Impetus Deductions

On June 22, Paul Krugman blogged on the New York Times in an attempt to discredit the revenue increases claimed to have happened during the Reagan years despite tax cuts. In order to prove his point Krugman gives us a bogus chart:

Just a few days ago Krugman presented another chart (apparently based on “data” or “evidence” or something) that he claims discredits any great productivity growth during the Reagan administration.

Yes, there are factual things that disagree with these charts on separate grounds, but what’s wrong with both of these charts? If you look, you’ll notice that each data point has years that are not correlated to presidencies. The first data point on the first chart (1973-1979) covers about one year of Nixon, three years of Ford, and two years of Carter. It is similar with the other data points. On the second chart you see a similar set of data points; none of the points are ever just one presidency. Here’s the problem: How can you discredit Reagan by adding years of Carter and George H.W. to his record? The data is usable (even more so if it were true), but not for discrediting any particular president, because the data does not focus on any particular president.

The first chart (concerning revenues) appears to be of his own making. Whereas the second chart gains astronomical credibility because it was made by somebody else — the Bureau of Labor Statistics. As Krugman himself recognizes in the text immediately preceding the chart, “Here’s one measure that the BLS happens to have put in a convenient chart, so that I’m not choosing the dates…” Yet regardless of who’s choosing the dates, even this data cannot be used to discredit any particular president.

Both charts do not correlate with either presidential or numerical relations. As for the first chart, the first data point is 6 years, the second is 11 years, the third is 10 years and the fourth is 7 years. With the second chart the first data point is 25 years, the second is 17, the third is 5, the fourth is 5, the fifth is 7 and the sixth is 3. It’s easy to say we had more productivity in a 25 year time-span directly after WWII than during the 17 years of Nixon/Ford/Carter/Reagan/Bush, the first data point is obviously the highest because the BLS is adding more years to it than any other data point on the chart. These numbers are skewed and it looks to me like someone would really like to prove a point. A point which can to be credibly made.

In addition, concerning the first chart, we must recognize that Carter left the Treasury dry with his inflation and spending, it’s impossible to add Carter’s bad revenues to Reagan and legitimately conclude that Reagan had bad revenues. You have to look at revenue growth relative to Presidents as they change their policies. Let’s consider relevant, hard facts:

[W]ith inflation down to 3 percent for the long term after 1982, the real interest-payment obligations of the federal government increased markedly. In the 1980s, the government had to pay upwards of a real 8 percent on debt issued in the double-digit inflation years. Those payments drained the treasury….By the late ’80s, revenue growth rate surpassed the high growth rate of spending maintained throughout the decade.” -Brian Domitrovic in his book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (ISI, 2009) p. 264

This conclusion is very sensible. With high taxes, such as in the 1970s, doctors were known to take certain days off so that they didn’t “make too much” and end up in another tax bracket where they have to pay more. When the taxes are cut, people are encouraged to do more, because they get to keep more of the money they make. If you only get to keep 30% of what you make because of marginal taxes (like in the 70s), and the less you make the more you keep, you’ll find yourself wanting to make less money (or at least find that sweet spot between poverty and new tax brackets). But when the top rate suddenly changes to 28% (like in the 80s) suddenly you’re keeping 72% of what you make, a much higher incentive to produce. Once this happens, GDP goes up, overall people make more which creates a rise in tax revenues.

Hey, what’s this? Sounds like this is far from the first time Krugman has been wrong:

Despite his prominence in the field, [Paul] Krugman’s record with predictions are mixed. Consider a memo Krugman and a colleague wrote to [Martin] Feldstein in September 1982…’We believe that it is reasonable to expect a significant reacceleration of inflation in the near future…[V]ery low commodity prices…are…a result of unsustainably high real exchange rates and real interest rates…Our very rough guess is that the correction of these distorted relative prices will add five percentage points to the future increases in consumer prices.’ Furthermore, ‘This estimate is conservative.’ From a 1999 perspective, of course, the memo was laughable…some wag created a chart plotting the memo’s position against actual events and…showed just how terribly and completely wrong Krugman had been about the dollar, inflation and commodity prices.” -Brian Domitrovic in his book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (ISI, 2009) p. 266

I don’t know Krugman, I don’t really trust your numbers — let a lone conclusions.



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