Who wrote this . . .

OK – so I just read it from a link on a Krugman blog post, but it’s worth repeating.

An example of fad economics occurred in 1980, when a small group fo economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would raise by so much, they claimed, that tax revenue would rise. Almost all professional economists, including most of those who supported Reagan’s proposal to cut taxes, viewed this outcome as too optimistic. Lower tax rates might encourage people to work harder, and this extra effort would offset the direct effects of lower tax rates to some extent. But there was no credible evidence that work effort would rise by enough to caues tax revenues to rise in the face of lower tax rates. George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea “voodoo economics.” Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s…. Congress passes the cut in tax rates… but the tax cut did not cause tax revenue to rise… tax revenue fell… government began a long period of deficit spending… largest peacetime increase in the government debt in U.S. history. Fads can make experts seem less united than the actually are… when the economics profession appears in disarry, you should ask whether the disagreement is real or manufactured… [by] some snake-oil salesman who is trying to sell a miracle cure…

Answer over the fold:

Greg Mankiw: But that was the first edition of his Principles of Economics. (I’ve not read it, but Krugman tells us that this passage hasn’t appeared in subsequent editions. Meanwhile as Krugman puts it “The Bush debacle undermined the control once exercised by the establishment, which tried to keep up the appearance of reasonableness; and now people like Pawlenty and Romney need to sound crazy even if they (possibly) aren’t.”

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Sinclair Davidson
10 years ago

First edition Mankiw – never appeared in the that form again. He was asked very embarrassing questions in the Senate about it when nominated by Bush to the council of advisors.

Tel
Tel
10 years ago

Hmmm, Wikipedia claims the opposite:

According to a United States Department of the Treasury economic study,[30] the major tax bills enacted under Reagan, in the short term, increased total tax revenue and reduced the tax burden on the economy (~-1% of GDP). The Economic Recovery Tax Act of 1981 resulted in a reduced tax burden on the economy (~-3% of GDP) and an increase in total tax revenues (the largest tax cuts ever enacted).[31] while other tax bills had neutral or, in the case of the Tax Equity and Fiscal Responsibility Act of 1982, a (~+1% of GDP) increase in revenue as a share of GDP. It should be however noted that the study did not examine the longer-term impact of Reagan tax policy, including sunset clauses and “the long-run, fully-phased-in effect of the tax bills”.[30] The fact that tax receipts as a percentage of GDP fell following the Economic Recovery Tax Act of 1981 shows a decrease in tax burden as share of GDP. Total tax revenue from income tax receipts increased during this time. The economic growth and increase in GDP outpaced the increase in tax receipt revenue, resulting in a slightly reduced tax burden as a percentage of GDP for the economy.

http://en.wikipedia.org/wiki/Reaganomics

They have references, I’ll admit that I have not personally checked out the reference material, but I’d like to know the real answer if anyone can find it.

Surely US federal accounting is at least good enough to definitively calculate whether they are going forward or backward? Am I out on a limb with that expectation?

desipis
10 years ago

Also from wikipedia:

In 2005 dollars, the receipts decreased from $1.25 trillion in 1981 to $1.13 trillion in 1983 and did not return to $1.25 trillion until 1985.

The section Tel quoted appears to be a straight up mistake:

The Economic Recovery Tax Act of 1981 resulted in a reduced tax burden on the economy (~-3% of GDP) and an increase in total tax revenues (the largest tax cuts ever enacted).[31]

From source [31]:

ERTA slashed federal revenue by $38 billion the first year, $91 billion the second year, and $139 billion the third year.

derrida derider
derrida derider
10 years ago

The Wikipedia entry is a classic example of how Wikipedia is reliable on topics that are not the subject of political dispute (mostly, but not wholly, from the US Right), but unreliable on those that are.

That article is actively dishonest in parts – in particular, Tel should read the cited US Treasury study, whence he will quickly find that it mostly says the opposite of the Wikipedia article’s claims. As another example, the article cherrypicks the start and end years for its deficit figures – the big one is from the depths of the Reagan recession, the middle one from the peak of the Reagan boom (a boom, which, incidentally, was largely created by a massive Keynesian budget deficit – due primarily to a paucity of tax revenue), and the final one after the 1988 tax rate increases.

