I disagree with his demonstration that tax cuts paid for themselves and that therefore the deficit is attributable solely to spending, not to tax cuts.
Let’s take a look at what Hassett wrote:
Let’s tune out the chatter for a minute and just do the math. One easy way to gain perspective is to compare the situation before Bush took office with today. At the beginning of 1999, the Congressional Budget Office made (as it does every year) a 10-year projection of revenue and expenditures for the years 2000 through 2009. Since then, a number of policies have changed and the economy has surprised us. How well did the budget office do in its 2000 projections for 2006? How far are we from where we expected to be? The numbers are startling. First, let’s look at revenue. In the 2000 forecast, the budget office expected that the U.S. Treasury would collect $2.39 trillion in 2006. In its latest forecast, it projects that revenue will be $2.21 trillion, an error of only $180 billion.
Two points: (1) a forecast of $180 billion per year is large; and (2) Hassett has to go back to a forecast two years before Bush took office to make his claim. Hassett continues with this claim about real GDP:
The gap is so small because economic growth surprised on the upside, delivering more revenue after the tax cuts than was expected. Supply-siders can rightly point to this as partial vindication.
Hassett is trying to get us to believe that the 2001 and 2003 tax cuts led to faster than expected growth. Given the weak real GDP growth during Bush’s first term, I went back to see what the CBO was forecasting in early 1999. The real GDP forecast from table 2 is compared to actual real GDP growth below.
Note in particular how conservative these forecasts were. In fact, real GDP growth for 1998 was higher than what CBO had forecasted it would be in early 1999. Real growth for 1999 and 2000 was substantially higher than what CBO forecasted. Even with these conservative forecasts for 2001 and 2002, the very weak growth rates were below the 1999 CBO forecast. While it is true that real GDP growth was moderately strong in 2004, this growth was what one would have expected for in a Keynesian recovery – and not evidence for a supply-side effect.
To give you an analogy to how Hassett has been mining the data to cook out some spurious claim, consider the following analogy. Imagine you had consulted Donald Luskin as an investment advisor in January 2000 as to what might be a hot stock tip. Of course, you would likely not be so foolish but then Mark Kleiman confused Donald Luskin with Karl Rove’s attorney (see Parsing the Morison Case). In my analogy, your investment advisor convinced you to purpose shares of Cisco Systems. Let’s also assume that you recently complained that your advisor’s advice in early 2000 yielded significant portfolio losses. It would be like Luskin – or even Hassett – to compare how Cisco has done in the last five years relative to how it was doing in 1995. But then you did not buy the stock in 1995. In a similar vein, one cannot argue that real GDP is higher today than what we were led to believe would have happened when President Bush made his case for the 2001 tax cut.
Update: Mark Kleiman has now corrected his identification of Rove’s attorney as the name now reads “Robert Luskin”. If you have not already, check out Mark’s blog for some excellent coverage of the legal angles of PlameGate.