Tuesday, July 12, 2005

Krugman never met a spent tax dollar he didn't like

Paul is at it again, sputtering the usual distortions. Donald Luskin won't let him get away with it, (again) devastating Krugman's contentions and exposing the ivory tower-ensconced Princetonian for what he really is: the ultimate tax-and-spend socialist. The difference between the two is that Krugman has a socialist agenda to promote, while Luskin is a non-academic who, having to work in the real world, knows we must focus on maximizing tax revenue without having to hike tax rates. If the federal government tried to collect 28% of GDP in taxes, as Krugman has suggested, it would "utterly destroy the economy." And the U.S. would certainly take the rest of the world down with it.

Krugman would do well to read Frédéric Bastiat, patron saint of this blog. Bastiat wrote "What Is Seen and What Is Not Seen" over 150 years ago to destroy the myth that government spending is good for the economy: it's merely a transfer, at best. Bruce Bartlett wrote this past January, "A common estimate is that the federal tax system as a whole has a deadweight cost of about 20 cents per tax dollar." That is, every dollar collected in federal taxes reduces total U.S. economic output by 20 cents, for the plain reason that taxes discourage economic activity. That's even a low estimate compared to others. This 1996 Congressional report stated:
Recently, the Joint Economic Committee (JEC) released a report written by two academic economists, Lowell Gallaway and Richard Vedder. They carefully studied U.S. history to examine the relationship between government spending and economic growth. They concluded that at current spending levels the last dollar government spends reduces private sector GDP by $1.38. In other words, the economy experiences a net loss of 0.38 cents. From their analysis, it follows that in 1994, if the federal government were to reduce its spending by four percentage points, economic growth would have increased to 5.4 percent.
One of the report's footnotes cites Gallaway and Vedder as saying optimal federal spending for the U.S. is "17.57 percent." I think that's far too high, but curiously enough, that's where Krugman said we are.

Government spending has been known to hurt certain industries much more than the average. The National Center for Policy Analysis criticized Kerry's plan for massive federally subsidized health care, especially because the 1990s Medicaid expansion showed that a dollar of increased federal spending on Medicaid has not been matched by the private sector spending a full dollar less:
A study by Harvard University Professor David Cutler and Massachusetts Institute of Technology Professor Jonathan Gruber found that Medicaid expansions in the early 1990s were substantially offset by reductions in private coverage. They found that, for every additional dollar spent on Medicaid, private sector health care spending was reduced by 50 to 75 cents on the average. Thus taxpayers incurred a considerable financial burden, although little was accomplished.
Put simply, for every extra dollar the feds spent on Medicaid, the private sector could cut back by only 50 to 75 cents, not one dollar. The private sector still had to spend 25 to 50 cents to maintain the same level of service. So much for the "economy of scale" that socialists like to ascribe to government!

Even a basic Marxist model of capitalism illustrates how taxes prevent an economy from reaching full potential. A business produces profit, which is reinvested so it can become greater profit, which is in turn reinvested ad infinitum. My Marxist professor who harped on that, back in my undergrad days, would never admit that when government taxes profit, the business cannot expand in future cycles as much as it did before. That means it cannot hire as many new workers, which reduces the potential tax base.

Shouldn't government want people to work as much as possible? You'd think so, but big government is greedy and wants to tax now, when instead it could promote economic growth with lower tax rates, which in the end create higher total tax revenue. The Laffer Curve just plain works. Reagan proved it. The 1997 tax cuts, which the Republican Congress pushed Clinton into signing, proved it. George W. Bush's tax cuts are proving it as we speak.

Krugman and others claim otherwise in their straw-man argument, but the Laffer Curve does not state that tax cuts will always pay for themselves. It does say, though, that at a certain level of taxation, both tax revenue and economic production will be maximized. That's how we can reduce tax rates to a certain level, encouraging people to produce more economic output, and achieve more tax revenue than before. It's the same principle by which a retail store can experiment to determine a product's optimal price: if every increase of 10 cents discourages x people, how much can the store charge to maximize earnings? So pay no attention to the man behind the Princetonian curtain, especially when you consider his prediction record.

