Mark Thoma reminds us of the November 1, 2004 Charlie Rose Show where Paul Krugman debated Robert Barro. While it was an interesting debate – this portion of Barro’s comments reminded me of what we often see over at the National Review:
Because I think where we are now, which is actually quite a good economy – owes quite a bit to the 2003 tax cut plan. And I – I should distinguish a lot between the 2003 and 2001 tax cut plans. They are really quite different. The big thing about the 2003 plan is that it didn’t just heap money to people. It didn’t just particularly give money to people at increased incentives to do things. It did that particularly by accelerating the marginal income tax rate cuts. It did it by cutting some of the tax rates that pertain to saving. It motivated people to work more, to enhance productivity, to increase investment. It worked great. I mean, since early 2003, the economy has done extremely well. And I – I can’t prove it for sure, but I think it is a very convincing case that that tax cut in 2003 was a lot responsible for it.
Good grief! Even before the 2003 tax cut was passed, economists such as Paul Krugman were suggesting that we would enjoy a return to full employment as the great investment slump would eventually reverse itself. The Federal Reserve had reduced the Federal Funds from around 6.5% in late 2000 to around 1% by 2003. A year later, the Federal Reserve would reverse its easy money policy as aggregate demand began to increase. Barro just ignores these Keynesian considerations and pretends its all some sort of supply-side phenomena. But as Barro often tells his students, Keynesian recessions tend to reverse themselves on their own without assistance from fiscal policy. On the eve of the 2004 elections, however, he makes out like he is Lawrence Kudlow. Sad.