Last Thursday, we suggested that Greg Kaza more carefully read the paper by Greg Mankiw and Matthew Weinzierl that Kaza used as evidence for supply-side economics. We are happy to report that Brad DeLong has read this paper and notes:
The abstract is misleading. It should read, “The feedback is surprisingly large: in the long run, provided spending is cut to keep the government budget in balance, for standard parameter values, half of a capital tax cut is self-financing.” In Mankiw-Weinzerl’s model, you have to cut spending by almost all of the static revenue loss in the short run, and by half of the static revenue loss in the long run. That’s not Bush tax policy. Bush tax policy is to cut taxes and boost spending. “[H]alf of a capital tax cut is self-financing” implies that Mankiw-Weinzerl’s results are relevant to the capital tax cut bill moving through the system right now.
Brad also asks us to read Eric M. Leeper and Shu-Chun Susan Yang:
Neoclassical growth models predict positive growth effects over the entire transition path following a reduction in capital or labor tax rates when lump-sum taxes (or transfers) are used to balance the government budget. This paper considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. The paper shows that the stronger the response of distorting fiscal policies to debt, the more favorable the growth effects of a tax cut.
Had President Bush decided to actually reduce government spending as he pretended to “give us our money back”, the recent supply-side chanting could rely upon the Mankiw-Weinzierl model to suggest that higher savings would eventually lead to significant output gains. The problem, however, is that the current crop of supply-siders are very much like the supply-siders during Reagan’s term in that they pretend there are free lunches. As in the 1980’s, the tax cuts have LOWERED national savings.
And we’re going to be fine because we stand for things that are important. We stand for strong natural defense abroad and complete victory in the war on terrorism which involves victory in Iraq. “We stand for a strong national defense. We stand for economic policies that are pro-growth, involving tax cuts and free trade. We are strongly for fiscal restraint in the budget process. “And our opponents, at this point, stand for little or nothing, except mere obstructionism.
Natural defense abroad? Excuse me Karl – but we Democrats stand for a strong national defense and the protection of our environment at home. But OK, he misspoke. George Bush is neither for fiscal restraint nor free trade judging from his first five years in office – so stop pretending.