In my earlier post, I catalogued some quotes from high Bush Administration officials asserting the Laffer claim that a cut in US tax rates stimulates income so much that the Treasury ends up taking in more revenue than before. I didn’t then quote in detail the extensive statements made by the Director of Office of Management and Budget, Joshua Bolten, in July 2005.

Director Bolton’s statements are of particular interest for several reasons. First, by 2005 it had become obvious to any objective observer that (1) the record budget surplus inherited by the Bush Administration had been quickly converted into a record budget deficit, and that (2) the aggressive Bush tax cuts were a major cause of that swing (as was the sharp acceleration in federal spending, both domestic and international, relative to the 1990s). Second, while the utterings of President Bush himself can in general perhaps be dismissed as not to be taken seriously, Bolten was the professional whose job is to be responsible for the integrity of the budget process. (Indeed, he is a higher-quality civil servant than some in the Bush Administration who have been quick to “bolt on” crazy ideological propositions to what should be serious positions.)

Here is what the OMB director had to say about the Laffer proposition:

“And with all those economic gains, we are also seeing more revenues coming into the Federal Treasury. We have arrived at this point largely because of this President’s and this Congress’ pro-growth policies, especially tax relief. Those policies have strengthened the economy, which is now producing better-than-expected revenues.” — Testimony of Joshua B. Bolten, Mid Session Reivioew of the President’s FY 2006 Budget Requst, Committee on the Budget, U.S. House of Representatives, page 1, para. 3.

And lots more:
“The tax cuts proposed by the President and enacted by Congress are not the [budget] problem. They are, and will be, part of the solution…Had Congress not enacted the President’s three tax relief packages, moreover, the economy would be substantially weaker than it is…The most effective way to lower future deficits is to grow the economy. And the President’s tax packages have been well designed to do precisely that.”

“…all economists, I think will agree very strongly that when you reduce taxes, put more money back into the economy, that has a feedback effect in the economy that causes growth and in turn increases receipts. And being able to measure those receipts, to see how much better the government’s fiscal situation is as a result of the tax cuts would be something I’d very much like to include in the numbers….We think we’ve done the right things by making the tax cuts to restore the economy to growth, because what got us into the difficulty deficit situation in the first place is the flagging growth, flagging receipts in the economy. We think the best way back is to restore the economy to growth, and restore receipts that correspond to it…. ”

Q: “…you’ve got a substantial drop in the deficit [forecasted] in 2005…”
A: “…there are other factors involved, and one of them is the ‘03 tax cut.”

– Press Briefing by OMB Director Josh Bolton, The White House, July 15, 2003.

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.

Floyd Norris notes in the New York Times (Feb. 9, 2008, p.B3),“George W. Bush is in line to be the first president since World II to preside over an economy in which federal government employment rose more rapidly than employment in the private sector.”    It is another bit of confirmation of the truth behind a comment that “Joe S.” posted in response to my blog entry of February 6 (“Reagan and Stalin”): “What, pray tell, does the Republican Party have to do with conservatism?”  

The liberal and conservative labels are no longer useful.   It’s not that shorthand political labels are never useful; they are, even though individuals resist pigeonholing. 

And it’s not just that these particular words have long since lost their original meanings.   Linguistically, “liberalism” of course was supposed to refer to a philosophy of leaving individuals free from interference by government and other entrenched institutions, while “conservatism” was supposed to mean valuing continuity and stability.   But it is a commonplace that Americans use the word “liberal” to mean the opposite of what it meant in the 19^th century (which is now often called “neoliberal,” for some reason).  

Supporters and detractors alike still considered George W. Bush a conservative, despite the original meaning of the word, when he launched radical departures from longstanding American principles  in the spheres of foreign policy and domestic policy.   The White House has asserted maximal political powers for the executive, and has used these powers to enact virtually unprecedented levels of interventionist policies, ranging from Iraq to domestic citizens’ right to privacy.   

But people still seem to think that the Bush Administration also stands for conservatism in the economic sphere as well.   Or some think that President Bush may no longer stand for economic conservatism, but that other Republican politicians do.   I would contend that, not just George W. Bush, but also Richard Nixon, Ronald Reagan and (to a lesser extent) George H.W. Bush, all — in sharp distinction from their conservative rhetoric – in practice have been interventionist.  They have all wandered, far from the principles of good neoclassical economics, and far from from the principles of small government and laissez faire.  How far?   Farther than did, for example, Jimmy Carter and Bill Clinton.  

The criteria are:
(1) Growth in the size of the government, as measured by employment and spending.
(2) Lack of fiscal discipline, as measured by budget deficits.
(3) Lack of commitment to price stability, as measured by pressure on the Fed for easier monetary policy when politically advantageous.
(4) Departures from free trade.
(5) Use of government powers to protect and subsidize favored special interests (such as the oil and gas sector, among many others).   

Documentation that Republican presidents have since 1971 indulged in these five departures from “conservatism” to a greater extent than Democratic presidents can be found in some writings of mine, listed below.   The name I would give to this set of economic policies, as well as to the parallel abuses of executive power in the areas of foreign policy and domestic policy, is neither “liberal” nor “conservative” but, rather, “illiberal.”

Original:     “Republican and Democratic Presidents Have Switched Economic Policies,” in Milken Institute Review, vol. 5, no.1, 1st Quarter, 2003, pp.18-25.

Shortest:    “Trading Places” , Financial Times, Sept. 13, 2002.

Most recent: “Responding to Crises,” for 24^th Annual Monetary Conference, Cato Institute.   Cato Journal vol. 27, no. 2, Spring/Summer, 2007, pp 165-1708.