Luskin’s latest tirade nitpicks at the wording of something Paul Krugman said. OK, that’s nothing new but let’s take a look at his first substantive comment in the tirade:
But Krugman continues to whine: “Revenue remains lower, and the federal budget deeper in deficit, than anyone expected a few years ago.” Anyone? That just can’t be true. Someone, I’ll grant you. For example, the Congressional Budget Office, in it’s August 2002 Budget and Economic Outlook — written before the 2003 tax cuts had even been proposed — expected $2.224 trillion in revenues for fiscal 2005 (the fiscal year ended last September). In a recent budget update (October 6), CBO estimated fiscal 2005 revenues at $2.154 trillion. So, for this “someone” at least, yes, revenues remain lower than expected. But barely – only by $90 billion, or about 4 percent.
While the GOP is crowing that it reduced $8 billion per year from Federal spending, Luskin scoffs that a $90 billion per year additional shortfall is chump change. It gets even funnier when Luskin tries to convince us that tax cuts lead to faster long-term growth and pay for themselves:
But let’s dig deeper into CBO’s analysis. Back in that 2002 report they estimated fiscal 2005 GDP to be $11.936 trillion. In fact, it turned out to be $12.308 trillion – $372 billion higher. So let’s put these numbers together. We get $90 billion less than expected in tax revenues. We get $372 billion more than expected in GDP. That’s a terrific deal, if you ask me. So while Krugman derides supply-side economics as “hokum for the yokels,” all the evidence points to the reality that lower tax rates do lead to faster economic growth … Because, as Boehner puts it, “The problem is the government is too big and takes too much money out the economy and leaves too little for investment in the future.” You want a bigger, faster-growing economy? Then cut taxes – or at least leave them at low levels, like the Republicans in Congress are trying to do. It’s so simple, even a zombie can understand it. Leftist economics professors like Krugman, though, are another matter.
Isn’t it odd that Luskin is reporting nominal GDP rather than real GDP? But I did take a look at the CBO forecasts back then versus the Administration forecast and the consensus of the Blue Chip forecasts in terms of real GDP. CBO was forecasting 2.3% real growth for 2003, 3.0% real growth for 2003, and 3.2% real growth for 2004 and 2005. Given that even the CBO was noting we were below full employment, these forecasts suggested continued weak aggregate demand relative to potential output. The Administration and Blue Chip forecasts were projecting faster aggregate demand growth. But as we now know, real GDP grew by only 1.6% in 2002 and 2.7% in 2003. It is true that real GDP grew by 4.2% in 2004 and might have grown by about 3.7% in 2005 (BEA has yet to publish numbers for the fourth quarter). Most economists believe that output eventually returns to full employment – and in my opinion, we are still not quite there. And no economist thinks that tax cuts are the only way to stimulate aggregate demand.
But why does Luskin claim as his theory for the proposition that tax cuts increase economic growth? Is he relying on some short-term Keynesian aggregate demand story or some claim that tax cuts lead to more national savings and investment? Let’s see – the government takes “too much money” and leaves “little for investment” is his story. Does he even realize that George W. Bush’ is a “big government conservative” who has increased government purchases as he pretends to “give us our money back” so we can consume more? Does Luskin not understand that when the sum of private consumption and government purchases rise as a share of national income, simple accounting dictates we have less national savings – not more? Had Luskin bothered to comprehend the New York Times op-eds from Dr. Krugman over the past five years, he might get what even college freshman understand after a couple of principles of economics classes. Then again – Luskin never finished his first semester as an undergraduate.