Disingenuous Defense of Bush’s Fiscal Policy
The Luskin-Kudlow-Moore free-lunch supply-side crowd over at NRO have been trying to convince us that Bush’s fiscal train wreck will actually promote long-term growth. Their new ally is William Kucewicz who must have figured out that candidate Reagan was right in 1980 when he advocated growth through more savings and investment. Alas, the policies of President Reagan did just the opposite. But Kucewicz wants the readers of NRO to believe that consumption is falling and net nonresidential investment is rising. His case for this is a tortured abuse of logic and data that eclipses the mendacity and stupidity of the Luskin-Kudlow-Moore coalition. Note that this passage what have Lord Keynes rolling in his grave:
Democrats, however, aided by a pliant (and largely economically illiterate) Washington press corps, continue to foist the fiction that the Clinton tax hikes produced the 1990s boom by closing the federal budget deficit. This is patent nonsense. For a start, they’ve got the cause-effect deficit-GDP relationship backwards: The deficit closed because economic growth quickened, not the other way ’round.
It may be true that recoveries from deep recessions tend to lower deficits but even Keynes would have told us 70 years ago that there is a full employment constraint and that economies do eventually recover from recessions even without the aid of long-term massive fiscal stimulus. Kucewicz’s appeal to the logic of The General Theory falls right off the cliff here:
GDP growth is clearly more responsive to changes in private investment than personal consumption. Personal consumption expenditures, as a percentage of GDP, have a tendency to rise during economic contractions, while private fixed investment usually shrinks
Any reasonable read of the GDP accounts over the past five years would have it that investment had been quite volatile harkening back to the comments by Keynes regarding “animal spirits”. So some Keynesians might argue that much of the volatility during business cycles comes from shifts of the investment function. But Keynes never argued that the multiplier from a shift of the consumption function was less than the multiplier from a shift of the investment function. I would argue that Kucewicz is unfair to Lawrence Lindsey’s “perfectly timed” tax cut (2001) with most of the criticism of this tax cut coming from the small bang for the buck on consumption demand and not from some suggestion that the multiplier effect of higher consumption was tiny.
Beyond the lousy logic, Kucewicz’s presentation of data is very suspect in part because he presents only nominal figures. He tries to claim nonresidential investment was at an all-time high in 2004, but there are two problems with this claim. One is revealed by his own graph that tries to remove depreciation from gross investment – and by doing so, the graph shows nominal net nonresidential investment was actually higher in 2000 than it was in 2004. The other problem is that inflation-adjusted gross nonresidential investment was lower in 2004 than it was in 2000 (see line 8 of table 1.1.6 here).
Kucewicz’s main statistic for trying to convince his readers that investment is rising and consumption is falling turns out to be the ratio of investment to consumption and how this has recently increased. But this should not surprise anyone as real investment fell over the 2000 to mid-2003 period and real consumption rose faster than real GDP. Later, investment has recovered partially while consumption growth has been less than GDP growth. But if one looks at the consumption/GDP ratio for 2000 (68.65%) versus for 2004 (70.18%) and if one looks at the nonresidential investment/GDP ratio for 2000 (12.55%) versus for 2004 (10.38%), one realizes that the rise in consumption is crowding-out investment.
Kucewicz is trying to convince the readers of NRO of something that is simply not true and his attempt to do so is incredibly transparent. Why do the NRP econopundits continually treat their readers as stupid little children who deserve to be lied to?