Bruce Bartlett and Mark Thoma are having a debate over what New Keynesians and sensible supply-siders have to offer. See the comments at Mark’s place as Paul Krugman has engaged in this debate. While Mark does an excellent job, I have to add something about one of my pet peeves as Bruce writes:
Based on insights derived from the Nobel-winning economists Robert Mundell, Milton Friedman, James Buchanan and Friedrich Hayek, the supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth.
The usual argument about stimulating growth in the long-run runs along the Solow argument that increasing national savings promotes faster growth. Granted certain changes in how we raise taxes might induce more savings, but the usual Reagan-Bush43 line is that we can lower taxes for everyone – which translates to more consumption. And given the fact that neither President Reagan nor President George W. Bush ever figured out how to cut government purchases, the U.S. witnessed declines in the national savings rate following the 1981 and the 2001 tax cuts.
But since Bruce mentioned Robert Mundell, let’s go back to the 1980’s when the fiscal stimulus crowded out both investment and net exports. The fall in net exports were due to a massive appreciation of the dollar, which had a temporary inflation benefit. Our current account deficit was eventually reduced during the late 1980’s as the dollar devalued. Now the inflation rate did not accelerate as the dollar devalued – but wasn’t that more due to the fact that it took a long for the economy to return to full employment.
Bruce’s contention that a mix of tight money and easy fiscal policy is good for long-term growth is relevant today as the Federal Reserve increased interest rates as the economy got closer to full employment. But this strikes me as absurd as it appears to be saying lower national savings and higher interest rates somehow encourages growth. Bruce should go revisit the Solow growth model if he believes this.
Update: James Pethokoukis reports that one of Mitch Romney’s economic advisors is part of the free lunch supply-side camp:
What kind of economic policy advice is Mitt Romney getting? One of the people doing some idea work for Romney, the former Massachusetts governor and current 2008 GOP presidential hopeful, is Cesar Conda. Conda is former assistant for domestic policy under Vice President Cheney and a longtime policy wonk around Washington, D.C.
Conda’s idea of promoting growth is to reduce the corporate income tax rate, to increase contribution limits to IRAs and to allow for faster accounting depreciation of assets. The hope is to increase savings according to Conda. Of course, George W. Bush promoted these tax cuts ideas as a way of giving people their “money back” so they could consume more. One day – one of these free lunchers is going to realize that consuming more means saving less.