Arnold Kling  

Supply-side Dissatisfaction

Comment of the Week 2003-02-27... Inefficient Market?...

Some folks are reportedly bitter about the appointment of Greg Mankiw to succeed Glenn Hubbard as Chairman of the Council of Economic Advisers.

N. Gregory Mankiw, whom Mr. Bush nominated on Wednesday to lead his Council of Economic Advisers, wrote a popular economics textbook in which he ridiculed the supply-side tax cuts of President Ronald Reagan as "fad economics" conceived by "charlatans and cranks."

...Mr. Mankiw's comments have infuriated a number of prominent supply-side economists

There is a weak form of supply-side economics to which many mainstream economists subscribe. This weak version would say that cuts in marginal tax rates can increase long-term economic growth.

There is a strong form of supply-side economics, which says that cuts in tax rates can raise government revenue. Given that Milton Friedman and Gary Becker are arguing nowadays for tax cuts as a way to reduce government spending, it is doubtful that they believe that tax cuts raise government revenue. So one can infer that the supply-side camp would still be bitter if Friedman or Becker were named CEA Chairman.

For Discussion. If Mankiw believes that tax cuts reduce government revenue, does that make him a poor salesman for tax cuts?

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CATEGORIES: Supply-side Economics

COMMENTS (3 to date)
GT writes:

Does believing that tax cuts reduce revenues (it's a matter of faith? ) make him a poor salesman?

No. There may be an ulterior benefit that overrides the loss in revenue.

But understanding that budget deficits DO impact interest rates and the general economy (as Mankiw does) might put him at odds with the WH line, don't you think?

Jim Glass writes:

"If Mankiw believes that tax cuts reduce government revenue, does that make him a poor salesman for tax cuts? "

Only if the purpose of government is to maximize its revenue.

Having read Mankiw on all this, I can say the strong statements I've seen pouring out about him during the last 24 hours with their various slants are highly political. (Surprise, surprise.)

The Mankiw I've read says deficits do matter -- but not much in the US on the scale that we've experienced or can expect to in any near future. E.g, he estimated that the entire accumulated national debt as of 1998 (WWI, WWII, Great Society, Reagan, etc) reduced national income by 3%. (And the debt is lower now). Now, 3% is indeed something, but it's not a whole lot for most of a century of running deficits, including some real good binges.

Mankiw and Elmendorf did a really good paper surveying all the issues regarding gov't debt -- and covering all the arguments people keep going over in these blog comment sections -- titled of all things "Government Debt", by Elmendorf and Mankiw.

It can be downloaded from the Fed. Use the search engine there to find it. I recommend it to all who want to be informed on the subject and armed for the blog wars.

Bill H writes:

I am a believer in lower taxes as a way to grow the economy - which can lead to more government revenue. Whether "supply side" tax cuts reduce government revenue (which they probably do in the short term) or increase it (which they probably do in the long term), the point is that the people have more money and pay less in taxes, which is always a good thing.

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