Arnold Kling  

Politics vs. Economics, II

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Two-Handed on Vouchers... Mortgage Depreciation...

(Note: this continues the discussion from Politics vs. Economics.)

Another topic on which politics and economics can be separated is "supply-side tax cuts." The meaning of this phrase has changed somewhat over the years.

During the Reagan era, a supply-side tax cut was a cut in tax rates that would yield an increase in tax revenues. Whether or not President Reagan's tax cuts produced this result is an interesting issue that is outside the scope of this post.

Today, supply-siders seem to argue that even a tax cut that does not increase revenues is a supply-side gain. From the standpoint of economics, this is difficult to support.

The point can be made using one relationship that everyone agrees on, which is that more investment increases aggregate supply. Other than that, all that is needed is a simple accounting identity, one which holds for Hayek as much as for Keynes. That is,

S + T = I + G + (X-M)

where S=savings, T=tax revenues, I=investment, G=government spending, and (X-M)=the trade balance.

So, what does a tax cut do to aggregate supply if we hold constant savings, government spending, and the trade balance?

The answer is: tax cuts are bad for the supply side. Lower T means lower I, which reduces aggregate supply.

This is really basic stuff. I would absolutely flunk any first-year macro student who didn't get it. I tend to doubt that Kudlow gets it.

Politically, however, I sided with Kudlow in favor of tax cuts. My support for tax cuts, which is fading with each passing month, was based on the assumption that government spending would be reduced by about as much as tax revenues. The combined effect on supply of an equal reduction in tax revenues and government spending can be--and probably would be--positive.

Some economists, including Gary Becker and Milton Friedman, made the political assumption that lower tax revenue would lead to lower government spending. Instead, the political dynamic seems to be that the passage of the tax cuts has taken away President Bush's leverage to control spending. It's like if you run out and buy a sports car, and then your spouse asks if a home redecoration project is affordable. How can you say no?

But that is politics. Politics is messy. Reasonable economists can differ about politics. But I am idealistic enough to believe that good economists do not let their political views drive their economic analysis. Moreover, I believe that most of the time, differences about economic beliefs are not the driving factor in political differences among well-trained economists. I think that it is possible to keep the two dimensions separate.

(This is closely related to the philosopher's distinction between "is" and "ought," or Milton Friedman's distinction between positive and normative economics.)

This whole issue came up, ironically enough, on the civility plea thread!


Comments and Sharing


CATEGORIES: Supply-side Economics



COMMENTS (47 to date)
Eric Krieg writes:

Arnold, don't flunk me, but what about the relationship between taxes and investment returns?

I think that the basis for cuts in marginal tax cuts is to create more incentives to work and invest. If you make the after tax returns to work and investment more attractive, you will get more of it.

Now, that doesn't fit into your simple little Econ 101 model. I hope my class participation is such that I pass your class.

Eric Krieg writes:

As far as spending is concerned, it is just TWO YEARS since September 11th. To say that we are in a special time and under special circumstances is an undestatement.

We are at war. We are fighting terrorists on mutliple fronts. We are making up for past underinvestment in security and intelligence. We are in a recession partially caused by the attack itself. We have invaded two wars in two years.

It is unrealistic to think that spending is going to be restrained under these circumstances.

I do agree that certain spending should be limited. That grossly overweight farm bill should be eliminated. And there should not be a perscription drug benefit in Medicare.

Eric Krieg writes:

>>I would absolutely flunk any first-year macro student who didn't get it.

You mean that you would give that student a B-.

With grade inflation, no one flunks anymore.

Kyle Markley writes:

Maybe I'd flunk your class, but I don't think it's right to hold S, G, and X-M constant. Deficit spending is paid for by inflation, which is actually a tax, or by legitimate borrowing, which seems like investment.

A tax cut that's paid for by inflation isn't actually a tax cut, it just looks like one.

Boonton writes:

"Politically, however, I sided with Kudlow in favor of tax cuts. My support for tax cuts, which is fading with each passing month, was based on the assumption that government spending would be reduced by about as much as tax revenues. The combined effect on supply of an equal reduction in tax revenues and government spending can be--and probably would be--positive"

I don't like math anymore than the next guy but one thing that mathematics certainly does well is keep economics away from 'story theories'. Story theories are those like Eric's first post here, we make something up about how a cut here encourages that there which makes X happen producing Y etc. etc.

