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June 10, 2011

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nato

I do have to say that Pawlenty's plan lives in utter fantasy land of constant 5% growth. I lost tremendous respect for him after seeing it. Of course, I reject Tomasky's analysis (it's all their fault!), but Pawlenty's projections are genuinely laughable.

Nathan Smith

5% growth is not "utterly fantasy land." It's been achieved in the past, as Pawlenty points out. And given how far we are below trend, there should be room to grow at that rate. We're never going to be able to create jobs for all the unemployed without some pretty fast growth. Nato has no justification for this smugness.

Tom

Well, he claimed that we could have 10 years of 5% average annual growth. There has been no 10-year period in recent US history with 5% annual growth averaged over that period (except after the Great Depression).

nato

Who the heck *projects* 5% growth over that period? That's either idiotic or dishonest. Or both.

Nathan Smith

Anyway, I think he's just setting that as a goal. It's not necessarily bad to set a high goal. By the way, I think 5% growth, or even more, is an *easily* attainable goal, but it would require opening the borders a lot.

Nathan Smith

And another thing.

I think the basic macro indicators in the Bush years (before 2008) were just fine. You can cherry pick numbers to claim it was (a little bit) worse than previous decades, although I like the old-fashioned "misery index" and in those terms it was pretty good. To use GDP growth rates as your main comparison indicator, at a time when demographic trends were much less favorable than in previous decades and two wars were taking a big chunk out of the economy, plus strong growth in the 1990s meant we started from a high base, seems like an indefensible approach. Anyway, how high does GDP per capita need to be? To be "stagnant" at a high level of prosperity doesn't seem like such a bad fate. So I'd be happy just to get back to 5% unemployment, even without a lot of income growth.

However, many pundits are now complaining not only about what's happened in the last three years, but about what's happened in the past thirty years. They don't see the Bush years as the good old days we need to get back to; some even call them a "disaster." They complain that wages haven't risen that much over the past generation. Now, if all you want to do is create jobs for the unemployed, four years of 5% growth might do the trick. But if you want to make wages rise, as many pundits do, ten years of 5% growth is more like what's needed. So if you're going to charge Pawlenty with "lunacy," the same charge needs to be leveled against all those pundits, mostly on the left, who think we need to overcome the long-term stagnation in wages. I don't think it's lunacy to aim for ten years of 5% growth, but I do think it's lunacy to expect that to come from further expansion of big government.

Nato

Actually, all of my analyses use per-capita growth, which helps a lot with leveling demographic trends. It still doesn't account for rising participation rates amongst women, but that one is much less trivial to suss out because lowered participation rates can in themselves be a bad sign.

In any case, the key point I want to make is that low tax rates did not noticeably encourage participation, create a lot of jobs, or grow the (per-capita) economy in a detectable way. This doesn't mean Keynesianism is right or that low tax rates are bad for the economy or anything like that. It is simply a response to the certainty so many on the right express regarding the tight linkage of low taxes and high growth.

Really, that's almost all my point has ever been on the topic. So much certainty, which is in my eyes contradicted by the numbers. I've said almost every time that I do tend to agree that low taxes and economic growth go together, but that the connection is much weaker than assumed by people by Pawlenty. Further, I would say that such an assumption at this point is economic (and political) malpractice.

In any case, Nathan clearly wants to argue with unnamed pundits on the left (who really are smug) rather than his actual interlocutors.

Nathan Smith

The taxes remark started on a different thread, but I can respond here. I think Nato said there was a "correlation" between higher taxes and economic growth. When I pointed out that if this was over the business cycle, it was actually evidence against Keynesianism, Nato said that he was really looking at longer periods, decade by decade patterns. Over those time periods, there would be changes in demographic and technological conditions that would render such "correlations" as Nato cites essentially meaningless. Also, the number of data points is effectively reduced. I would assume, too, that the data series starts somewhere in the 1930s, so it would miss one powerful piece of evidence in favor of the claim that low taxes are good for GDP, namely the contrast between the low-tax, prosperous 1920s and the high-tax, depressed 1930s. Yet even there I'm not sure how a correlation of *growth rates* would work out, since the economy's worst weakness was concentrated in the first years; growth rates in 1933-37 look good, though not enough to bring the economy out of a Depression. The basic point is that Nato's "correlation" claim is meaningless. "Malpractice" is perhaps too strong a term to describe what Nato's doing, but it is certainly the kind of argument that subtracts from the total sum of knowledge in the world rather than adding to it.

