, the inventors and early adoptershavemadeoutsizedgains.JustlookatGoogle andtheNewYorkTimes.Googleemployeesandowners are experiencing a much faster increase in earnings than reporters and investors in the newspaperbusiness...
...There is obviously no revenue at 0 percent...
...He also argues that the economy worked fine between 1947 and 1973, when the top tax ratewasashighas91percent,butneverbelow70percent.AndhealsoarguesthattheLafferCurveiswrong...
...Instead, The Big Con is an interesting combinationofwittyrepartee,bittermemories,and caustic language...
...This is naive...
...As an economist, I want some data and facts to work with...
...E C O N O M I C S 4 0 T H E A M E R I C A N S P E C T A T O R N O V E M B E R 2 0 0 7 Everytime,andeveryplace,that peoplehavelivedthroughaboomin technology,theinventorsandearly adoptershavemadeoutsizedgains...
...ONE OF CHAIT'S MAIN COMPLAINTS about supplysideeconomicsisthatitwaspropelledbymany non-economists--Jude Wanniski, Bob Bartley, George Gilder, Jack Kemp, and Dick Cheney...
...This is a curious argument because it is hard to fathom how raising taxes on one group (the rich) will increase wages for another (the poor and middle-class...
...The only role tax cuts have had in anyofthisisthattheymadeiteasierfor savings to be redirected towards the new, more rewarding technology and awayfromtheold,lessrewardingbusiness models...
...Chait claims he does not believe in conspiracies...
...Inonestrangesectionofthebook,hegoesoffona tangent about how presidential candidate John Kerry was unfairly maligned because he ordered Swiss cheese on his Philadelphia steak sandwich instead of Cheese Whiz...
...The Big Con won't sell well inIreland,wheretaxcutsinthepast20yearshavelifted the Celtic economy from one of Europe's worst to one of its best...
...enue undermine his entire argument...
...AND THIS IS THE REAL FLAW at the core of Chait's argument...
...To argue anythingelseprovesanignoranceofthedata...
...ofabookwrittenbyamoderate...
...The connection between this story and why supply-siders should be feared is a thin one that seems sort of conspiratorial when you stop to think about it...
...Thelastargumentisanoddone.TheLafferCurve saysthatagovernmentwillreceivezerorevenueattwo different tax rates--0 percent and 100 percent...
...How then do we explain the enduring sniping at supply-side economics...
...THE LAST COMPLAINT of Chait we need to address is income inequality...
...First of all, tax rates in the Soviet Union were not really 100 percent...
...If you don't, go backtothedrawingboard.Withthisthoughtinmind, it'sprettyhardtobelievethatpeoplewouldn'twantto do the supply-side revolution of Ronald Reagan over andoveragain...
...Andthisisjustfromtheintroduction...
...Chait is very bothered that tax cuts are in, and politicians who propose tax hikes or argue for Keynesian ideas just can't seem to make much headway...
...I will admit right up front that I wish I had not plunkeddown$27tobuyhisbook.Allthecorpusdelicti that I needed to refute his feeble attack on supplyside economics was included in the excerpt of The Big ConpublishedinearlySeptemberintheNewRepublic...
...Is it as Michael Barone says that today's old-fashioned statists have forgotten the stagflation of the 1970s...
...Unfortunately, it eventually turns into inflation, which underminesgrowth.Inthemeantime,inflationboosts tax revenues because people pay taxes on inflated incomesandcapitalgainstoo...
...So the effective tax rate was 100 percentminusthevalueofthese"benefitsoftheworkers paradise...
...HethinksthattheClintontaxhikeof1993,andthe performance of the economy in the years that fol-lowed,area"completeandtotalrefutation"ofsupplyside economics...
...economy was in recession 32 percent of the time...
...And by the way, if you didn't like it, you had some other even less pleasant options to choose from.Remember,youweren'tallowedtoleave...
...This,inturn,ledtobiggainsinincome forinventorsandentrepreneurs.Butit also led to rising incomes and living standards for all Americans...
...Nowthattheeconomyisrecovering,taxrevenues haveclimbedrightbackuptotheirlong-termaverage (or a little above), despite the Bush tax cuts, just like Arthur Laffer said they would...
...Whatever the reason, the attacks against supplyside economics have reached a crescendo...
...Low tax rates encourageworkeffort,saving,andinvestment...
Vol. 40 • November 2007 • No. 9