When you boil it down to an equation then you are forced to justify your theory against hard mathematics, not your creative writing ability.

I think it's big of you to admit it, many conservative economists got taken for a ride with Bush II. They fell for one of the biggest 'story theories' that's been around since at least Reagan: There is no evidence that Federal Spending is directly related to tax revenue! In fact the evidence seems to point in the opposite direction. As tax revenue increases spending is constrained.

The 'Story Theory' you feel for is the one of gov't spending as ATM machine. Imagine you go to the ATM to get $20 for lunch. You think you have $500 in your account but the receipt says you have $950. Well now you feel richer so you take out $40 and have sushi. Likewise if you show $300 you may feel too sick to eat...

The story is that Congress has a giant ATM machine hooked up to the Treasury and when they budget things like military increases, roads, etc. they 'check their balance' at the Treasury ATM first. If they see more money due to increased taxes they will spend it away, if they see less money because of tax cuts they will cut back on spending.

This is not how it works in reality. Budgets are set *before* the tax revenue comes in. If extra revenue comes in Congress must pass special bills in order to spend it. While this may seem easy, I suspect its not. Once a pot of money appears everyone has their own idea how to spend it. What happens, I suspect, is that it doesn't get spent because its very hard to get 50%+ to agree on any one way to spend it. During the Clinton surpluses, ideas were all over the place for universal healthcare, school building, tax cuts etc. Even though the surplus grew they didn't happen because not enough people could agree to get the spending passed.

Ironically we now have the reverse, as tax revenues fall spending passes because its an 'emergancy'. Even though we haven't funded anywhere near enough security at our ports, Bush signs a huge farm bill and hints that those Republicans who balked at raising the debt limit were hurting the war on terror.

Eric Krieg writes:

>>A tax cut that's paid for by inflation isn't actually a tax cut, it just looks like one.

Have any REAL tax cuts (1920s, 1960s, 1980s, now) led to inflation? The 1960's and 1980's didn't. Todays tax cuts haven't yet.

Forget your little models. What does the real data say? Inflation dropped throughout the 1980s. What do you attribute that to, dumb luck?

David Thomson writes:

Oh no, I’ve flunked my exam! It looks like I will have to mug old ladies and rob banks for a living. I still insist that tax cuts, especially in the states, constrain government spending. This is definitely the case in Texas. While this is less true for the federal entity---eventually even those politicians tell their constituents that the severe budget crisis prevents them form giving in to their demands. Arnold’s example about the man’s wife wanting the home redecorated might be right in the short run, but not the long run. Very soon both of them will likely become more cautious with their spending habits.

Am I therefore saying that Arnold Kling doesn’t have a valid point? Nope, not at all. We still have a serious problem with the spending already promised to the voters. Putting a halt to this nonsense is akin to standing in front of an avalanche hoping to stop it dead in its tracks. As I have pointed out repeatedly, one must essentially act altruistically to argue against a particular spending bill. Unfortunately, the people advocating this piece of legislation are usually getting a lot in return.

Eric Krieg writes:

Oh wait. I know. The standard economists answer...

"Inflation WOULD HAVE BEEN lower had the tax cuts not been implemented".

Blah, blah, blah, coulda, woulda, shoulda.

David Thomson writes:

“There is no evidence that Federal Spending is directly related to tax revenue!”

“If extra revenue comes in Congress must pass special bills in order to spend it. While this may seem easy, I suspect its not. Once a pot of money appears everyone has their own idea how to spend it. What happens, I suspect, is that it doesn't get spent because its very hard to get 50%+ to agree on any one way to spend it.”

Wow, somebody obviously does not understand human psychology. Politicians are always interested in bribing their constituents. It’s as simple as that. You take care of me---and I will take care of you. Remember me on election day. Many of these spending programs are never even discussed by the voting politicians! They don’t have to agree about the intrinsic value of the bill. In many instances an attachment is added to a bill that has nothing directly to do with the matter and the whole congress passes the bill in its entirety.

Arnold Kling is exaggerating the importance of math. He must remember that flesh and blood human beings are selfish and not always rational. Oh shucks, maybe someday Arnold will put a statue of John Calvin in his study. This should be mandatory for all professional economists.

Eric Krieg writes:

>>When you boil it down to an equation then you are forced to justify your theory against hard mathematics, not your creative writing ability.

