Still Crazy After All These Years
Not having listened to the entire thing, I can’t say for sure that every single word uttered at the White House economic conference this past week was nonsensical. But I do know that when I tuned in Wednesday morning, it was only a matter of seconds before I was treated to a piece of pure hokum.
It was conservative economist Martin Feldstein giving his familiar spiel on taxes. Current tax rates, he said, “create bad incentives which slow down the rate of growth of the economy and hurt the standard of living.” The point of Feldstein’s lecture was that President Bush’s tax cuts had made an enormous contribution to economic growth and, if we’re not fully satisfied with the results, we ought to cut taxes yet again.
Feldstein’s theory reflects the basic underpinning of Bush’s economic agenda. The theory is that tax rates exert an enormous influence over people’s (and especially rich people’s) willingness to work hard and take risks. According to this view, countless potential entrepreneurs and innovators haven’t bothered trying to get rich because of high taxes.
The corollary to this theory holds that tax cuts stimulate so much economic growth that they reduce tax revenue far less than conventional economists assume. Alas, the theory has failed every empirical test.
Feldstein’s cohorts at the conference were polite enough not to bring up his influential prediction about the 2001 Bush tax cut. When Bush took office, if you recall, moderates prudently argued for using most of the $5.6-trillion-over-10-years budget surplus to pay down the national debt. Bush, however, insisted his tax cut was small enough that even afterward there would be enough left over to pay off the debt and keep a trillion-dollar “contingency fund.”
To persuade skeptical tightwads, the administration trotted out Feldstein, who made essentially the same argument he made Wednesday. When tax rates go down, he explained, taxpayers “work harder and take more of their compensation in taxable form.” Therefore, “the true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates.”
As it turned out, the true cost ended up being substantially larger than the estimates. In fact, income tax revenues crashed through the floor, dropping to their lowest level as a percentage of the economy since 1942.
Frankly, it’s amazing that anybody listened to Feldstein even then because he had made an equally bumbling prediction eight years before. In 1993, when Bill Clinton raised the top tax rate, Feldstein argued that because high-income workers are so sensitive to tax rates, they would dramatically change their behavior. Clinton’s plan, he wrote, “reflects a fundamentally incorrect view of how taxes affect individual behavior.” In another column, he thundered that “there is no possibility that the Clinton plan will produce the deficit reduction that it projects.”
No possibility! Well, in case anybody has forgotten, the deficit actually dropped far more than anybody projected. Income tax revenue shot up through the ceiling. It’s as if there was an actual invisible hand guiding the economy, and it grabbed Feldstein by the collar and screamed, “You’re utterly, completely wrong, you fool!”
Feldstein’s defenders would claim he just got unlucky twice in a row: Clinton’s tax hike happened to precede a huge boom, and Bush’s tax cut happened to coincide with a major slowdown. But revenue grew under Clinton and shrank under Bush, far more than could be accounted for by growth alone.
And, anyway, even if that excuse were right, it undermines Feldstein’s point. Feldstein and his conservative allies argue that upper-bracket tax-rate levels are crucial to economic health. But history shows that, at the very least, many other factors have a greater effect on economic growth. So accepting large deficits for the sake of tax cuts makes no sense. This history also suggests that it’s Feldstein who has a “fundamentally incorrect view of how taxes affect individual behavior.”
And yet here is Feldstein today, dispensing his economic wisdom once again before the most powerful people in the country. Imagine if one man had designed the Titanic and the Hindenburg, and then was put in charge of the space program.
In a way, Feldstein’s no worse than any of the other conservatives who made laughable claims on behalf of Bush’s economic policies. That’s exactly why the administration felt no shame in trotting him out once more. Anybody unprepared to make a fool of himself wouldn’t appear at that conference in the first place.