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Tuesday, December 18, 2007

"Crazy Views on the Economy"

Dean Baker reviews the economic plans of the Republican presidential candidates:

Creative thinking, by Dean Baker, Comment is Free: Since several of the Republican presidential candidates regard creationism as a serious theory in biology, it should not be surprising that their economic views also have little connection to reality. In fact, the Republicans' test scores in biology are probably somewhat higher than in economics. Creationism is a minority view... By contrast, all of them seem to be spouting some pretty crazy views on the economy.

Of course tax cuts are central to the Republicans' economic story. They have great plans to reduce taxes, especially for people who don't work for a living. For example, Mitt Romney ... insists that anyone with an income of less than $200,000 a year should pay no tax on any income from dividends, capital gains or interest. Under the Romney plan, a person who collects $200,000 a year in interest on $4m held in government bonds would pay zero tax. By contrast, a custodian working two jobs to earn $40,000 a year can look to pay around $4,000 a year in taxes.

In the same vein, Mike Huckabee has proposed the "Fair Tax", which his website claims is "based on wealth", although it is described as a sales tax. Huckabee proposes to have his Fair Tax replace all other forms of taxation... If a national sales tax is to replace all other federal taxes, then it would have to be in the neighbourhood of 25% to 30%. ... If we don't tax items like healthcare and house sales ..., we might be up to 40% with Huckabee's Fair Tax.

But this is where the fun comes in. Typical workers will probably have to pay President Huckabee's Fair Tax on almost everything they buy throughout their life. But, the smart folks who make their money by inheritance, strike it rich on Wall Street or work in highly paid professions can simple skip out on the Fair Tax. ... Their tax burden will get passed on to the teachers, fire fighters, custodians and others who are left behind. What could be fairer?

Fred Thompson also deserves credit for creativity. He proposes the option to pay tax at a marginal rate of 10% for couples on earnings below $100,000 and 25% on earnings over $100,000. This would be a modest cut in taxes for most workers, but it would reduce taxes by more than a third for the richest 1%. ...

All the Republican candidates claim to be devout believers in tax cut creationism: the view that tax cuts pay for themselves due to their effect on stimulating growth. Even Rudy Giuliani and former straight talker John McCain claim to believe that tax cuts pay for themselves.

It is important to understand that this one is not a debatable point, as often claimed in the media. Tax cuts do not come close to paying for themselves. There is no serious dispute among economists on this issue. The Congressional Budget Office recently did a study examining the range of predictions from the available theoretical models on this topic. It found that the most optimistic model showed that growth replaces less than one-third of the lost revenue, and even this gain was only possible for a limited period of time. In short, when the Republicans claim that they can have large tax cuts without any offsetting cuts in spending, they are prescribing a route to really large deficits.

Of course, this suggests an important reason why some people may opt to support the Republican contenders. With the Democrats backing down from plans to end the war in Iraq, the war may continue long into the future if Democrats take the White House. On the other hand, the tax cuts proposed by the leading Republicans could take away the money needed to prosecute the war. In short, when it comes to the war in Iraq, the only way out may be to "starve the beast".

Since I've been noting reality-based Laffer curve reporting lately, I should acknowledge this from Ross Douthat (as pointed out at Crooked Timber, it's helpful to realize that David Frum is one of Giuliani's "senior policy advisers"):

Anti-Intellectualism, the Right, and Rudy, by Ross Douthat: David Frum, on populism and anti-intellectualism:

Conservatives have drawn strength from populism. But you can overdo any good thing —and I am beginning to think that on this one, we've zoomed the car into the red zone.

For me, the lights started flashing in 2005, during the battle over the nomination of Harriet Miers to the Supreme Court of the United States. Defenders of the president's under-qualified nominee began attacking the concept of qualification. One wrote: "The GOP is not the party which idolizes Ivy League acceptability as the criterion of intellectual and mental fitness. Nor does the Supreme Court ideally consist of the nine greatest legal scholars." Harriet Miers, we were told, had a good Christian heart. That was enough ... In the end, it was not quite enough for Ms. Miers. But it may be enough for many voters in 2008.