By math, you mean a model. My creative writing is a model too. Perhaps with math, your model can be more precise, and it is easier to do what-if scenarios.

But no model can get reality perfectly correct. On some level EVERY model is a simplification of the real world. Just because you do some algebrea doesn't make it less of a simplification.

Boonton writes:

"Wow, somebody obviously does not understand human psychology. Politicians are always interested in bribing their constituents. It’s as simple as that. You take care of me---and I will take care of you. Remember me on election day. "

Nothing in my model would be inconsistent with this. Yes they want to 'bribe' their constituents...but their desires are contradictory. New York wants a new bridge or tunnel while the mid-west wants bigger farm supports. If tax revenue is suddenly $5B more, neither idea will get 50% of the votes necessary plus other people will come forward with their ideas.

On the flip side when tax revenue falls it is usually associated with an 'emergancy'. Sometimes the emergancy is real (9/11) and sometimes it is just a minor recession. Ironically during these periods there is a great urgancy to do something.... Whether it is spending (a stimulus bill, military increase) or something else (Patriot Act), the need to 'get it done' drives additional unrelated spending.

For example, consider Bush's support of a massive increase in farm subsidies. In effect, the bill brought back the subsidy system that was finally ended under Clinton! Is it unreasonable to think that Bush might have supported this spending in order to ensure that Republican Congressmen would be supportive of his other measures?

David Thomson writes:

“For example, consider Bush's support of a massive increase in farm subsidies. In effect, the bill brought back the subsidy system that was finally ended under Clinton! Is it unreasonable to think that Bush might have supported this spending in order to ensure that Republican Congressmen would be supportive of his other measures? “

Wow, I think you are starting to get it! Tears are starting to roll down my cheek. President Bush deserves severe criticism for that ridiculous farm bill. And yes, he and Karl Rove are trying to bribe the farmers. I have repeatedly argued that neither political party is pure as the driven snow regarding spending our tax dollars. Furthermore, I have always praised Bill Clinton for his courage regarding NAFTA and other free trade policies.

Mcwop writes:

I am still confused. Where in the formula do the tax savings come into play? If there is a $50 billion tax cut does that move from ‘T’ to ‘S’ or ‘I’. I mean the $50 billion is still “in the economy. The taxpayer is doing something with it, there must be some effect at some point.

PS - What President has not supported a farm bill? This is a great place to cut spending. Somehow, I doubt we will starve to death without it.

randy writes:

Identities must be respected, but it is erroneous to change one thing in an identity, then pick and choose where one redistributes that change across the other items. Thus the Econ 101 comment is unfortunate and needs to be retracted; Professor Kling is using the tool improperly. One cannot escape the need for a theory to predict how other things change in response to some exogenous change; of course, one would prefer to use a theory that has survived empirical scrutiny.
Here is a "supply side" tax reduction that is likely to increase output: an investment tax credit. Demand for loans rises (for investment purposes), interest rate rise, increasing saving (hand in hand with reducing consumption); aggregate capital rises, output rises immediately (aggregate demand rises) and also as potential output grows.
This is not to say that the Bush tax cuts will accomplish this; that is a lot more uncertain.

David Thomson writes:

“Nothing in my model would be inconsistent with this. Yes they want to 'bribe' their constituents...but their desires are contradictory. New York wants a new bridge or tunnel while the mid-west wants bigger farm supports. If tax revenue is suddenly $5B more, neither idea will get 50% of the votes necessary plus other people will come forward with their ideas.”

Oh gosh, you are not getting get it this time around. You are right when discussing big ticket items. However, our federal budget is being pin pricked to death. How does that old saying go? A billion here and a billion there, and after awhile we are talking about real money. It’s the two million dollars for some small town’s swimming pool and three million for another’s museum to a forgotten and long dead politician ---and eventually we have a real problem. These items are not usually debated and thoroughly discussed. Once again, it’s merely a matter of my scratching your back and you scratching mine.

Mcwop writes:

Another question. How did this model fare under Bush I versus Clinton.

Remember, Bush I raised taxes, which did not lead to surpluses or significantly lower Gov spending. In fact federal spending increased at a pretty good clip after the 1990 budget deal.

Some claim the deficit would be worse if not for the Bush I tax hikes. I see no convincing evidence of this. In fact if the government held to the Gramm-Rudman-Hollings law things would have been better.

