More Big Con blogging

By Megan McArdle

I have to admit to a bit of private hilarity at the multiple accusations that I couldn't possibly have read Jon Chait's book because a mere thirty six hours before I posted my review of it, I complained of not having a copy. I hadn't realized that so many people considered reading a 250-page book, set in the EZ Reader Xtra Large typeface popular among political polemics, such a heroic feat. I'm sorry to disappoint, but shortly after that post, I borrowed a copy from my colleague Matt Yglesias, then sat down and read the book.

At any rate, in order to clear any lingering doubts that I am incapable of finding passages to critique unless some smarter guy such as Will Wilkinson discovers them for me, let me offer one of my early favorites:


Next, conservatives insist that tax revenues actually did rise under Reagan. And in a literal sense this is true: as the Wall Street Journal editorial page writer and supply-side propagandist Stephen Moore triumphantly declared: "From 1982 to 1989 income tax receipts climbed from $298 billion to $446 billion -- a 50 percent increase." But this is like saying that your policy of feeding your children nothing but marshmallows for six months has been proven correct and healthful because your children have continued to grow. It's a meaningless measure. In any growing economy, tax revenues will tend to rise in nominal dollars -- from inflation alone, if nothing else. The more accurage measure of revenue growth is as a percentage of the economy, and by that count revenues dropped under Reagan. [Emphasis mine]



This is where the book totally went off the rails for me--on page 34, for those following along at home. This is a huh? moment so profound that one really doesn't know where to look. This passage seems to indicate that Jonathan Chait has completely failed to understand the supply side arguments that he is trying to take apart. It's hard to comprehend how he could make such an error, for the supply side argument just isn't that sophisticated. Learning to tie your shoes is considerably harder and more time consuming.

The whole point of the supply side argument is that if you lower the fraction of the economy that the government consumes, you will spur economic growth, which will raise the absolute amount of revenues that the government collects, allowing them to do more spending with lower marginal tax rates. It is definitionally true that under supply side policies, tax revenues will fall as a share of GDP. Saying "tax revenues grew in absolute terms, but fell as a share of GDP" is not a rebuttal of the supply-siders; it's support. Yet Mr Chait seems blissfully unaware of this. He has not only scored an own-goal; he is doing a victory dance in his side's end-zone.

To be sure, what Mr Chait is trying to say is correct: the Reagan tax cuts did not increase revenues in the way that Stephen Moore is claiming. In the first place, there was a little bit of inflation between 1982 and 1989; the 1989 equivalent of $298 billion was about $382 billion, meaning that most of that growth in tax revenues came from the falling purchasing power of each individual dollar. The rest could be accounted for by even relatively meager economic growth rates of the 1970's. And even if that weren't the case, it conveniently ignores the rather large tax hikes and base broadening that took place later in Reagan's term. Finally, to the extent that growth did improve, deregulation, falling oil prices, tax simplification, and better monetary policy all seem like better conservative explanations of the change than do the rather ephemeral tax cuts.

With all that armor at his disposal, I am mystified by Mr Chait's decision to borrow a simplistic argument from other liberal/conservative arguments about taxes, and employ it where it is not merely inappropriate, but actively counterproductive. It's not as if arguments against tax cuts are all just interchangeable parts. The good arguments tend to be somewhat theory specific, not general panaceas against the bad vapors of tax cuttery. It's particularly unfortunate that he should be so indiscriminate in a book that is supposed to take on the broad-spectrum economic snake oil sold by the hard-core supply siders.

This article available online at:

http://www.theatlantic.com/business/archive/2007/09/more-big-con-blogging/1958/