Government and Growth

May 6, 2017

It’s Holy Writ in some quarters that government just gets in the way of progress, with all those regulations and taxes, and smaller government, lower taxes (see my post just before this one), and less regulation are essential to economic success. As Mitt Romney said during one of his debates with Barack Obama, “the private sector always does it better.”

There’s a lot of de-bunkery around for that statement, the most recent being this commentary from economist Mariana Mazzucato.

Later,


Magic Unicorns

May 6, 2017

Allow me to introduce you to George Callas, House Speaker Paul Ryan’s senior tax counsel. He’s 43, was once a moderate Dem who became disillusioned with the party during the Clinton years, enjoys reading Greek and Roman history, and who knows tax policy absolutely stone cold. He is equally knowledgeable on how policy is made and the effects policy has on the economy.

On April 20th, Mr. Callas was part of a panel discussion hosted by the Institute of International Finance. The event occurred just shy of a week before the administration’s announcement of its page-of-bullet-points tax “plan,” which called for deep tax cuts, particularly corporate income taxes, only slightly offset by some revenue increases. The administration repeated the Laffler-esque mantra that tax cuts would pay for themselves by charging up economic growth.

I’ll touch on why that last part is nonsense in a moment. Mr. Callas addressed the more immediate nonsense.

“A plan of business tax cuts that has no offsets, to use some very esoteric language, is not a thing,” he said. “It’s not a real thing . . . Not only can that not pass Congress, it cannot even begin to move through Congress Day One.”

Mr. Callas chided the belief in “magic unicorns,” which he described as “people saying, ‘why don’t we do this instead’ when ‘this’ is something that cannot be done.”

You can watch the event here, by the way. Mr. Callas’ remarks come a little after the 54-minute mark.

Thing is, magic unicorns like the bullet-point tax “plan” have, because of their simplicity, great persuasive power. As Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, put it, “Who doesn’t love a tax cut, especially if no one has to pay for it? This is a free-lunch mentality.”

For demagogues, this is a basic tool in the box, been around practically forever. The message is usually a version of, “We could have all this; it would be easy; it’s just those (pick your scapegoat here) getting in the way.” Identify people’s fears or resentments and channel them to assign blame as it suits you. Whether what you’re saying is true or not is beside the point. As the noted curmudgeon H.L. Menken observed a century ago, “there is always an easy solution to every human problem – neat, plausible, and wrong.”

I worked on the Hill in the 1990s, under a Republican-led Congress. There was a system in place called PAYGO, which required that any additional spending or tax cuts had to have offsets, meaning they had to be paid-for with spending cuts or some other revenue source. The idea was not to add to the federal debt. This system helped produce the last balanced federal budget, at the end of the Clinton years.

Then, in 2002, PAYGO was dropped. A couple of years later, Dick Cheney told Treasury Secretary Paul O’Neill that “deficits don’t matter.”

We’ll see. The conservative Tax Foundation estimates the “plan,” as presented, will reduce revenues and add between $4 trillion and $6 trillion to the debt over 10 years.

This latest “plan” is probably a non-starter for another reason: there are enough people in Congress who know better than to believe that tax cuts alone will stimulate economic growth. It didn’t happen when taxes were cut (mainly at the upper end; ordinary people saw increases) in the Reagan years, for example. Yes, there was a growth spurt coming out of the recession, but that was fueled by other events. Fed Chair Paul Volker clamped down on interest rates; the price of oil dropped steeply; and deficit spending grew rapidly (leading to Cheney’s remark).

Bruce Bartlett, who worked for Reagan and, later, the elder Bush, and who had a major hand in crafting the Kemp-Roth tax bill that became the first round of cuts in the 1980s, reviewed studies evaluating the impact of the 1986 tax package and concluded, “[I]t is hard to find ways in which it changed anything real in terms of economic growth, employment, or productivity.”

Over eight years, the Reagan administration presided over an average annual 3.5 percent growth in GDP, a smidgeon above Jimmy Carter and slightly less than Bill Clinton. Reagan trailed both Carter and Clinton in terms of average annual job creation.

Both Bushes cut taxes. Elder Bush’s four years were marked by an average annual GDP growth of 2.3 percent. Younger saw 2.1 percent.

Back in 2012, the Congressional Research Service prepared a study that looked back to 1945 and found that changes in the top tax rates did not correlate to growth, but they did correlate with increasing concentration of wealth at the top: https://fas.org/sgp/crs/misc/R42729.pdf.

At the state level, look at the basket case of the Kansas economy, where taxes were slashed and the expected growth never materialized.

Writing in the Washington Post the other day, Douglas Holtz-Eakin, director of the Office of Management and Budget under the Younger Bush, called promises of economic growth by cutting taxes were “detached from empirical realty.” A group of economists surveyed recently by Chicago University’s Booth School of Business felt likewise.

As I have said previously, tax cuts do some things very well. They get politicians elected. They redistribute wealth upward. They create deficits. What they cannot do boost the economy to unrealistic levels of growth.

You don’t like taxes and want them cut? Make the case. You want to cut taxes to shrink government—meaning, cut social spending; no one’s seriously going to lay a hand on the Pentagon budget—argue for that. But don’t try to argue tax cuts will pay for themselves with economic growth. If you really believe that, I have a magic unicorn for sale.

Later,