Boonton writes:

"Wow, I think you are starting to get it! Tears are starting to roll down my cheek. President Bush deserves severe criticism for that ridiculous farm bill. And yes, he and Karl Rove are trying to bribe the farmers. "

I think you are the one that is starting to get it, but just starting! Bush isn't trying to bribe the farmers, he is trying to bribe the Congressmen of farm states. He feels the need to do this because he wants to do other BIG THINGS(tm) to address the EMERGANCY(tm). So Bush pays off farm state Senators and they keep their libertarian minded criticisms of the Patriot Bill to themselves.

What's generating this spending is a preceived emergancy. I think the 9/11 emergancy is now past but politicians also view normal recessions as emergancies and they want to do something BIG during an emergancy. They want to do this because they want to have a plausible way to claim credit for solving the emergancy after it is past.

But to do something BIG you have to get Congress to go along & the easiest way to do that is to go along with their various spending wants. Since 'emergancies' are usually economic downturns it isn't surprising that we see spending rising as tax revenues fall.

On the flip side when you have the opposite situation....'good times' like we had in the last 6 years or so of Clinton's term the dynamics are entirely the opposite. The incentive is to not do any BIG THINGS(tm) because life is already good and if things go downhill people will blame your BIG POLICY as the cause for runing the good times. Extra money may flow into the Treasury but Congress will have too tough time overcoming their bickering to spend it & the President has every incentive to oppose any changes that are too drastic.

Boonton writes:

"Oh gosh, you are not getting get it this time around. You are right when discussing big ticket items. However, our federal budget is being pin pricked to death. How does that old saying go? A billion here and a billion there, and after awhile we are talking about real money."

Another story, unfortunately it isn't very true in the macro scale. Discretionary spending was more or less held in check during the period that Clinton prosperity brought in large amounts of tax revenues. On a micro basis there is plenty of room for pork...but if the budget for some department (say Parks) is set at $5B then getting pork inside of that budget is a zero sum game. Gingrich grabbing a $5M swimming pool for his district just cuts $5M from some other district. On the macro scale gov't is still spending $5B on parks...just not as efficently as if such shady activities didn't exist.

M writes:

Arnold Kling is correct, all thing being equal, the government will use up private investment capital to make up for lost tax revenue. This is the whole criticism about the economic failure to support business investment, government is eating all the resources while consumer spending, not investment spending, is using up the tax savings. If there is an error, it is the fact that some of the lost tax revenue ends up in savings.

As far as the war on terror is concerned, the massive trade deficit will draw an order of magnitude more terrorists into the country in the next immigration wave than will be killed in war. The reason is simple, much of the trade dollars in China go to terrorist rich Gulf states to buy energy for the manufacturing engines in China that feed our consumers who spend their saved tax dollars.


The real story is, make the same fools pay for the spending they demand. Only then will congress get a message from their constituencies to quit spending their money.

By the way, Kudlow is a big government, Reagan massive spending, Republican Communist who never found a Republican big goverment program he didn't like.

David Thomson writes:

“What's generating this spending is a preceived emergancy. I think the 9/11 emergancy is now past ...”

This is absolutely false. We are engaged in a life and death struggle against those who are adamantly trying to kill us. The threat of Islamic radicalism and secular Arab socialist extremism will probably continue long after we are dead. Even the most optimistic projections conclude that around 100 million people embrace these nihilistic world views. President Bush is not indulging in a con game similar to that George Orwell wrote about in “1984.” Are we winning the war on terrorism? I think so, but we have a long way ago before claiming victory.

Mcwop writes:

I have to echo David T.

Who thought terrorists would bring down the towers, especially after the buildings survived the first attack. Had terrorists blocked the bottom floor exits on 9/11, we could be talking 30,000 people dead.

All it takes is one nuke to get in the wrong hands, so the risk of an economically devastating attack is very high.

The funny part, is that many in the middle east region don't realize that terrorism against the U.S. is not in their long term interets. Just imagine U.S. retaliation to a more severe attack (e.g. nuke).

Boonton writes:

'War on Terrorism' is a war on an abstract noun. For all reasonable purposes our war on Al Qaeda has succeeded. Does that mean terrorism is no longer a danger? Of course not. Let's remember that before 9/11 the most serious terrorist (Ok. City) attack was pulled off by just 2 or 3 Americans and killed over 300 people.

