When Tim Russert asked Speaker Hastert about the large budget deficits, the response was:
You know, Tim, I taught economics for 16 years to high school kids. I always said it was the toughest job I ever did until I came to Congress and tried to explain it to some members of Congress. You know, I also had a book called Samuelson–when I took economics in college it talked about priming the pump and deficit spending.
Of course, Paul Samuelson never endorsed the notion that long-term fiscal stimulus was needed for full employment and Greg Mankiw has often written about the crowding-out of investment and next exports.
Later Russert asked about his idea to replace the income tax with sales taxation:
We have an embedded tax in this country. Every time the little guy buys a loaf of bread, a pair of shoes, a pair of pants, an automobile, a refrigerator, he has an embedded tax of 20 to 25 percent, because every corporation in this country pays income taxes, but the cost of those taxes are embedded in the product. The kicker is when we sell our products overseas, those taxes are still in the cost. And so we’re impeded in being in good competition overseas. When somebody else overseas brings their product here, whether it’s a television or an automobile or a pair of shoes or a pair of pants, their VAT taxes drop off at the border, so they’re more competitive with our products.
When did Hastert teach these kids – over 40 years ago before the writings of Robert Mundell? His proposal is basically an expenditure-switching idea, which Mundell would suggest would have no net impact on net exports as the currency would simply appreciate to offset any changes in relative prices from changes in tax policy. After all, we had an income tax based system before the Reagan fiscal stimulus but did not have sustained, large current account deficits. Does not Hastert understand a primary cause of the current account deficit is the fiscal imbalance and corresponding low national savings rather than the way we collect taxes?
It is sad that economic policy seems to be drafted by high school teachers as opposed to those who have taught at places like Harvard and MIT.