Krugman has predicted since March 2003 that we're headed for a "fiscal train wreck," which not only hasn't happened yet, but the basis for his insanity, the federal budget deficit, continually decreases in the 2005 projections. It was once extremely high by anyone's standard, but whaddya know: incoming revenue is outpacing Congressional spending, so each new deficit projection is less and less. A "right-winger" isn't claiming that, but the Congressional Budget Office itself. How much did Krugman weep to read the first paragraph of that report? I'll highlight the first part that he didn't want to admit:
In the first three-quarters of fiscal year 2005, the federal government incurred a deficit of about $251 billion, CBO estimates, $76 billion smaller than the shortfall recorded in the same period last year. Both revenues and spending are running ahead of last year’s pace, up by about 15 percent and 7 percent, respectively. With robust growth in revenues in May and June, CBO now expects that the 2005 deficit will be significantly less than $350 billion, perhaps below $325 billion, assuming that no other legislation is enacted that affects spending or revenues. CBO will release updated budget projections for the 2005-2015 period on August 15.
Krugman also cited a January 2001 "budget office" (the CBO?) report that forecasted $2.57 trillion in tax revenues for 2005, and that at current projections, we'll still be $400 million short. First, the CBO issued so many ridiculously optimistic projections in those days, based on the unsustainable "bubble" growth of the late 1990s. Second, the CBO projects federal spending for 2005 at $2.42 trillion. So if we get Krugman's predicted $2.17 trillion in tax revenue, that's a considerably smaller budget deficit of $250 billion, about 2% of GDP.

As I've noted, Krugman predicts economic Armageddon after economic Armageddon, none of which have come to pass. He needs such economic bogeymen to stay interesting. Well, Krugman can keep admitting his "forecasting record isn't that great," and maybe as I said, with enough time and a whole lot of predictions, he might finally predict something that will happen -- but more than a few of us will never forget his lies about his forecasting.

Where were Krugman's warnings in the 1980s when the federal budget deficits were worse than today? The federal budget deficit is higher today in terms of raw numbers, which our friend Steve Conover points out is not as meaningful as better measures. It's far more accurate to examine federal debt as an annual budget deficits as a percentage of current GDP, and total debt as a percentage of GDP.

Look at this CBO data, particularly through the 1970s and 1980s. Federal budget deficits, as a percentage of the economy, continued to soar under Democratic Congresses. Strangely enough, the deficit's growth, again measured as a percentage of GDP, started dropping in 1992 but really started dropping when the Republicans won control of Congress. Do we really think the deficits would have kept dropping if Hillary had had her way with our health care system? Now, I'm no cheerleader for the Republicans. The last couple of years of federal spending have been ridiculous, as the data shows, but 2005 looks to be a big reversal -- even by Krugman's numbers from my previous paragraph.

My twist on John Stuart Mill is, "Debt is an undesirable thing, but not the most undesirable of things." No rational person borrows merely for the sake of borrowing, but debt can be worthwhile when we want something today, if the interest is worth having it sooner. I would much prefer that the federal government not borrow at all, but we can't stop it cold turkey just yet. In the meantime, its debt is not the end of the world, especially not at these modest levels. Skeptical Optimist Steve Conover has been updating his chart for a while now, the debt-GDP ratios of the U.S. and other countries. What I like about his projections is that it wouldn't take much fiscal austerity to reduce the U.S. debt burden over a few decades; we can do it even with modest spending increases and sustained tax rates.

But Krugman couldn't care about any of this. Luskin's spot-on: Krugman and his fellow socialists just want to tax first, and determine spending allocation later. Like all good self-anointed bureaucrats, academics and activists who have undertaken a mission to save mankind (which means molding man into their desired image), success is measured by dollars spent and more people dependent on government.

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