The big 1981 income tax cut unambigously cut revenue sharply – as the US Treasury study notes, all 3 tax bills passed between then and 1986 had to contain tax rates increases to try and counteract it.

The 1986 rate cuts were more modest and got through Congress in explicit exchange for a massive crackdown on loopholes (that’s what Niskanen really meant in the article when he coyly boasted of Reagan’s “major reversal in the tax treatment of business income”). Pre 1986, income tax on the rich was pretty much voluntary in the US. It was the closure of these loopholes that generated the progressive effects of the package that the Wikipedia article boasts of (though note these effects are overstated by the measurement problems of a changing tax base – that’s a longish argument that I’ll set out separately if anyone wants to dispute it). Now of course the crackdown was a Good Thing, but it means you can’t just assign the overall revenue effects to the rate cut.

Victor Trumper
Victor Trumper
10 years ago

I agree with DD on most of his observations however Reagan never had a massive Keynesian budget. Monetary policy was working very nicely thank you very much under Paul Volker moreover Reagan had his largest deficit because of specific revenue measures in the middle of a boom.

That is the exact opposite of Keynesianism as <a href= "http://johnquiggin.com/2011/04/28/hard-keynesianism-in-the-european-union/"Quiggin and Farrellexplain.

The embarrassing questions Mr Davidson is talking were questions from a political point of view given he was going to work for George Bush.

Greg has since taken a complete about turn on what he advocated under Bush and what should occur under Obama without ever acknowledging there is a liquidity trap now and there wasn’t back then.

Pedro
Pedro
10 years ago
Victor Trumper
Victor Trumper
10 years ago

Here is Greg’s problem now.

He favoured tax cuts under Bush because they were a ‘Keynesian’ response despite having no liquidity trap and the tax cuts still contributing the largest amount to the current deficit he now complains about.

He cannot support alleged stimulus tax cuts under Bush and then complain about stimulus programs under Obama when the Economy is a lot worse thanks to his former boss.

He should acknowledge that the tax cuts are the largest contributor to the present deficit he decries and also acknowledge which President increased entitlement programs and which one has led to some being reduced.

Also it must be a coincidence the words taken out of his text occurred at the same time as leading Republicans were attempting to unsuccessfully say the Reagan tax cuts aims were successful.

He has remarkable thin skin if he took offence to Bernstein’s article or a guilty conscience.

Tel
Tel
10 years ago

Interesting… indeed the Wikipedia article does not match the references. The short-term effect of ERTA was a drop in revenue. We could argue about what the long-term effect might have been, but that gets much more complex to measure (and lots to argue about). The treasury report reference [30] makes it clear that it only studies short-term effects.

I agree that Wikipedia is better at handling non-controversial topics, but then again that applies to a great many sources.

I note that it has recently been edited though :-)

On the “Regan was really Keynesian” theme, http://old.nationalreview.com/reagan/roberts200406101413.asp points out that the tax cuts made rates of return inside the USA more attractive for investors, thus reducing the flight of capital. Running a big government deficit during a period of poor employment under Regan resulted in a boom, but similarly running bigger government deficits under Bush and even bigger again under Obama has only made the employment situation worse — this suggests that something fundamentally different is happening.

… acknowledging there is a liquidity trap now and there wasn’t back then.

But Regan did manage to deliver a boom, which neither Bush nor Obama has delivered. If Krugman’s “liquidity trap” was the key ingredient then we should be seeing a massive economic turnaround in the US any moment now (but fewer and fewer people are believing that).

Victor Trumper
Victor Trumper
10 years ago

sorry Tel,
Like may other you misunderstand Keynes.

Reagan,like Paul Keating here, had no reason to have a large deficit.

for why the reasons behind the present US deficit see this and all is revealed.

Your last paragraph shows you haven’t read all of which Krugman has written about the US situation.