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Friday, December 26, 2014

The Brownback Effect Hobbles Supply Siders

     Sumner is crowing about the alleged embarassment Keynesians in Brazil. 

     :Back in 2012, Paul Krugman did a post praising the “New Economic Policy” in Latin America, which focused on reducing inequality.  A few weeks later he singled out Argentina and Brazil for special praise:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

     “And it’s true that these countries had shown some impressive growth.  But that was more than 2 and 1/2 years ago.  How do things look today?  Obviously things are going downhill rapidly in Argentina, but what about Brazil?  Here’s The Economist:
IN 2005 a debate raged between the two most powerful figures in President Luiz Inácio Lula da Silva’s government. Antonio Palocci, the finance minister, proposed taking advantage of faster economic growth to eliminate Brazil’s persistent fiscal deficit—and thus lower its exorbitant interest rates—by capping the increase in federal spending. But Dilma Rousseff, Lula’s chief of staff, thought Mr Palocci’s plan “rudimentary” and blocked it. Ms Rousseff became Lula’s successor as Brazil’s president in 2011, implementing a “new economic model” that placed full employment and wage increases ahead of macroeconomic rigour.
Fiscal laxity has come back to haunt Ms Rousseff, who won a second term last month by the narrowest of margins. As we went to press she was due to announce that Joaquim Levy, one of Mr Palocci’s deputies in 2005, will become her new finance minister. Nelson Barbosa, the most capable economist in the ruling Workers’ Party (PT), will get the planning ministry. Mr Levy is a Chicago-trained economist who has been running a big asset manager; his presumptive appointment has been welcomed by investors. It seems that Ms Rousseff has at last tacitly accepted the error of her economic ways.

  “Big spending policies to promote jobs, and wage increases to reduce inequality—no wonder Krugman was impressed. Unfortunately Brazil is now paying the price, with only about 1%/year RGDP growth over the past three years.  Fortunately, after Keynesian economics makes a mess of things there’s always a few “Chicago Boys” available to clean up the mess.  I have another post at Econlog, discussing how Krugman’s preferred tax policy failed in France, and how a somewhat more moderate economic minister was brought in to clean up the mess.  Not a good two years for Keynesian/Piketty economics, maybe 2015 will be better.”
     Sumner likes to say that there is no such thing as public opinion in economics, the idea being that only trained economists can have intelligent opinions about economics. Well one thing that divides those who understand economics from those who don’t is the point about counerfactuals-that correlation doesn’t necessarily prove causation. 
     I mean if growth has slowed since 2012 in Brazil why might this be? There could be all kinds of possible reasons that economists might propose-right to maybe 2012 was the top of the cycle in Brazil-the boom phase-and now they’re at the bottom-the bust phase-that is characteristic of the capitalist business cycle. 
   Sumner and the Economist see an increase in fiscal spending and a decrease in GDP and just assume ‘but of course, this crowded out private industry, raised interest rates, and reduced growth’-and don’t even do anything like a rigorous analysis to show that’s what happened.  Yet Sumner seems to think that if only economists get to have an opinion about economics-leaving aside the inherently undemocratic nature of this theory-we should have better analysis. So maybe neither he nor the writer at the Economist are real economists?
      Not suprisingly Sumner doesn’t mention that Supply Siders themselves have had a tough few years. Turns out that deep tax cuts for the rich doesn’t magically make up for the revenue via ‘dynamic scoring.’
      “Ohio Gov. John Kasich will roll out “responsible” tax plans that protect against revenue gaps. Wisconsin Gov. Scott Walker and Arizona’s new Republican governor are delaying big dreams of nixing the income tax as they face budget shortfalls. And Missouri Republicans, once jealous of their neighbor Kansas’ massive cuts, are thankful they trimmed less.

        Call it the Brownback effect.

         Republicans once idolized Kansas Gov. Sam Brownback as a tax cutting superstar — now he’s a lesson in what not to do.
        “It’s a cautionary tale on a national scale … Many of us felt that [Kansas] had been too aggressive,” said Indiana Senate Majority Leader and tax committee chairman Brandt Hershman, who helped GOP Gov. Mike Pence cut corporate taxes last spring. “We all like low taxes … but we have to ensure the stability of a revenue stream to provide basic services that our citizens expect.”

    Read more:

         Maybe Pence can have a chat with Sumner. We’ve had this debate before but Sumner’s Market Monetarism is basically a backdoor way to achieve Supply Side fiscal outcomes. If you assume monetary offset and the alleged superiority of monetary vs. fiscal policy in managing the business cycle then you’re bascially locked into a Supply Side fiscal policy. 

        The Brownback Effect reminds us that there are many problems with a SS fiscal policy starting with the absurd claim that dynamic scoring and growth will magically make up the difference. 

        UPDATE: Sumner has also been pretty slippery about whether or not he claimed that bad predictions discredit a model. He responded to a comment of mine to say that’s not what he said-that I misinterpreted him. 