By contrast, Edward Prescott's 2004 paper on why Americans work so much more than Europeans is high-quality empirical research. Prescott's conclusion is that taxes and the welfare state explain a difference on the order of 50 percent in hours worked. So, no, it's not at all malpractice to say that lower taxes promote growth. Theory and evidence favor the view.

Nathan Smith

Here's the link to Prescott's paper: http://www.nber.org/papers/w10316

Nato

My original comment on the correlation included an asterisk in which I noted that the correlation was accidental: "*More or less accidentally, I'm sure." So I've more or less already said that "such 'correlations' as Nato cites [are] essentially meaningless." Unless the meaning is to show limits on the positive causal relationship between tax rates and growth rates, which is precisely what I'm trying to say. Nathan can dismiss the whole bit as incomparable because of demographic changes or whatever, but Nathan would still have to explain how modern demographics would allow for Pawlenty's preposterous figures. Now, if Pawlenty any signs of really significantly liberalizing immigration, I'll be overjoyed to come back and reexamine his position, but right now the assumed 5% growth rate is the only thing that makes his proposal stick together at all without truly immense long-term deficits.

As for "it's not at all malpractice to say that lower taxes promote growth," Nathan *again* insists on misrepresenting what I said. With a small cut-and-paste edit fixed, my actual words were: "I do tend to agree that low taxes and economic growth go together, but that the connection is much weaker than assumed by people [like] Pawlenty." Prescott's paper does little to answer that, or at least it doesn't do so without a little additional argument. It totally demolishes some argument I didn't make, but I'm hoping Nathan will respond to what I intended to communicate soon. I didn't think I was so unclear.

Nathan Smith

Well, both of us are kind of talking past each other here, but that's OK. Mainly I'm reacting to Nato's way-over-the-top attacks on Pawlenty. As I said, I think Pawlenty is setting a *goal,* and anyway it's not "preposterous," since (a) we're well below trend now, and (b) he's proposing not just tax cuts, but *lowering spending,* which is a much more promising plan from a theoretical point of view and which is a plan that has not at all been discredited by the Bush or Reagan periods, when tax cuts were combined with higher spending. In the brief oasis of spending discipline in the late 1990s, the economy saw its best years in a generation. I don't know what Pawlenty's view is on immigration. If he stays quiet about it, I'll start to hope that he's more pro-immigration than he wants to tell the base. If he wants to be the next Reagan, well, immigration amnesty is part of the deal. We'll see.

Nato

He does propose lowering spending, but even with the lowered spending, we still end up with huge deficits (more than a trillion per year, on average and the same as realistic estimates of the Obama 'plan') without the huge growth. Fine, the 5% is an 'aspiration,' but if that's what's necessary to achieve budget discipline, it's a bit like saying that 'not defaulting' is 'aspirational'. Having said that, I totally agree that budget discipline seems both theoretically and empirically likely to effectively promote growth.

I have lots of problems with the Ryan plan*, but one huge virtue it has that Pawlenty's doesn't is that I have no trouble seeing how it can at least approach its claimed results** in terms of budget balance.

Having said all that, if Pawlenty walks it back a bit and explains what the alternatives will be in the likely scenario is that tax cuts*** don't yield the hoped-for gains, I'll happily take back my 'over the top' criticisms.

*Ryan's plan lives in political unreality, but I don't get as exercised about that because the point of politics is to negotiate that stuff out.

**Though Obama's 'plan' (if you can call it that) is just as bad as Pawlenty's in terms of deficit-creation, its projections are only unrealistic to the degree I expect from politicians, accounting for 1/3 - 2/5ths of the total deficit.

***Recall that unless there really is 5% growth, there won't be any balanced budgets to spur the economy, so he's banking on spending cuts (and the *hope* of growth) to create the necessary rapid growth.

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