President Bush took a ride on the Laffer Curve yesterday and espoused a tax-cut theory his father once derided as "Voodoo Economics."
After a meeting with his Cabinet, the president was asked about the federal budget deficit. "Well, we have a deficit because tax revenues are down," he said. "Make no mistake about it, the tax relief package that we passed -- that should be permanent, by the way -- has helped the economy, and that the deficit would have been bigger without the tax-relief package."
That is orthodox supply-side theory: the notion that tax cuts, by stimulating the economy, actually increase the government's tax revenue. Such thinking, popularized by Arthur Laffer and his Laffer Curve, was the ideological fuel for Ronald Reagan's tax cuts.
Most economists since then have reached a consensus that while tax cuts have an "economic effect" that partially offsets the lost revenue from tax cuts, the overall result is still lost revenue. That's the case for Bush's $1.35 trillion tax cut from last year. "I don't know anyone who has said that the makeup in revenue because of the economic effect is greater than the reduction, and I would concur with that," said Eric M. Engen, a former Federal Reserve economist with the American Enterprise Institute.
Sen. Kent Conrad (D-N.D.), in his last days as Senate Budget Committee chairman, labeled Bush's statement as "dream-world economics." Said Conrad: "I don't know where he learned his math, but he didn't learn them in North Dakota schools, because we learned that if you subtract money, you have a bigger deficit."
The White House's Office of Management and Budget, in a budget report issued last summer, determined that the tax-relief package reduced revenue by $41 billion in the last fiscal year and would reduce revenue by $94 billion this year and $1.49 trillion over 10 years. Such "static" scoring does not consider the economic effect of tax cuts.
Asked about Bush's statement, OMB spokesman Trent Duffy said that the tax cut produced growth that "certainly softened the recession's impact on revenues." But, he added, "by how much and to what degree, it's impossible to know."
Urban Institute President Robert Reischauer said Bush is "not way off base" to say the tax cuts mitigated the economic downturn, but "the magnitude of these effects is not as great as he believes."
Even some supply-side theorists were unsure about Bush's argument that his tax cut reduced the deficit. "It's decreasing revenues," said Jude Wanniski, a former Wall Street Journal editorialist who popularized supply-side views.
But Bush got hearty support from one famous economist. Told of Bush's statement, a pleased Arthur Laffer replied: "This is the correct way of putting it."