I think we can agree, though, that farm subsidies have little to do with protecting ourselves from terrorism.

David Thomson writes:

“For all reasonable purposes our war on Al Qaeda has succeeded.”

This is not even slightly accurate. We may have severely damaged Al Quaeda, but its remaining members are still a major threat---and their views are embraced by millions. I strongly recommend that everyone visit Daniel Pipes at www.danielpipes.org and read the many works of Bernard Lewis. The latter’s “What Went Wrong” is mandatory reading. Also, Lewis’ Atlantic Monthly article written in 1990 is highly illuminating:

http://www.theatlantic.com/issues/90sep/rage.htm

David Thomson writes:

Here is a live link to Daniel Pipe's superb website:

http://www.danielpipes.org/

Eric Krieg writes:

Boonton's opinion about Al Qaeda represents the same sort of complacency that got us Sept. 11th in the first place.

We will NEVER be in a position to put our guard down ever again. As Sept. 11th showed, the cost of complacency is simply too high.

Boonton writes:

Too much of something is as bad as too little. Millions might be mildly supportive of Al Qaeda, that doesn't mean we should consider ourselves at war until the entire world joins hands and sings the Star Spangled Banner....

Al Qaeda's ability to attack the US has been dramatically reduced. Afghanistan's open hospitality to terrorist training camps has been reversed. Security around vulnerable areas should continue to be increased...that doesn't mean we are at war.

Consider this statement:
"This is absolutely false. We are engaged in a life and death struggle against those who are adamantly trying to kill us. The threat of Islamic radicalism and secular Arab socialist extremism will probably continue long after we are dead."

It is not necessary for the Arab world to like us in order for us to be *reasonably* safe from another attack. It is not even necessary for Islamic radicalism to be eradicated. Even if those two things were to happen, remember two other notable pre-9/11 attacks:

1. Ok City, done by what appears to be two or three people with no foreign aid.

2. The serin gas attack in the Tokyo subway system, done by a looped out cult with a belief system totally discontected from any serious political or demographic movement.

We will always be vulnerable to terrorism & 9/11's lesson is that it terrorism must be incorporated into the design of our infastructure just as much as hurricans, earthquakes & other diasters are. It cheapens language, though, to say that we are at WAR when we are just involved with minor foreign skirmishes & increased security.

arnold kling writes:

I think that the war issues are getting a bit off track. Let's keep to the economic topic, ok?

From a supply perspective, the war is an adverse shock. It is part of the reason that government spending has increased. But it is not all of the reason. 9/11 may also have increased private spending on security, which also is an adverse supply shock.

Since people brought up the farm bill, I believe that it is true that farm subsidies will exceed the war as an expenditure. If so, then I think it is untenable to blame high government spending on 9/11.

Eric Krieg writes:

>>It cheapens language, though, to say that we are at WAR when we are just involved with minor foreign skirmishes & increased security.

Then stop bitching about how much it is costing!

Jesus christ, you people are always trying to have it both ways. On one hand, spending is out of control, but on the other we are involved in "minor skirmishes and increased security".

The only reason that we have not been attacked again is because we have taken the battle to the terrorists, invading both Afghanistan and Iraq. Iraq is drawing "combatants" (a Reuterism, from an organization that won't even call a terrorist a terrorist) from all over the Middle East. When they're in Iraq, they're not causing trouble in their home county or here in the US.

I don't dispute that spending has increased a hell of a lot under Bush. I don't dispute that some of it is political, and wasteful. But I DO dispute that the money we are spending in Iraq is not needed. Iraq is another front in the war on terrorism, and the money spent there is well spent.

Eric Krieg writes:

>>Since people brought up the farm bill, I believe that it is true that farm subsidies will exceed the war as an expenditure. If so, then I think it is untenable to blame high government spending on 9/11.

The farm bill was supposed to cost $80 billion. The SUPPLEMENTAL spending in Iraq is supposed to be $87 billion.

Here is how the farm bill is related to Iraq. The President only has so much time and energy. He can't be fighting Congress on every little issue. So he rolls over on some (most) spending bills to concentrate on the things that he thinks are more important.

Matt Young writes:

9/11, college kids with student loans.

Flying airplanes into public buildings was talked about when I was in college, it ain't new. Someone crashed a small plane onto the White House lawn during Clinton's administration. If the Islamics weren't first, the Harvard Rowing club would have eventually gotten around to it.