The currently front-running candidate in Iowa, former Arkansas governor Mike Huckabee, has built his campaign on a plan to abolish the Internal Revenue Service and replace the federal income tax with a national sales tax ... Economists and tax experts virtually unanimously agree that the plan is beyond unworkable -- that it is downright absurd.

... Just a little lower down in the polls is a libertarian candidate named Ron Paul. Paul is best known for his vehemently isolationist foreign policy views. But his core supporters also thrill to his self-taught monetary views, which amount to a rejection of everything taught by modern economists from Alfred Marshall to Milton Friedman.

Huckabee and Paul have not the faintest idea of what they are talking about. The problem is not that their answers are wrong -- that can happen to anyone. The problem is that they don't understand the questions, and are too lazy or too arrogant to learn.

Fair points all: ..., and Frum's larger worry about anti-intellectualism in the contemporary Right is one I share in spades. But if you're going to be hard on the current crop of Republican candidates for making bogus claims about public policy, it seems awfully unfair to leave out the candidate given to running ads in which he announces: "I know that reducing taxes produces more revenue. The Democrats don't know that. They don't believe that." (They don't believe it, of course, because in the current fiscal landscape you can't find a serious conservative economist who thinks it's true.) Or penning op-eds in which he explains that "the meaning of fiscal conservatism" includes the principle that "lower taxes can result in higher revenue." Or telling a GOP debate audience, in response to a question about whether we need to raise taxes to fix up our nation's transportation infrastructure, that the way “to do it sometimes is to reduce taxes and raise more money.”

Now it’s true that occasionally Rudy Giuliani hedges his bets (“sometimes,” “can,” and so forth) on this topic, and it’s true as well that he may not actually believe the extreme supply-side talking points he’s spouting, in the way that Huckabee presumably believes in the Fair Tax and Paul in the gold standard. On the other hand, neither of those ideas are likely to serve as the basis for economic policy in the United States any time soon, and both are marginal even within the right-wing coalition; the “tax cuts raise revenue” canard that Giuliani keeps promoting, on the other hand, is a staple of Bush Administration rhetoric and probably the dominant view among movement conservatives. If you’re looking for cases where the Right’s anti-elitism has shaded into outright anti-intellectualism - for cases where, in Frum's words, a GOP politician has deliberately failed to "study the problem, master the evidence, and face criticism" - Giuliani’s frequent channeling of Larry Kudlow seems like at least as telling an example as anything Mike Huckabee and Ron Paul are peddling.

I don't believe it's "anti-intellectualism," i.e. I don't believe that Giuliani is unaware of the evidence on this issue (and his policy advisers ought to be aware of it - if they aren't, or if they are reluctant to correct his misleading, untrue statements, that's a big worry).

This is a character issue. I don't believe Giuliani has deliberately 'failed to "study the problem, master the evidence, and face criticism"' through a deliberate act of anti-intellectualism. The chances that the campaign is unaware of all the fact checks on this issue are zero. It seems to me that what is deliberate is the willingness to pander to the movement conservative base even if it requires ignoring the evidence and saying things he knows in his heart of hearts aren't true. He's not deliberately ignorant, he's deliberately calculating and we shouldn't excuse it by acknowledging the occasional hedge (“sometimes,” “can,” and so forth) when the intent is to mislead, or use terms like anti-intellectualism to describe the behavior. We shouldn't just say, "when the Republicans claim that they can have large tax cuts without any offsetting cuts in spending, they are prescribing a route to really large deficits," we should also note that there is an intent to deceive, that they are not telling the truth, or they are so ignorant of the truth that it ought to raise questions about their fitness for office.

Giuliani and others who make this claim know what they are doing. When it comes to, say, selling a war with Iran, reforming Social Security, or other issues, will they also be willing to ignore evidence, to only accept "facts" that confirm their preconceived beliefs instead of objectively reviewing the situation, will they be willing to look you in the eye and mislead in order to convince you to go along with their plans? Those who continue to make misleading claims about tax cuts in spite of the very public debunking of that position have given every indication that the answer is yes.

    Posted by on Tuesday, December 18, 2007 at 12:33 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (104)


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