Jonathan Chait on Pseudo-economists and Bush’s Silly Budget Logic

Mark Thoma asks us to read Jonathan Chait:

ALAN D. VIARD, a former Bush White House economist currently at the conservative American Enterprise Institute, recently told the Washington Post: “Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that.” He’s right. There’s no dispute among economists. Conservative, moderate or liberal, every credentialed economist agrees that the Bush tax cuts caused revenues to drop. There is, however, a dispute between economists and pseudo-economists. Supply-siders may be laughed at by real economists, but they still enjoy a strong following among politicians, including, alas, the president of the United States. Here is what President Bush said a week and a half ago:

“They said that we had to choose between cutting the deficit and keeping taxes low – or another way to put it, that in order to solve the deficit we had to raise taxes. I strongly disagree with those choices. Those are false choices. Tax relief fuels economic growth, and growth – when the economy grows, more tax revenues come to Washington. And that’s what’s happened. It makes sense, doesn’t it?”

Well, no, it doesn’t make any sense at all. Bush, of course, is correct that tax revenues have risen over the last few years. This is normal. Except in certain extreme theoretical conditions, tax cuts cause revenues to fall, and tax hikes cause them to rise. The economy also can affect revenues. During an expansion, revenues can rise unusually fast, and during a recession, they can drop unusually fast. The latter is what happened following the first Bush tax cut. When Bush took office, tax revenues accounted for 19.8% of gross domestic product. After the tax cut, they collapsed to a low point of 16.3% – far lower than even the most pessimistic projection. Yes, revenues have risen from that low level, but they still haven’t recovered. The Center on Budget and Policy Priorities found that revenues currently lag $200 billion behind the revenue growth you would normally find during a recovery. Now, Bush’s reply to that is to say that if it weren’t for his tax cuts, we would still be in a recession. Indeed, in the same Oct. 11 speech, he asserted, “I’m convinced that if we had raised taxes, it would cause there to be an economic decline, which would make it harder to balance the budget over the years.” Because Bush can veto any tax hike, we can’t know for sure whether he’s right. But there’s another pretty good way to check that claim: Go back to the last time there was a major tax hike. That was in 1993. Just about every major elected Republican predicted the 1993 tax hike would slow down the economy, probably cause a recession and cause revenues to decline. Instead, they boomed, rising from 17.5% of GDP when Bill Clinton took office to 19.8% when he left. Republicans say Clinton just benefited from a good economy. Of course he did. That’s the point.

Mark argues:

supply-side economics has been misused and misrepresented to suit political ends and that has tarnished its reputation, something that could have been avoided if those “real economists” who didn’t speak out strongly against claims made on behalf of the theory that were clearly wrong or wishful thinking at best … My objection comes when people dismiss the demand side entirely.

Actually, President Bush is abusing Keynesian demand side economics. His claim seems to be that aggregate demand will be inadequate to maintain full employment unless we make his fiscal irresponsibility permanent. Does any real economist not find this claim laughable?