Not this again

For some reason, people are still arguing over supply-side economics (particularly, the Laffer curve). This centers on a new book by TNR senior editor Jonathan Chait, who has a forth-coming book entitled The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics (an excerpt may be found here). This book was great when Paul Krugman wrote it in the early-90s as a criticism of Reaganomics (Peddling Prosperity), but the current crop of GOP fiscal idiots don't follow the same pattern. Well, I don't know. The point -- just how influential is extreme supply-side economics these days -- is being debated all over the blogosphere.

Megan McArdle says that Chait's case is "overblown". Matthew Yglesias disagrees, and quotes a bunch of people (Bush, Cheney, etc.) spouting off supply-side nonsense. McArdle rejoinders by accusing Chait (and Ezra Klein, who had come to Chait's defense) of setting up supply-siders as straw men, knocking them down, and then concluding that tax cuts aren't a good idea. Yglesias responds by saying that Chait hasn't done this at all. Brad DeLong and Mark Thoma take Yglesias' side. Tyler Cowen takes McArdle's. Greg Mankiw thanks McArdle for defending him and Glenn Hubbard from inappropriate accusations.

It's weird, because the question isn't whether or not extreme supply-siders, inspired by the Laffer curve, are right or wrong when they say that tax cuts will pay for themselves by boosting economic growth enough to boost government revenues. Everyone agrees that this is ludicrous. The question isn't even over whether or not tax cuts can be good for economic growth. Everyone agrees that this is true. The question isn't even whether or not tax cuts can improve economic growth enough to for themselves in the context of the entire economy. Everyone agrees that this is true. The question is: how influential is the Laffer curve in the GOP leadership?

My guess, although it's impossible to know for sure, is that the idea might still hold some sway among late-70s/early-80s true believers left over from the Reagan administration (e.g. Cheney), or among people who don't know anything at all about economics (e.g. Bush), but that the idea is completely devoid of intellectual backing at this point. There aren't any notable economists who support extreme supply-siderism (that i know of), and I'd be willing to wager that even the Cheneys and Bushes of the world know that the things they say are untrue (or, at least, are possibly untrue).

So... the divergence. McArdle (and Cowen) sees the complete lack of intellectual support for these ideas on the right, and conclude that the ideas are no longer influential. Chait and Yglesias see the words of the national leadership of the GOP giving lip-service to these ideas, and conclude that they still hold sway. Who is right?

Neither, really. Well, both, I guess. Yglesias backs into it:

Meanwhile, the reason people like Jon and I and other liberals spend so much time pointing out that this claim is false is precisely the same as the reason conservatives spend so much time defending it: it's an extremely potent political claim.

McArdle's right; supply-siderism is no longer intellectually influential. The Yglesias/Chait contingent is also right: these things are still in the political discussion, and the Bush admin. still uses them as potent political weapons to convince voters to pass tax cuts. The Bush admin. doesn't actually believe that the tax cuts will pay for themselves, but a lot of other people do. And plus, if they can convince people of it, then the opposition for tax cuts disappears. The trade-off is gone... tax cuts come with no downside.

Alex Tabarrok issues a challenge to Yglesias, et al:

Following Jon Chait, Matt Yglesias writes:

...the central element of the Republican Party's tax policy -- lower taxes rates will lead to higher tax revenues -- is a discredited crackpot notion.

Fine, but a more fruitful question which I'd like to see Yglesias, Chait and others grapple with is why discredited, crackpot ideas can become central elements of a winning political party in the world's most important democracy. Explain the demand side and give us your policy prescriptions.

I answer him, and the underlying debate, in the comments:

Alex -

I assume you've read Caplan's book? I think you'll find your answer there. Unfortunately, there is no workable "policy prescription" which will make voters rational alluvasudden. The work of the reality-based economists and politicos is to educate people to the *true* costs and benefits of policy, and punish those who knowingly lie about them.

everyone acknowledges that the Laffer curve does exist. The question is, which side of the curve are we on? The GOP folks that Yglesias is talking about have a prior assumption that tax cuts (esp. the top marginal rates) are always a good end, but they recognize that this is a normative judgment which isn't universally persuasive. so, to gain support for their preferred policies, they engage in intellectual dishonesty by arguing that the U.S. economy is on the right side of the Laffer peak, when in fact we are on the left side of it.

Right-wing economists who are not intellectually dishonest -- like Greg Mankiw and Glenn Hubbard -- do not do this. They acknowledge that, given the economic realities in the U.S., further tax cuts will not pay for themselves; they are in favor of tax cuts despite what they will do to federal revenues, because they believe that tax cuts are good things in and of themselves. But their bosses don't think that this is a politically feasible argument, so they lie and deceive. This drives left-wing economists (e.g. "Rubinomics" folks) and left-wing literate politicos absolutely batty, and understandably so. They are prevented from having a debate on the merits, because the extreme supply-siders won't acknowledge reality before coming to the debate.

Yglesias (and Chait) are not arguing against Mankiw; they are arguing against the WSJ editorial page, the Heritage Foundation, Pres. Bush, V.P. Cheney, etc.