Kudlow on Ankle-Biting, Demand-Side Keynesians

I have a bad habit of biting my nails but I’m not flexible enough to bite my ankles even if Lawrence Kudlow suggests:

Ankle-biting, demand-side Keynesians (most of whom reside in the Democratic party) are always looking for blotches, hanging toenails, and the occasional scrape on what is today’s muscular and statuesque American economic body. But the genial and optimistic Mr. Reagan undoubtedly chuckles from his perch on high, as he watches his critics scramble to come up with a coherent opposing idea. They can’t, and they won’t. One of Reagan’s big ideas was that tax incentives matter. It has been a blockbuster, runaway success. But even today, twenty-five years later, it remains the greatest economic story never told.

His evidence that supply-side economics produces miracles? That the economy has grown by about 3.5% per year over the past 25 years. Never mind that the economy grew by the same rate the quarter of a century before the 1981 tax cut. Never mind the fact that economic growth averaged only 3% during the Reagan-Bush41 period and only 2.6% under Bush43. Yes, it was that 3.7% growth during the Clinton years that kept the overall average near 3.5%. And supply-siders claimed the 1993 tax increase would lead to low economic growth.

But what was the rational for the 2001 and 2003 tax cuts? Try Keynesian aggregate demand stimulus. One of the rationales for the 1981 tax cut was also Keynesian aggregate demand stimulus. But Kudlow did had a new tidbit to his usual nonsense:
Over the past 3 months core sales rose 6.7 percent at annual rate, and in the past year they’re up 7.4 percent. Excluding autos alone, sales have gained 9.2 percent in the last 12 months. That’s big time.

Core sales excluding autos? What is Kudlow including? We know he usually excludes government purchases and net exports preferring to include only consumption and certain kinds of investment such as business investment. Is he including or excluding residential investment? Let’s review the facts. BEA shows the sum of consumption and investment in terms of 2000$ to have been $9967 billion as of 2006QI and $10,025 billion as of 2006QII. This increase is nowhere close to 6.7%. The fall in residential investment may be part of the issue here, but I suspect Kudlow is using nominal increases rather than real increases – AGAIN.

We should also note that real motor vehicle output was only $417 billion as of 2006QII as compared to $447 billion as of 2005QIII. This is not good news so sunny Larry decides to exclude this sector as well as the residential investment sector. To exclude the statistics of sectors that are declining is dishonest. To report nominal growth rather than real growth is dishonest. But this is what it takes for Kudlow to write an upbeat story about recent economic growth for the National Review aka Dishonesty R Us.

Since I do have a hanging toenail, I need to practice my yoga so that one day I can actually bite it!

Update: The claim that real GDP growth averaged 3.5% per year over the quarter of a century from 1981 to 2005 struck me as a bit off so I compared real GDP at the end of 2005 ($11,163.8 billion) to real GDP at the end of 1980 ($5202.1 billion) and it seems real GDP had grown by 131.7%, which translates into an average annual growth rate of 3.1% and not the 3.5% rate Kudlow claimed. Even if one uses 2006QII versus 1981QII (notice real GDP fell during the second quarter of Reagan’s first term), real GDP was only 116.2% higher, which translates into an average growth rate of only 3.13%.