Over the past month, I , citing Feldstein, have said that if one looks at available information on monthly GDP, available from estimates of MacroAdvisers, that output declined within the first quarter of the year, even though as standardly reported GDP was higher in QI overall than it had been in the last quarter of 2007. But, as it turns out, there is some ambiguity to the question.

The estimates do show GDP falling in February, by a hefty 10.1% anualized. But the numbers for January and March are up. To net out the three months, one must split hairs. The positive numbers for January plus March are just slightly greater in absolute value than February’s negative 0.9 (monthly). So the net is up? Not necessarily.

We are trying to figure out the change within the quarter, from beginning to end. Technically, that means from January 1 to March 30. But of course even Macroadvisors doesn’t report daily or weekly estimates. Estimated total real GDP in the month of March was just slightly above total real GDP in the month of December. So again the net is up? The most precise measure of the change between January 1 to March 30 is the change between the December-January average and the March-April average. That is a tiny negative number: GDP fell by an estimated $28 billion within the first quarter (in year-2000 $). And April is so flat as to be essentially zero.

I think I am sorry I brought the subject up.

It would in any case be a mistake to make much of these numbers. The reason the Commerce Department’s Bureau of Economic Analysis doesn’t report monthly numbers is that the data are so unreliable, and subject to revision. For anyone who needs some sort of estimate of monthly GDP, as we do on the NBER Business Cycle Dating Committee as an input into our thinking, this is what we have to go on. But one sees here yet another illustration as to why the BCDC waits a long time, until all the data are in, before declaring a recession.

*** Comments can be posted at http://www.rgemonitor.com/us-monitor/bio/660/jeffrey_frankel . ***

Following up on my preceding post, I will here document who has said what.

High officials in the Reagan Administration apparently did subscribe to the Laffer Hypothesis:
• Reagan himself: “…our kind of tax cut will so stimulate the economy that we will actually increase government revenues…” July 7, 1981 speech 1/
• His Secretary of the Treasury, Don Regan, even after events had falsified the proposition to the satisfaction of most observers, wrote of his “very strong opinion that a tax cut would produce more revenue than a tax increase.”2/
Also: “The increase in revenues should be financed not by new and higher taxes, but by lower tax rates that would produce more money for the government by stimulating higher earnings by corporations and workers…” (p.173).

Similarly, high officials during the Bush era have also have been quoted saying that tax cuts, via faster growth, lead to higher tax revenues:
• President George W. Bush : “The best way to get more revenues in the Treasury is not raise taxes, slowing down the economy, it’s cut taxes to create more economic growth. That’s how you get more money into the U.S. Treasury.” — July 24, 2003.
• OMB Director Joshua Bolten, press conference July 2003; & WSJ, Dec. 10, 2003
• Majority Leader Tom DeLay: “We, as a matter of philosophy, understand that when you cut taxes the economy grows, and revenues to the government grow.” NYT, 3/31/04.
• Treasury Secretary John Snow, Congressional testimony, Feb. 7, 2006: “Lower tax rates are good for the economy and a growing economy is good for Treasury receipts.”
• CEA Chair Ed Lazear, press conference 2/12/07, “revenues have come in…higher than we predicted…because the economy has grown at a rate higher than we predicted…[T]he tax cuts…[were] at least in part responsible for making the economy grow.”

Most leading Republican economists who served as chief economic advisers to Presidents Reagan and Bush during their tax cutting frenzies, however, do not subscribe to the Laffer Hypothesis, and did not compromise their beliefs while in office. Three examples:

• Martin Feldstein: “I objected therefore to those supply-siders like Arthur Laffer who argued that a 30 percent across-the-board tax cut would also be self-financing because of the resulting increase in incentives to work.”3/
• Glenn Hubbard: “Although the economy grows in response to tax reductions… it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.”4/
• Greg Mankiw: “Subsequent history failed to confirm Laffer’s conjecture that lower tax rates would raise tax revenue. When Reagan cut taxes after he was elected, the result was less tax revenue, not more.” 5/

1/ Feldstein, American Economic Policy in the 1980s (U. Chicago Press) 1994, p.21.
2/ Regan, For the Record (St. Martin’s Press: New York) 1988, (p.214).
3/ American Economic Policy in the 1980s ( U. Chicago Press) 1994, p.24 .
4/ Economic Report of the President (Government Printing Office) 2003, p.57-58.
5/ Principles of Economics (Dryden) 1998, p. 166.

I thought it would be useful to get all this into the record, since some observers have claimed that Reagan and Bush never subscribed to the Laffer hypothesis, while others have inaccurately accused Feldstein, Hubbard and Mankiw of selling out on this score.

So Arthur Laffer — still arguing the improbable “supply side” proposition that cutting income tax rates generally raises total tax revenue — is apparently now a special adviser to John McCain. And McCain has taken on a big consignment of the snake oil, to Greg Mankiw’s dismay. The political temptation for a Republican candidate to promise both lower tax rates and higher revenues is irresistible. The policy-makers who cut taxes when Ronald Reagan and George W. Bush, respectively, came to power subscribed to this claim. Remarkably, at the same time, the economists who were the chief economic advisers to Reagan and Bush during these tax cuts disavow the proposition that they increase revenue (Murray Weidenbaum, Martin Feldstein, Glenn Hubbard, Mankiw…) . Almost all serious economists – let us say Ph.D. economists – disagree with this proposition, with only a microscopic handful of exceptions like Laffer. Indeed some of the advisers who defend the Reagan and Bush economic policies claim that this formulation of supply side economics is a caricature, and was not the true rationale of the tax cuts. This wishful thinking is directly at odds with quotes from the presidents themselves and their Treasury secretaries and other economic officials, to the effect that tax cuts stimulate income so much as to produce more tax revenue. Laffer is not a straw man. (See my next post.)

Even more interesting, the academic defenders of the Republican tax cuts often offer a proposition that is diametrically opposed to the defense offered by their political masters. This is the famous “starve the beast” hypothesis: the claim that if you deprive the government of tax revenue, it will reduce government spending, which is of course viewed as a worthy objective. If this proposition were true, and the supply side hypothesis were also true, it would lead to the nonsensical proposition that Republican presidents should raise tax rates in order to reduce tax revenue (Laffer) and thereby reduce government spending (Starve the Beast). I challenge some candidate to run on that platform !

As it happens, there is abundant empirical evidence against both the Lafferite hypothesis and the Starve the Beast hypothesis. In other words, just because two propositions are diametrically opposed doesn’t mean they are not both wrong. I hope that in this election campaign, the media do something they have failed to do in the past. If McCain proposes extending the Bush tax cuts, he should at least be forced to choose between the Lafferite defense, which tends to be driven more by political expediency, and the “Starve the Beast” defense, which has more support among at least some reputable Republican economists. Only then can the rest of us know which of the two propositions to refute.