Alan Reynolds

In a remarkable trilogy of editorials, The Washington Post took a "fresh look" at the Bush tax cuts of 2001-2003. "The Bush administration's fiscal policy has been grinding on for three years," they wrote, "producing few concessions or apologies." Unsurprisingly, this "fresh look" merely "reinforced our view that these cuts are a mistake." Not any specific tax cut, mind you, but every one of them is decreed a mistake. Yet there were two "concessions or apologies" that undermine that conclusion.

 The most startling concession was to see The Washington Post finally admit supply-side economics works: "Lower tax rates on wages do boost the labor supply; lower tax rates on investment may boost savings; more labor and more capital mean more economic output."

 The Washington Post also admits privatization of Social Security works. "Social Security privatization could reduce long-term deficits," according to the editorial. "The nation should not be deterred by the transition costs," it continues. "Privatization could also stimulate economic growth, boosting tax revenues and so strengthening the nation's fiscal prospects via a second route. By converting the payroll tax into contributions to personal accounts, government could reduce the tax burden on workers, thereby boosting incentives. Moreover, private accounts would boost national savings."

 Unfortunately, these insights were lost while rushing back into the comfort zone of conventional (Keynesian) economics, in which every economic policy is primarily judged by its impact on the Federal purse. Faster economic growth and Social Security privatization were described as desirable, for example, only to the extent that they might help pay for a much bigger government.

 The Congressional Budget Office last estimated the budget deficit at about zero by 2014. But The Washington Post prefers unofficial projections from Alan Auerbach of U.C. Berkeley, and two former Clinton officials, Bill Gale and Peter Orszag of the Brookings Institution. This trio assumes not a single feature of the 2001-2003 tax cuts is allowed to expire as scheduled in 2009-2011, as though the president's talk about making it all "permanent" could somehow bind every future Congress. They also assume the Alternative Minimum Tax will be greatly emasculated, although there is no apparent legislative rush to do that. Such assumptions help lift their deficit estimate to 3.5 percent of GDP in 2014.


Alan Reynolds

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