Hysterical nutcase Republicans. Most of our problems are created by hysterical Republican Communist soccer mom and NASCAR dad chickens who want government to protect them from all of life's little problems. Wasn't this problem created by hysterical Reaganites funding Islamic terrorists to protect us from their other childhood fantasy?

I have never found anybody so scared of life than TV educated, star trekkie, suburban communist Republican. They are worse than the paranaid Democrats.

Eric Krieg writes:

>>TV educated, star trekkie, suburban communist Republican.

Yeah! That's me allright-digidy.

You got that right. Conservatism is all about "managing uncertainty and threat" (Theory of Motivated Social Cognition to Account for Ideological Incoginuitites and Political Anomolies (2003), Psychological Bulletin, 3, 383-393)

We're all a bunch of nutcases in need of serious Prozac. Or maybe "Re-education". Or maybe a rifle butt to the base of the skull. Or something.

And, as chief Commie Republican (or is it Republo-Commie, I always forget) in these parts, your grasp of reality is BEYOND RAPROACH!

Damn, I'm being uncivil again. Arnold's gonna spank me. Or give me a B-.

Kyle Markley writes:

So much for civility?

Erik Krieg,

>>A tax cut that's paid for by inflation isn't actually a tax cut, it just looks like one.

>Have any REAL tax cuts (1920s, 1960s, 1980s, now) led to inflation? The 1960's and 1980's didn't. Todays tax cuts haven't yet. Forget your little models. What does the real data say? Inflation dropped throughout the 1980s. What do you attribute that to, dumb luck?

I should have realized it was futile to use the I-word among non-Austrians. My bad.

Replace "inflation" with "money creation" in my argument, and try again. Deficit spending pulls wealth away from the private sector in real (not just monetary) terms; it's just like a tax. Period.

Eric Krieg writes:

>>I should have realized it was futile to use the I-word among non-Austrians.

Come on! Don't you know the entymology of my last name? My ancestors were Austrian.

Seriously, what private sector are we talking about here? In the 1980s, it was the Japanese buying our T-Bills. Currently, it is the Chi-coms, in a futile attempt to stabilize their currency to stay competitive.

I understand the point you are making. I understand the theoretical basis from which the conclusion is made. I just don't agree that that is what is happening out on the street.

Scott writes:

I think the problem with the math equation is the assumption that S (savings) can be held constant. The tax cut just hit the economy. The most recent data indicate that C (consumption) increased as expected. In addition, S increased from 3.1% to 3.8% of income. We also know that investment spending by business is increasing.

It’s not that the math is wrong, it’s that the underlying assumption is incorrect.

Boonton writes:

"Here is how the farm bill is related to Iraq. The President only has so much time and energy. He can't be fighting Congress on every little issue. So he rolls over on some (most) spending bills to concentrate on the things that he thinks are more important."

This is a example of the model I presented. When there is a feeling that something needs to get done, spending increases because it is the President's way of ensuring that he gets to enact his policy change. Basically the price is that everyone else gets their policy change too...so Bush gets his policies while the farm states get their subsidies back and steel gets their tariffs and so on.

My position is that this feeling that 'something must be done' usually happens when tax revenues are falling. Generally this would be during a recession but it also includes real emergancies like 9/11. So falling tax revenues yield higher spending and increasing tax revenues yield lower spending....as much as that may seem to violate common sense.

Boonton writes:

Getting back to the original topic, I think it's pretty obvious that Kudlow is not an economist in any real sense of the term. He is a pundit. Like a doctor hired by a chemical company who tells the press that pesticides do not harm humans, Kudlow is telling a TV audiance (and his economic lightweight readers in his column) a story they like to hear. As Arnold Kling pointed out, Kudlow is probably unable to put forth any mathematically consistent explanation for his theories. He doesn't have to anymore than the astrologer has to provide scientific evidence to back up the daily astrology column in the paper.

Eric Krieg writes:

>>Kudlow is telling a TV audiance (and his economic lightweight readers in his column) a story they like to hear.

Ouch.

This economic lightweight would like to know how Kudlow is any different than these Democrat appologist HACKS:

http://www.epinet.org/webfeatures/viewpoints/economy_transcript_20030812.pdf

Go to http://www.techcentralstation.com/090803B.html for Arnold's explanation for why they are HACKS. They're all hat, no cattle, as our good Texan friend David Thompson would (probably) say.