      “Mike, I’d add that you misinterpreted my comment (which was from an older post, I had to check.) I wasn’t saying that bad predictions should not discredit a model, I was referring to the fact that Keynesianism (and Austrianism?) has not been discredited in many people’s eyes despite lots of bad predictions. Reread the comment. Of course it’s a grey area as to how many bad predictions should be allowed, in an imperfect science like economics.”

      You be the judge whether or not he was saying that:

       “And of course Friedman made some bad predictions in the 1980s (but since when do bad predictions discredit a model?)”

        In the quote he said nothing about Keynesian or Austrians. It looks like that is what he was saying. What his position basically is that bad predictions discredit Keynesians or Austrians but not Monetarists-or at least not Market Monetarists. Yet he claims that Keynesians are slippery!

        Meanwhile, the GOP itself is seeing it’s faith in SS being shaken. 

        It’s a major turnaround from two years ago, when Brownback was considered a Republican trailblazer for conservatives around the nation who dreamed of phasing out their state income tax.

Now, Republicans are rethinking how aggressive they can be on taxes in light of the projected $279 million revenue gap that’s plaguing Kansas this year — shortfalls that resulted in the state’s credit rating being downgraded and nearly booted the Republican from office in a state that bleeds red.

Read more:

       Obviously the GOP is not going to give up on SS wholecloth-anymore than anyone has given up on Keynesianism wholecloth despite Sumner’s overwrought claims to the contrary. 
       “Of course, Republicans aren’t ditching supply-side economic theory or tax cuts. But they’re considering ways to avoid Kansas’ troubles. Their takeaways include smaller cuts over extended periods of time, stopgaps to protect revenues — and avoiding overpromising.”

        “It’s making for an odd dynamic in which some Republicans now proudly say their tax plans will be “incremental” or “evolutionary” instead of “revolutionary.”

        A GOP a little more humble about the potential of supply side tax cuts is not a bad thing. It’s not even inconceivable that there could be a deal with Democrats-not in Kansas where there are few Dems-but elsewhere where some of the tax cuts that could be considered SS could get Dem support. The real fight is not just between ‘to cut taxes or not to cut them’ but what kinds of tax cuts. Al Gore too supported tax cuts in the 2000 election and on those tax cuts to Americans outside of the 1% he and Bush even largely agreed-the difference was Gore disagreed with the giveaways to the 1%. 

        With the economy finally looking pretty good in most ways the one continuing problem is wage stagnation and the long term unemployed. The question that is asked is should Obama and the Dems celebrate this? Obviously you have to. If Obama took hits when the unemployment rate was over 10% or even over 8% during the 2012 election he should get some credit now. In reality the President gets too much credit and blame about the economy but as that’s the case he should take a lot of credit. 

       No matter how you want to size it there was 1 million new jobs in the Bush years and 12 million new jobs during the Obama years. What I see Obama do that makes sense is take some credit but also admit that inequality remains a problem and that there is a need to do some ‘structural’ things about the wage gap-we can start with the minimum wage which is popular and passed this year even in red states where it was on the ballot. 

      Regarding this whole issue of structural issues-one I do believe as Schumer says is technological displacement-though I do think there is a legitimate debate for liberals to have amongst themselves. Namely should we continue to push for low taxes for the working poor and middle income-for the nonrich? What about the need to build up infrastructure and the welfare state which has been badly decimated under the GOP Congress and many state GOPs? 

     Many progressives have made the argument that there are much better social safety nets in Northern and Western Europe but would we want to follow the same program of higher taxes for the poor and middle as well as the top? Since 1980 the Dems have followed the GOP’s call for lower taxes with just the small proviso of not wanting too many cuts for the rich. However, Dems made 98 percent of George W/ Bush’s tax cuts permanent in 2013-and Gore called for many of those himself in his initial 2000 proposal linked to above. 

    I’m not saying I have the definitive answer here I’m saying this is a debate libs need to have-it’s very tough for Dems to cut the earned income tax credit or raise the tax rate for the nonrich. I’m not saying we should. Just noting that this was Jude Wanniski’s whole playbook in the late 70s-the GOP had to be it’s own kind of Santa Claus. The Dems are the Santa Claus of government spending, so the GOP had to be the SC of tax cuts-their previous error had been to postpone tax cuts until the deficit was cut.

     I do think this remains a question for liberals though. How much can we expand the safety net and oppose tax hikes on anyone but the superrich? I do think we could probably do a decent amount at this point though without this coming into question. While you can make a case for the European or 
Sweden model’ think of Social Security taxes which take such a bit out of the average guy’s paychecks. That’s just a taste of how taxes are in Europe-they used to be a little more like that in the U.S. too prior to 1980. 

     Food for thought, but if the GOP has finally given up on claiming that deep tax cuts can somehow ‘pay for themselves’ no matter how dynamic the scoring this is major progress. 


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