Another thing. Since when is a Nobel Prize proof that you aren't a HACK? What's Jimmy Carter? God bless him, this former vice president of the Genesee County New York Habitat for Humanity chapter thinks Carter should stay out of politics and stick to pounding nails.

Mcwop writes:

"So falling tax revenues yield higher spending and increasing tax revenues yield lower spending....as much as that may seem to violate common sense."

Not under Bush I, and he raised taxes too. Receipts went up, and outlays went up. Be careful not extrapolate the Clinton years to every point in history.

Matt Young writes:

I read Eric's piece on "all hat and no cattle".

I would think that government spending with borrowed money in times of recession presumes that government has some wise investments in infrastructure to make. There is no magic in Kenseyian theory, it is simple household economics. Government should utilize cheap capital to build its infrastructure in times when the private sector is on its back.

Other than the hysterics concerned with the terrorism war, does anyone really believe that current federal spending helps infrastructure?

Eric Krieg writes:

All hat, no cattle means that the conference to which I linked consisted of a bunch of whiners critical of Bush but who themselves had no real answer to what he should be doing differently.

In another words, a bunch of HACKS.

BTW, there was a HELL of a lot of infrastructure spending in NEW YORK.

Boonton writes:

"Not under Bush I, and he raised taxes too. Receipts went up, and outlays went up. Be careful not extrapolate the Clinton years to every point in history."

A fair point, but then there was the Gulf War and a recession under Bush. In my model both would serve as a EMERGANCY that would be the prime motivator for increased spending.

Let me propose an alternative question; we all know who advocates additional spending but who advocates additional taxes and why? The stock answer is people who want to spend YOUR money (aka liberals). But Bush's term as well as Reagan demonstrate that an advocate of increased spending can opt to join forces with supply siders and advocate more spending while leaving taxes unchanged!

The only answer I can think of offhand is the bond market & those who have an interest in fixed incomes since inflation would be painful for both.

Eric Krieg writes:

>>The only answer I can think of offhand is the bond market

Yup. Robert Rubin. Another guy I really don't like.

Still, I ask where is the inflation following the 1920s, '60s, and '80s tax cuts? I don't see it.

Boonton writes:

Wasn't the US on the Gold Standard during the 20's? In that case prices would be linked to the gold supply. Tax cuts, deficit spending etc. would have to show up in reduced investment.

Inflation certainly picked up in the late 60's & in the early 80's inflation was literally beaten out of the economy by punishing interest rates that swamped any inflationary effect tax cuts may have had.

It's a bit too simplistic to say tax cuts generate inflation. Tax cuts financed by money creation do create inflation. If monetary policy refuses to accomodate tax cuts then eventually their impact must be felt somewhere. If it isn't then you have violated the 'free lunch' rule. You'd be able to cut taxes down to zero, even make negative taxes and never pay a price.

Where is the somewhere? It has to be the investment market, specifically long term investment where the 30 year treasury bond is one of the largest competitors. Tax cuts absent spending cuts that do not show up as inflation show up as a drag on long term growth.

Eric Krieg writes:

>>It's a bit too simplistic to say tax cuts generate inflation.

Thank you!

Arnold Kling writes:

"The farm bill was supposed to cost $80 billion. The SUPPLEMENTAL spending in Iraq is supposed to be $87 billion."

But the hope is to stabilize Iraq and then leave. Farm subsidies are forever (or so it seems). It's a good bet that over the next ten years, the farm subsidies will cost more.

Eric Krieg writes:

Hey Arnold, forget the exit strategy in Iraq. What's the exit strategy in Japan and Germany?!?

57 years after WW2, and we're STILL THERE!

Not to mention that we're still in Haiti, and Bosnia, and Kosovo...

Okay, maybe it doesn't cost us $80 billion per year to occupy Japan and Germany and all the other places that we have a presence. But don't think that we're going to leave Iraq anytime soon.

Boonton writes:

"Hey Arnold, forget the exit strategy in Iraq. What's the exit strategy in Japan and Germany?!?

57 years after WW2, and we're STILL THERE!"

That's a fair point however we should remember that prolonged occupation of Germany & Japan had more to do with the Cold War. If the Cold War had never happened it's not at all clear that we would have such a large presence

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